The Tech Tipping Point: Accommodating the Growth of Industry

 

 

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By David Steele and Janet LePage

Forty-one years ago, Silicon Valley legends Steve Jobs and Steve Wozniak created the first Apple personal computer in a Los Altos garage. Today, those very modest confines would likely be promoted as a centrally located work/live space featuring industrial-feel flooring, and renting out for $3,000 a month. 

This is more truth than fiction.  

According to Zumper, average monthly rents for one- and two-bedroom apartments in San Francisco are $3,330 and $4,430 respectively—the highest in the country. Neighbouring San Jose ($2,260; $2,850) and Oakland ($2,060; $2,500) provide only mild relief. 

How dire are things? San Francisco announced plans to spend $44 million to build the city’s first housing development for public school teachers—so that they can afford the simple pleasure of living in the general area where they work. The announcement came shortly after a news story of a San Francisco high-school math teacher who has been left homeless for several months despite earning a $65,000 salary. 

Our macro investment strategy is underpinned by GDP, economic, and population growth driving real estate demand. However, you can also see our investment model perform when viewed through the micro lens of the next-stage growth of a specific industry. 

From its humble garage beginnings, the tech industry has spawned the emergence of global connectivity, social media platforms, online commerce, the Internet of Things, software-as-a-service, digital entertainment, and so many more applications that there is probably someone right now creating a mobile app to keep track of them all. 

The important question for us is, where are they housing that growth? Silicon Valley’s homegrown success has been hampered by high cost-of-living pressures in the Bay Area. The near-term strategy has been for Bay Area companies to step out to nearby metropolitan centres with reputational cache. For example, Seattle and Denver have been heralded by several media outlets as the next Silicon Valley, owing to improved affordability and established talent pool.  

The rental climate for one- and two-bedroom apartments is certainly more favourable in Seattle ($1,850; $2,450) and Denver ($1,250; $1,700), as it would be anywhere in the country compared with San Fran. However, we see tech companies taking a longer-term outlook toward more prospective regions that have room to grow. 

Case in point: DuPont Fabros Technology Inc. (DFT), a company that not only operates data centres for many blue-chip Silicon Valley firms but also is packaged corporately as a REIT (real estate investment trust). Committed to cash flow and certainty, DFT chose Greater Phoenix as the location for a new one-million-square-foot data centre campus, which will sit on 56.5 acres. 

DFT’s announcement followed Bay Area semiconductor packaging company RJR Technologies’ decision to move its headquarters to Phoenix, as well as open a new manufacturing facility there. 

RJR’s CEO pointed to the Phoenix area’s talent base, affordable cost of living, and pro-business climate as reasons for the move. Arizona does provide a compelling business case: a right-to-work state offering a low-cost operating and labour environment, proximity to large markets, and tax incentives and exemptions.  

However, the rental rate—a key component of cost-of-living calculations—is also a persuasive driver. A one- and two-bedroom apartment in Phoenix are $890 and $1,100 respectively. Other areas like Mesa ($780; $950) and Glendale ($730; $900) also underline affordability.  

In making its decision, DFT knew it would be keeping company with a growing list of inflowing tech firms. 

“There’s a lot of activity going on in the Phoenix market right now,” acknowledged Christopher Eldredge, DFT’s president and CEO, of its strategic toehold. 

DFT’s neighbours along Mesa’s Elliot Road Technology Corridor are Apple (which is to build a $2-billion data centre), PayPal, Amazon, GoDaddy, and anchor tenant Intel (which is developing a $70-billion facility). 

According to industry news site Data Center Knowledge, “Phoenix and the surrounding area constitute one of the top US data center markets.”1 

The Silicon Desert 

In terms of pace, there continues to be significant momentum in Phoenix to become on par with Silicon Valley in terms of operational activity. 

A steady parade of new corporate locates is boosting the working population in the area’s tech sector. There were an estimated 2,545 new tech-related jobs in 2016, according to a report based on an analysis of US government data by CompTIA. As of year-end, 139,439 workers were estimated to be in Arizona’s tech industry. Of those, 67,354, or 48.3%, were in actual tech occupational jobs. That now ranks Arizona ninth in the country for tech-industry employment. 

How does this affect the rental market? 

It’s interesting to note that this population and economic growth puts the Greater Phoenix area in unique company. In a report on the top multifamily markets for net leasing in the United States, CBRE Group said that A-locations New York, San Francisco, and Washington, DC, were the country’s top three cities for apartment market absorption (net leasing). Which was number four? Phoenix. 

“This is a direct result of high net in-migration along with robust employment growth and the low home ownership rate,” Brian Smuckler, a senior vice-president with CBRE in Phoenix, told the Phoenix Business Journal.2 

Programming code in the Internet world is binary. So too is real-estate investment determinants. Economic growth spurring population influx equals strong rental demand. That has certainly been the winning formula for us. 

Note: Monetary figures cited in this article are in US dollars. 

  1. Yevgeniy Sverdlik, “DuPont Fabros Entering Phoenix Data Center Market,” March 2, 2017.
  2. Mike Sunnucks, “Phoenix Still Ranks as Top Apartment Market,” May 9, 2017.

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