The highly competitive and supply constrained market for tech talent, along with advanced communications infrastructure, has accelerated the expansion of tech talent labor pools beyond major hubs and into smaller markets. These previously untapped and undersupplied regions are gaining appeal from start-ups and established companies. Accordingly, demand for commercial real estate to accommodate this growing workforce is on the rise.

Fifty of the largest markets by number of tech talent professionals in the U.S. and Canada were analyzed to create a scorecard that ranks them (Figure 2). The scorecard uses 13 metrics to measure each market’s depth, vitality and attractiveness to companies seeking tech talent and to tech workers seeking employment. Each metric was weighted by its relative importance to job creation and innovation. Tech talent concentration metrics have the highest weights because they signify clustering of tech workers. Labor costs for tech talent are weighted more heavily than office rents because companies allocate more capital to labor than to real estate.

The top-three markets were the San Francisco Bay Area, Seattle and New York. Comparing the 2017 market rankings with the previous year, a few markets shifted positions. While the San Francisco Bay Area maintained the top score, Seattle and New York each moved up one spot to second and third, and Washington, D.C. slipped to fourth. Supported by strong tech-centric universities, Atlanta rose four spots to fifth and Toronto rose six spots to sixth. Other large changes came from Denver and Newark—both rose six spots to 12th and 13th, respectively.

As many companies expand their technology capabilities, demand for tech talent is growing in both large and small markets across all industries. Major gateway markets such as New York, Toronto and the San Francisco Bay Area dominate overall tech talent growth because of their size. These markets, along with others with a tech talent labor pool of more than 50,000 workers, are categorized as “large,” while those below this threshold are categorized as “small.” Both Kansas City and Portland moved up into the large market bracket in 2016. Both large and small markets have their advantages; while large markets tend to have a deeper pool of talent, small markets typically offer savings in business and living costs.

Tech labor concentration—or its percentage of total employment—is an influential factor in how “tech” the market is and its growth potential. Tech talent comprises 10.3% of the San Francisco Bay Area labor force—the highest concentration of the top-50 markets and about three times the national average of tech talent density. Other large tech markets round out the top-five most concentrated tech markets: Seattle, Toronto, Washington, D.C. and Austin have concentrations of highly skilled tech workers ranging from 7.1% to 8.6% of their overall labor force. This sizeable concentration of highly skilled workers offers an environment conducive to innovation.

In order to evaluate up-and-coming markets, compare them and determine their growth momentum, we considered ”large” and “small” categories separately. During the past five years, the five fastest-growing large markets increased their tech talent labor pools by more than 40% (Figure 3), with Raleigh-Durham and the San Francisco Bay Area both growing their tech talent base by 50%. Smaller tech talent markets also grew quickly. The top-10 small tech markets increased by more than 40%. Charlotte and Tampa grew at the fastest pace of all 50 markets, increasing by 77% and 55%, respectively.

Job growth momentum has picked up in more than half of the 50 markets. Tech talent grew faster over the past two years (2015-2016) in 28 markets when compared with the prior two-year period (2013- 2014). The top-10 markets for momentum grew at least 10% faster during the recent two-year period (Figure 4). Tech employment growth has a multiplier effect that positively impacts economic growth, which in turn can have an immense impact on commercial real estate.

Job growth momentum has picked up over half the 50 markets. Tech talent grew faster over the past two years (2014-2016) in 28 markets when compared with the prior two-year period (2012-2014). The top-10 markets for momentum grew at least 10% faster during the recent two-year period (Figure 4). Tech employment growth has a multiplier effect that positively impacts economic growth, which in turn can have an immense impact on commercial real estate.

A key aspect that top tech talent markets share is high educational attainment. Two-thirds of the top-50 tech talent markets have an educational attainment rate above the U.S. average. In Seattle and Washington, D.C., 55% or more of residents over 25 years old hold a bachelor’s degree or higher (Figure 5). In Atlanta, the San Francisco Bay Area, Minneapolis and Raleigh-Durham, the educational attainment rate is above 48%.

Education, particularly with a focus on technology,2 is best analyzed through degrees completed and issued from higher educational institutions. Metro areas that produced the largest number of tech graduates using the latest data available were New York, Washington, D.C., Los Angeles and Chicago (Figure 6). Large tech talent markets dominate the top-10 degree-granting regions, with the smaller markets of Pittsburgh, Salt Lake City and Minneapolis/St. Paul just missing the list. Demand is high for tech-related classes and degrees, and tech-related degree completions grew by an average of 33% in the top-10 markets since 2011. These numbers provide insight into which markets will produce the highest amount of tech talent entering the labor pool each year.

Graduates do not always remain in the labor market where they earn their degrees; they often migrate to locations that offer the best pay or have the most job opportunities. Analyzing tech-related graduation data and tech-related employment growth, Figure 7 presents the difference between where tech talent workers are employed and where they were educated. Tech degrees cover the most recent five-year period available (2011-2015) and tech jobs added cover the time period when most graduates would be counted in employment figures (2012-2016). The San Francisco Bay Area stands out as a strong tech-job creator, adding nearly 80,500 more tech jobs than graduates. On the other end of the spectrum, Los Angeles, Washington, D.C. and Boston produce the most tech graduates but post a deep deficit when it comes to employing them locally.

Another notable characteristic of tech talent markets is the presence of millennials3 in the workforce. Having grown up with technology, the younger half of this generation only knows of a world connected by the internet. Millennials generally prefer living in cities rather than suburbs, which has helped revitalize some downtown neighborhoods. This trend is best analyzed using data at the city level. As the largest demographic cohort, their robust entry into and maturity within the labor pool contributes greatly to the growth of tech talent across all 50 markets (Figure 8).

Six large tech markets increased their millennial populations by more than 9% since 2010. Seattle grew the fastest at 16.6%. During the same time period, six of the smaller tech markets increased their millennial populations by more than 9%, with Pittsburgh and Hartford growing significantly faster than the rest. Aided by the presence of higher educational institutions, Madison, Pittsburgh and Boston rank highest for concentration of millennials as a portion of the urban population, accounting for nearly 25% or more (Figure 9).

Similar traits between markets cause many of them to appear equivalent, but top tech markets distinguish themselves from the rest with tech clusters and higher concentrations of talent. These clusters typically form around preeminent universities where companies have access to a constant flow of new talent. Stanford University is an essential catalyst for tech clustering in the San Francisco Bay Area, as is Georgia Tech for Atlanta.

Tech clusters can also form around leading companies that draw other, smaller organizations to its region, in turn supporting entrepreneurs as they develop their innovations. Examples of this can be found in Seattle with large tech firms and in Charlotte with large financial services firms. Tech companies use these clusters to collaborate and compete with each other, thereby accelerating the innovation process. These companies in the core high-tech industry are heavily concentrated with about half of their workers doing tech-related jobs (Figure 10). Consequently, tech clusters are likely to form in markets with a strong concentration of high-tech companies.

The greatest cost for companies within tech talent markets is employee wages. These highly skilled and educated workers require a premium that can reach more than double the average non-tech salary. The San Francisco Bay Area ranked the highest for average tech talent worker salary at almost $123,000 per year, more than $9,000 above the next highest market—Seattle. The average tech worker wage in 19 of the 50 top tech talent markets was above the U.S. tech worker average.

The second highest cost for companies is office rent. Companies continue to pursue the benefits of tech clustering and often place a higher value on specific submarkets and even specific streets where tech talent is ample. This has led to some competition for office space and caused rental rates in these areas to increase. Average office rents are the highest in Manhattan, followed by the San Francisco Bay Area and Washington, D.C. Among the top-10 most expensive office markets, Miami and Ft. Lauderdale are the only small tech markets with an average asking rate above $30 per sq. ft.

Combining wage and real estate costs provides insight into what a tech company might pay to operate in one or more of the top-50 tech talent markets. For this comparison, U.S. averages were analyzed to determine the occupational makeup of a typical 500-person U.S.-based tech company needing 75,000 sq. ft. of office space. This breakdown provides interesting insight into relative costs, market-by-market (Figure 12).

Local market wages were applied to the various occupations to determine total annual wage costs by market, and local market rents were used to estimate the annual cost of renting a 75,000 sq. ft. office to house the 500 employees. The San Francisco Bay Area topped the list with the highest estimated costs at more than $57.4 million, followed distantly by the other major tech markets of New York, Washington, D.C., Seattle and Boston. These high-cost markets continue to attract employers seeking to push the boundaries of innovation, as well as the tech talent that makes it possible.

Tech talent growth, primarily within the high-tech industry, has reached more than 1 million employees in the past five years and has been the top driver of office leasing activity in the U.S. during that time. The high-tech industry’s share of major leasing activity4 nationwide increased to 19% in 2017 from 11% in 2011—the largest single share of any industry. Many tech talent markets, especially those with high concentrations or clusters of tech companies, have seen rising rents and declining vacancies as a result.

Significant demand for office space in top markets that have added tens of thousands of workers during the past five years raised rents to their highest levels and pushed down vacancy rates to their lowest levels. Rent growth is most prominent in the large tech markets, with office rents in the San Francisco Bay Area more than double what they were five years ago. But the decrease in vacancy rates is present across both large and small tech markets. Vacancy rates in the San Francisco Bay Area and New York are the lowest of the top-50 tech talent markets, and some small markets like Madison and Nashville are not far behind (Figure 14).

The in-migration of talent to these tech markets has a sizeable impact on residential real estate as well. Although Manhattan remains the most expensive market in which to rent an apartment, 30 of the top-50 tech talent markets have a cost of living above the U.S. national average (Figure 15), according to Moody’s Analytics. Comparing the annual average apartment rent with the annual average tech-worker salary, we found that even among the most expensive markets tech salaries can cover the high cost of living (Figure 16) based on the affordability standard of 30% of income to housing. Considering the underlying fundamentals of tech talent markets, we conclude that both occupiers and investors can pursue profitable real estate strategies.