Burdened By Layoffs And Uncertainty, Tech Leasing To Remain Depressed

The U.S. tech industry's retreat from office space, accelerated as the industry ramped up layoffs and normalized hybrid work schedules since 2022, promises another year of sluggish leasing, further stressing an already strained market. No turnaround is expected in the near term.

Before the pandemic, tech companies were a major driver of leasing activity in major office hubs across the country, and their absence from potential tenant pools has significantly contributed to a steep drop in leasing that has exacerbated in 2024.

“There's still a lot of demand to make up for,” Savills Vice President of Research Strategy and Insights Devon Munos said. “The larger tech companies have pulled back, and any leasing activity that we're seeing is primarily lease expiration-driven, rather than net new growth.”

In 2019 the tech industry was responsible for 21.7% of total office leasing nationwide, said Colin Yasukochi, executive director of CBRE's Tech Insights Center, and in tech-centric markets like the Bay Area, the total was well over 50%. Nationwide, tech companies represented 15.5% of total office leasing in 2023.

Activity generated by tech companies is sorely needed in today's office market, where absorption in the first quarter reached just 52.2M SF, 36% below the pre-Covid average nationwide. Available office space nationwide passed 1B SF for the first time ever in Q1.

Remote work and its popularity among tech workers is certainly a contributor to the pullback among tech firms, but turmoil in tech is also to blame.

There were 61,000 positions eliminated in 2023 and 153,100 in 2022, both of which are a vast surge compared with 2021, when 15,000 tech workers lost their jobs, according to Savills.

The tech sector's demand for office space cratered in 2023, according to Savills, with only 9M SF leased nationwide last year, compared to 16.6M SF in 2022 and 22.6M SF in 2021.

The country’s tech giants have given back swaths of office space in the last two years and are planning more, though they don't often release specific nationwide footprints.

Amazon wants to cut its office space usage over the next three to five years in a way that will save the retail giant $1.3B annually, mostly by letting leases expire or negotiating early lease terminations.

Meta has said it will downsize its footprint significantly as well. The company spent $2.5B on “facilities consolidation,” including getting out of leases, last year alone. 

In February, Meta downsized by 275K SF in New York. Last year, it put 122K SF up for sublease in Washington, D.C., along with 435K SF in downtown San Francisco.

The artificial intelligence trend has sparked some new leases, like OpenAI’s 486K SF sublease from Uber in San Francisco at the end of last year, the city’s largest since 2018. OpenAI is reportedly looking for more space in San Francisco. 

More than one-fifth of all venture capital funding in February went to AI companies, Crunchbase reports, with $4.7B invested in the sector, up from $2.1B in February 2023. Some of last year's largest investments went to AI, such as Microsoft's $10B multiyear investment in OpenAI, Amazon's $4B in ChatGPT rival Anthropic and $1.3B in InflectionAI by various tech players.

Sustained levels of funding could fuel innovation and expansion, necessitating office space for AI startups, Munos noted. But investment doesn't necessarily directly translate to office leasing.

“A lot of those AI companies are simply being acquired. There's a lot of [merger and acquisition] activity,” she said. “So when it comes to actually looking at the numbers, what's been signed and come to fruition, the impact of AI is really yet to be seen.”

Plus, the very nature of AI, which in most cases uses machines to either enhance or perform tasks humans have historically done, makes it hard to predict how these companies' space needs will grow, according to Savills Vice Chairman and Atlanta head David Rubenstein.

“That’s why it’s so hard to see through the crystal ball to really see what is tech occupancy going to look like 12 months or 24 months from now,” Rubenstein said. “There are [AI] companies raising tens of millions of dollars with just a handful of employees. They can grow significantly without the employee base that tech has had in the past.”

AI may still be a rising star, but for the overall tech market at this relatively early point in 2024, the two factors that continue to weigh on technology companies’ real estate strategy are interest rates and need, Tenant Risk Assessment principal Bradley Tisdahl told Bisnow in an email.

“Ignoring the enthusiasm around AI for the time being, we're seeing smaller technology companies, particularly those that are venture-backed and facing softer demand, continue to scale back and preserve capital,” Tisdahl said. “Many of them had to make painful cuts in 2023. For some, 2024 may continue to see headcount reductions, but we aren’t yet seeing a need for the larger cuts.”

Overall, companies are adapting to the higher interest rate environment and beginning to recognize that rates may not come down as much as expected this year, he said. As for larger technology companies, they are often better positioned to operate in the higher rate environment, so many aren't seeing the need to reduce headcount in 2024.

For those tech companies out there still looking for space, such as burgeoning AI outfits backed by eager VC dollars, it's a good time to find high-quality space and squeeze landlords for concessions, tech market specialists told Bisnow.

As recently as Q2 2020, sublease space offered by the largest 30 tech companies totaled less than 80M SF nationwide, but after that the total spiked, CBRE reports. As of Q3 2023, the total was about 185M SF. That kind of supply leads to eager landlords more willing to play ball with tenants.

Still, relatively few tech companies will be able to take advantage of this window, Munos said, with AI being one exception.

“Larger tech companies have pulled back from leasing activity, but there are some green shoots among AI and other transformative technologies,” Munos said. “We're seeing those verticals pick up a little bit.”