AI Investment Is Giving Tech Office Markets A Boost

The long-range effects might mean more investment in data centers and not in office, which might need fewer people.

Replace people with machines? The growing fear in the current wave of generative AI has had an ironic improvement on hiring certain types of workers — and the need for office space in high tech — according to Moody’s Analytics.

“The national office market has been on rocky footing for a few years now, but better leasing activity combined with limited construction prevented vacancy rate spikes as expected this quarter – vacancy actually fell to 18.8%, while rent grew by 0.2%. What else was happening in Q2? Artificial intelligence (AI) investment skyrocketed in the tech sector,” they wrote.

That is a correlation, not necessarily causation, but then correlation also doesn’t inherently mean that there can’t be causation.

In Q1, Moody’s did some reshuffling of emerging and established tech designations of metros. Afterwards, they found that the emerging group of metros saw office vacancy rates decline by 70 basis points. Established tech metros had flat vacancies. The national average dropped by 20 basis points.

Much of the activity was concentrated in a handful of examples. Nashville saw a drop of 340 basis points. Another Tennessee metro, Knoxville, was down 160 basis points. Buffalo, New York had a 90-basis point drop. Though the worst emerging market performance was the 50-basis point-increase in Norfolk, Virginia.

Similarly, what slowed established tech locations was another handful of metros where vacancy rates were up significantly higher than the national average. “Denver, Dallas, San Francisco, and Washington, DC were the main culprits: they saw vacancy increases of 100 bps, 90 bps, 60 bps, and 60 bps, respectively,” they wrote. “Of all the tech and emerging markets covered, 12 saw vacancy drops while 14 markets that saw a vacancy increase or flat movement.”

Then there were rents, with 0.4% growth in emerging markets and 0.2% in established tech markets as well as the national average.

“The strongest performing metros were littered with both emerging and established markets as the top four overall markets consisted of emerging markets Knoxville (1.1%) and San Bernardino (0.7%) and established markets Dallas (0.9%) and Baltimore (0.7%),” Moody’s wrote. “Out of the 11 emerging markets, Norfolk was the only emerging market with a rent drop, but it was only a minor 0.1% decline. Out of the 15 established tech markets, rents dropped in only three. San Francisco saw a sizable drop of 0.7% while Austin and San Jose decreased 0.2% and 0.1%, respectively.”

Moody’s takes the results as having been a product of the emergence of generative AI as a significant type of product. At the same time, they acknowledge that hype is nothing new in the tech industry. “The real question, though, is when and how companies will turn a profit on this advanced technology,” they added. “With specialized chips and data servers making the entire endeavor expensive to run, there needs to be a payoff with revenue-generating products that come along with it. Only then will it separate itself from past innovations that produced similar hype. Overall, the industry is confident that in due time this will be the case.”

It could be real and a boon to office needs in tech. But that doesn’t mean a net improvement, because one of the unstated but clear implications of AI technology is a reduction of headcount in multiple areas, because if it were more “efficient” financially and cheaper — and that’s compared to headcount, not to older computers, because the goal is to remove cost — why would companies keep on those now redundant employees? And that could mean as much if not more office space lost to AI than gained from it.

Erik Sherman | Globest.com