How STEM Tenants Are Driving Office Space Demand

By September 15, 2017Blog

Remember a few short years ago when, if you’d told your best friend you were investing in office property, they would have politely suggested that you have your head examined?

In California for example, at the beginning of the decade the overall office vacancy rate in Los Angeles County was nearly 19% with the Orange County vacancy rate for office space nearly the same.   Fast forward a few years and it’s extremely difficult to find decent office space, with occupancy rates nearing the 100% mark in many areas of Southern California.

That’s a pretty impressive increase in demand in only a few short years.  What’s been driving the abrupt turnaround in office space leasing – and consequent increase in office property sales prices – has been the STEM tenants.

If you’ve never heard the term ‘STEM’ before the first thing that probably comes to mind is something along the lines of stem cell research.  At least in one sense you wouldn’t be too far off the mark with this guess.

STEM is a abbreviation for the disciplines of science, technology, engineering, and mathematics.  When lumped together as a category, these high-tech tenants are responsible for a large percentage of the increased demand for Class A office space throughout North America.

Where STEM tenants are found, vacancies are decreasing and prices for office property occupied by these types of users are increasing.

Case in point, a recent story in the Los Angeles Times reported that two neighboring downtown office high-rises in San Diego sold for a total of just over $167 million, a nearly 64% increase in price compared to the prior sales for the two.

Key tenants of the buildings included a traditional media company – The San Diego Union Tribune – and also MiTek and WeWork, two STEM tenants that fall into the technology part of this category.

MiTek Systems is a high-technology company that optimizes the mobile user experience for over 5,800 financial services organizations and brands across the world.  WeWork operates a global network for its over 100,000 members who use the shared workspace facilities that WeWork creates to benefit from the dynamic environments of its private offices and shared desk space.

It’s not just Southern California that is benefiting from the increased demand for office space from STEM tenants.

Last month in our “Why The Next Silicon Valley Won’t Be In California” article we discussed how high-technology companies and employers are finding it necessary to go to where the skilled labor force is rather than trying to recruit workers to uproot themselves and relocate.

This generational shift with employees being able to call the shots instead of the employer is giving a boost to office property markets in secondary and tertiary U.S. cities and Canadian markets as well.

Over the past couple of years Indianapolis, Pittsburgh, Detroit, Vancouver and Toronto – cities with well educated, highly skilled technology labor pools – are markets that have benefited by having relatively low cost Class A office space combined with a high-tech workforce.

The key to successful commercial real estate investing is spot a trend in a specific market while it is occurring, before it hits the radar screen of the general investor pool and property prices begin to increase.  At TwinRock Partners we’ve identified just such an opportunity in Calgary, Canada.

While real estate prices for office space in Vancouver and Toronto continue to reach new levels, Calgary has not yet caught the eye of the general investment community.  But that’s likely to change in the not-too-distant future.

Located less than 600 miles east of Vancouver in the province of Alberta, Calgary is home to nearly 1.3 million people.  The city boasts a well educated, skilled labor force – exactly what high-technology employers around the world are looking for – plus Class A office space that is much more affordable than in Vancouver, Toronto, and much of the U.S.

Last year TwinRock Partners opened our Rock Fund VII to target distressed Canadian real estate in Calgary to take advantage of opportunities just like these.