Tech, AI Industries Drive Largest Share of Office Leasing Activity in U.S.

AI company’s office leasing concentrated in five U.S. markets

CBRE’s latest Tech-30 report shows that the tech industry boosted its share of U.S. office leasing to 18% in the first three quarters of this year, partly fueled by companies involved in artificial intelligence (AI).

In its 13th year, the Tech-30 report analyzes the tech sector’s influence on office demand and rental rates across 30 major tech markets in the U.S. and Canada, as well as select submarkets.

This 18% share marks a 3.8 percentage point rise from the 14.2% recorded for all of 2023, placing tech ahead of Finance & Insurance (16.5%) and Professional & Business Services (15.7%). After trailing both industries in 2022 and early 2023, tech regained the lead in last year’s third quarter and has now held the top position for five consecutive quarters.

In Canada, tech companies occupied 15.2% of office leasing activity in the year’s first three quarters, up from a low of 10.3% in 2023. However, tech still trails Professional & Business Services (18.5%) and Finance & Insurance (16.8%) in Canada.

This year marks a comeback for the tech industry, following layoffs in 2023 and a slowdown in U.S. venture capital funding from 2021 to 2023. Tech job growth rose by 1% in the first seven months of the year, compared to 0.3% in 2023. Venture capital funding, particularly for AI companies, increased 13.3% year-over-year in the first half of 2024, and large-cap tech stocks lifted the Nasdaq stock index.

Although AI-related firms make up a modest share of tech leasing, they’re contributing to the industry’s growth. AI startups have leased 10.8 million square feet since 2019 in top venture capital markets–San Francisco, Silicon Valley, Boston, Los Angeles/Orange County, and Manhattan. Leasing by these firms grew from 1.6 million square feet in 2019 to 2.8 million in 2023 before easing to 1.5 million through August of this year.

“AI will create more jobs than it will eliminate,” said Whitley Collins, CBRE Global President of Occupier Advisory & Transaction Services. “The rise of AI and continued tech job growth should help boost office leasing. Even with many tech companies reducing their office space for hybrid work, the sector’s cumulative leased square footage this year leads all others.”

The broader office market continues to face challenges from hybrid work, layoffs, and inflation. Out of the Tech-30 markets, only five recorded positive net absorption–more office space leased than vacated–from the second quarter of last year to this year’s second quarter: Nashville, Vancouver, Baltimore, Raleigh-Durham, and Montreal.

Among key tech submarkets, eight achieved positive net absorption, led by University City in Philadelphia, Nashville’s central business district, and North Loop in Minneapolis. These submarkets typically feature newer, higher-end office buildings, averaging a 10.1% rent premium compared to their broader markets.

Sublease space offered by office tenants dropped to 162 million square feet in the second quarter, down from a peak of 181 million a year earlier but still above pre-pandemic levels. Tech companies accounted for 27% of this sublease space in Q2, up from a low of 12% in 2019. While sublease availability provides more leasing options, it presents challenges for office investors, creating competition that can lower tenant rates and reduce income as leases expire.

“The pace of recovery for Tech-30 markets will depend on each location’s tech talent, presence of AI companies, and local office-attendance policies,” said Colin Yasukochi, Executive Director of CBRE’s Tech Insights Center. “In general, employment and office market indicators signal momentum for tech and its growth driver, AI.”