In Search of Affordable Office Space, Startups are Leaving the Tech Hubs

Startups are flocking to cities like Pittsburgh and Portland in search of affordable office space.

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When it comes to property in competitive tech hubs like San Francisco, market demand doesn’t always equal desirability.

SF’s current office rent is practically setting a new precedent. According to National Real Estate Investor, the average rent per sq ft of office space was $99.42 in February, marking a >100% year-over-year increase.

Amidst these booming prices, new tech startups are divided on how to proceed. Evidently, many have chosen to try to operate out of SF, pushing prices up further. At the same time, some of their competitors are opting for a different route. Instead of settling for an affordable office in the distant suburbs of the Bay Area, new startups are choosing to work out of less competitive cities like Portland and Pittsburgh.

Indeed, a slowdown of tech demand in core markets like San Francisco, New York, and Seattle is the “greatest source of risk to office and multifamily property owners”, according to Fitch Ratings. The tremendous growth of the past couple years had to slow down eventually, and competition from up-and-coming tech hubs will speed the process.

Generally speaking, it is the Midwest and Southwest that earn the attention of tech startups today. West coast companies are hopping over to Portland and Los Angeles, or even to suburbs featuring new commercial development like the Bay Area’s Fremont. In the Midwest, Pittsburgh has seen impressive growth, along with sub-markets in Chicago.

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For property developers, there’s another benefit to developing in emerging markets. With everyone putting up new buildings and renovating old ones to appeal to the incoming tech wave, it’s easier to hop onto trends in interior design.

Jay Chernikoff, founder of coworking space DeskHub, observed that new developments are more likely than ever to feature open space. The coworking space has a location in Scottsdale, Arizona, which is a city in the Greater Phoenix Area. Scottsdale is not a traditional tech hub, but Jay has noticed that new office developments are “removing interior walls and incorporating large sheets of glass with high sight lines,” giving regular employees the kind of views that would usually be reserved for executive suites. In another case, Jerry Hoffman of a consulting firm called Hoffman Strategy Group observed similar trends occurring in Missouri and Nebraska.

One way or the other, it appears that the secondary tech hubs in the U.S. won’t remain out of the limelight for much longer. Faced with higher prices, a swanky, modern office in Phoenix might beat a dingy hole-in-the-wall in a forgotten corner of Palo Alto.