No Bubble for Tech Properties

By Stephen Boyd, Director of U.S. REITs, Fitch Ratings

Stephen Boyd, Director of U.S. REITs, Fitch Ratings

Technology properties in centers throughout the country are showing signs of strain. While this may conjure up memories of the dot-com bubble that burst some 15 years ago, however, it would be inaccurate to say the environment of today is headed in the same direction.

Office and multifamily REITs are most at risk from reduced tech tenant demand in markets like San Francisco, Silicon Valley, Seattle, New York and Los Angeles. Retail REITs with meaningful presence in these markets are next in line when it comes to risk. That said, retail properties should benefit from longer leases (unlike multifamily) and less tenant failure risk and shadow space (unlike office).

The rampancy of speculative leasing in tech employment-oriented submarkets will influence the severity of an office market downturn due to lower tech tenant demand. It should be noted that widespread speculative leasing infrequently occurs. However, it was a key reason for the collapse in office rents in San Francisco and Silicon Valley following the tech bubble burst of the early 2000s. Conventional wisdom then held that San Francisco should weather a tech industry downturn reasonably well, since new supply was balanced with demand growth. Only in hindsight did the artificial boost to demand from rampant speculative leasing by weak credit tenants become clear.

While comparisons to the environment of 15 years ago are inevitable, there are stark differences in the tech commercial real estate environment of today. For one thing, tech company business models are generally formed around existing technological capabilities. Many of the companies that failed during the dot-com bubble were little more than a marketable idea in a white-hot capital markets environment. Another difference is that many smaller tech companies of today do not cover their lease payments with operating cash flow. Many have adequate financing to avoid a payment default during the lease term.

Taking this into account, renewal and re-leasing risk is always a concern if and when leases expire during a period of weak capital access.