Throughout this and most other business cycles we hear that tech cities have outperformed other markets by virtually every relevant economic and commercial real estate (CRE) metric, including GDP, jobs, absorption, rents, and more. But what exactly is a tech city? After all, technology is everywhere. Almost all companies today use internet, cloud computing, social media, smart phones, and more advanced machinery and equipment. However, certain cities stand out.
In these markets, tech plays a larger role in the city’s economic trajectory – it’s also a vibe. Certain cities have the tech feel in the air, on the signage, in the conversations at the bars, in its population’s habits, and preoccupations. In certain cities, tech is more deeply woven into the fabric of the city itself, and it’s dramatically shaping those local real estate markets. There are key characteristics of an environment that supports, nurtures, and promotes the formation of tech cities. We call it “tech stew” and these are the metric ingredients:
1. Institutions of Higher Learning
Leading universities that provide creative impetus, research, and that lead to creation of new companies. The presence of one or more local, high-profile universities where research is being conducted is an important characteristic of tech markets. These institutions are comprised of a high concentration of talented teachers, researchers, and students, and foster critical thinking, innovation, creativity, and competitiveness. These universities offer more than just a degree – other important factors include: links to industry partners, businesses, and professional groups; the presence of incubator facilities; a variety of extracurricular activities and societies; and work experiences and internships that can prove to employers that a student has the attitude and aptitude to succeed.
2. Venture Capital
The capital to take those ideas and turn them into companies. Venture capital (VC) is key to the tech industry, as this funding drives not only startups but companies at various stages in their life up to any possible M&A or IPO. In 2016, VC deal value was the second strongest in the current cycle at $74.3 billion, according to PitchBook and the National Venture Capital Association. That was 9.6% below the level of 2015’s $82.2 billion, far below the $91 billion and $188 billion invested that PwC Moneytree reported for 1999 and 2000, respectively. Top investments by industry in 2016 were software, pharma & biotech, health care devices & supplies, commercial services, and health care services & systems.
3. Tech Workers
An ample supply of workers within a market’s technology industry; leaders within tech who understand the requirements of the sector. Tech workers are those whose employers fall into numerous categories and include occupancy of office, research and development (R&D), and manufacturing space. Some of the major categories (as defined by Moody’s Analytics) include:
- Computer systems design and related services;
- pharmaceutical and medicine manufacturing;
- computer and peripheral equipment manufacturing;
- software publisher;
- data processing, hosting, and related services
- medical and diagnostic laboratories.
Tech workers in the U.S. have hit a record high of more than 6.92 million in 2016, surpassing the previous peak of 6.86 million in 2001.
4. Knowledge Workers
An available workforce with the skills to work in a tech-focused company. These workers are in occupations that support a tech environment, including legal, accounting, and other knowledge-driven occupations. Knowledge workers account for approximately 31 million persons in the U.S. and 20% of the workforce. In the highest ranked cities, knowledge workers account for up to 35% of the labour force. For tech companies to thrive and grow, there needs to be a readily available workforce with the skill set needed. These knowledge workers can work at any type of company, but they have skills that make them attractive to the tech sector.
Knowledge workers are those whose occupations fall into one of the following broad categories: Computer and mathematical; architecture and engineering; life, physical, and social science; management; education; and health care.
5. Educated Workers
A high-level of education is essential to supporting the growth of these companies. The educational attainment of a population is a major factor in tech markets, as an educated workforce is essential for the success and growth of these companies. Educated workers are considered to be those who have earned a bachelor’s degree or higher. The U.S. labour market is changing over time to demand a more skilled workforce. As workplaces and businesses become increasingly multifaceted and complex, employers need workers who are capable of adapting and excelling in these evolving environments. As a consequence of an increasing number of job openings requiring advanced education, access to top position jobs is determined largely by college degrees. According to a report from the Centre on Education and the Workforce at Georgetown University, 8.4 million jobs of the 11.6 million created after the recession (from January 2010 to January 2016) went to individuals with at least a bachelor’s degree.
6. Growth Entrepreneurship
Starting a company is one thing. Creating a growth engine is something else. Cities that have a higher concentration of growth engines are great tech locations. There are many kinds of entrepreneurs and many kinds of startups, from the local cleaner to the emerging tech giant. From a commercial real estate perspective, the interesting companies are those with a high-growth profile that has extended over several years. These are the companies that have the potential to become important contributors to local economies and to become mainstays of the local commercial real estate environment. The Kauffman Foundation, an organisation that studies entrepreneurship and its impact on the economy, refers to these kinds of companies as growth entrepreneurs and has developed an index that measures the level of growth entrepreneurship across major U.S. metropolitan areas.
The Growth Entrepreneurship Index is made up of three components:
- Rate of startup growth. This statistic measures how many jobs are created by startups over a five-year time period.
- Share of scale-ups. Fast-growing firms contribute more to the growth of a local region. The focus of this metric is on companies creating large numbers of jobs. It measures the number of firms that started small and grew to employ 50 or more people after 10 years of operation as a percent of all employers.
- High-growth company density. This statistic measures the number of businesses that have at least $2 million in revenue and have averaged 20% growth over the previous three years.
The above is an excerpt from the fifth edition of the Occupier Edge. Download the fifth edition here.