Whilst there is turbulence in the tech market, resulting in space reconsideration for some occupiers, the office remains a focal point for the sector, however, its use is changing. Big tech has seen the main challenges, although there are pockets of growth in some locations and within specific sectors of tech. There are opportunities for those growing tech firms to benefit from the space being offloaded by others, which is generally high quality and helping to attract talent. We also explored the impact on tech occupiers further in our recent Tech Cities report.

To understand how these tech industry trends are affecting office markets in the SPOC locations, we spoke to brokerage and research teams in three Tech Cities with lower vacancy rates compared to other tech markets: Paris, Houston, and Shenzhen.

• Are tech occupiers in your market looking to downsize or offer up some of their occupied space for sublet? Why or why not?

JM & NK: Tech occupiers are still running the gamut post-Covid. Over the last 6–12 months, we have seen everything from tech groups downsizing and going virtual in order to redirect their real estate budget towards hiring globally to other groups signing five to seven-year leases with the current work climate in mind (making the offices feel more home- or hotel-like, three or four days per week in-office schedules, cleaner and brighter spaces with a greater emphasis on human well-being). At this time, it appears that the sublet run from Covid-19 has subsided.

JM & AL: It does depend on the specific subsector. ‘Hard’ tech is still growing – government support is strong for advancing primary research and promoting technological self-reliance. For online platforms, there has been a regulatory crackdown in recent years (especially for anti-trust practices and for specific sectors such as online education or youth online gaming). Consumer-focused tech sectors have also had some market headwinds, with consumer sentiment having taken a hit in the last year. Some mid-size companies are still growing and moving into new sectors. Some of the tech giants who expanded massively in 2021 are now tending to downsize and adjust their CRE strategies with focus on cost saving and efficiency as well as experience improvements. However, the tech ecosystem is still robust and evolving, so the tech sector is still playing a key role in new take-up.

There is also no subletting in China. Lease terms here are relatively short, however, at three to five years, so if companies are downsizing, then it will either be through early termination of their lease or when their lease expires. Some tech firms own their office space and may or may not lease out unused space to the market.

SV & CR: Despite what’s happening in the tech industry at the moment, we have not seen any impact (yet) on real estate in Paris. No downsizing, no subletting. Employment law is regulated in France, so it’s more complex to make people redundant. For the moment, headcounts and spaces that are occupied haven’t seen any changes. But it’s hard to say for now if this will change in the near future.

• How do the key tech occupiers in your market see the current situation in the market? Are they well-placed to weather the storm?

JM & NK: As for now, key tech occupiers seem to have found a balance that works – whether the balance is everyone back in the office three days of the working week or all remote – for their firm. There were definitely a handful of companies we saw raise the white flag on the office space front, but by and large, companies were able to figure out how to make their situation work.

JM & AL: Key tech occupiers are keen on learning and deploying new ways to proactively improve their CRE strategies to save cost and support talent attraction; while some are downsizing, others are shifting from old buildings to newer spaces as the as the price differential for these newer assets is lower compared to two years ago.

Big Chinese tech firms have seen significant devaluation over the last three years in response to regulatory tightening. Many are now taking steps to restructure their businesses: Alibaba just announced the formation of six subsidiaries (cloud computing, e-commerce, local services, logistics, digital commerce and media) which have the potential for separate listings.

SV & CR: It is clear from the fundraising in 2022 that the more mature start-ups will have the means to continue their development in 2023. This is less clear for the youngest companies, which have had more difficulty in raising funds.

A recent EY study on fundraising shows that financing French start-ups, whether they are just starting out or in their first few years of existence, have become more complex and expensive. In 2022, equity financing operations reached €13.5 billion, up 17% on the previous year. In contrast, there were only 735 fundraising deals, down 6%.

The most active sectors were concentrated around internet services and software, with total rounds of €2.98 billion and €2.94 billion, respectively. On the third step of the podium is fintech, with €2.34 billion, up 7%. The cleantech sector followed with a 172% increase and €2.08 billion raised.

• For the space that is coming back to market from the tech occupiers, which sorts of firms are taking up the space?

JM & NK: For Houston, the green/renewable energy firms are stepping up as well as any group looking to reposition themselves in a modern workplace for the talent they are looking to hire. Companies that want to be in the office more are using their space as a recruiting tool. A lot of their newer employees want the corporate experience and the office is a large part of that.

JM & AL: It’s still mostly other tech companies that are driven to take the back-to-market space as these offices are styled for their purposes and well fitted out, and therefore provide advantages in reducing capital expenditure for those wanting to save costs while improving experience.

The tech occupiers that have downsized have only recently done so, so it is still too early to say which other firms outside of the tech sector will fill their spaces at the moment. In some cases, such as Hangzhou’s Future Sci-tech city, Grade A office availability has been tight, and you may see some firms upgrading from Grade B premises. There may also be opportunities for some flexi space operators to step in.

SV & CR: We do not see any space coming back (yet) in the market. If there were space made available, as most tech companies are in the CBD, the usual occupiers would be finance, law firms and co-working providers.

Outlook – Opportunities for offices

JM & NK: There are significant opportunities for tech and other sectors in Houston. The market as a whole has seen new construction emerge or be proposed in prime infill areas that cater to an urban lifestyle. There is definitely still a flight to quality that smaller firms are happy to take advantage of when the opportunities arise. New live/work/play developments have appeared that will be packed with people as soon as they open their doors. Houston’s business-friendly economy and low cost of living help in perpetuating this. While landlords in certain submarkets are faring better, others are still more than willing to agree to aggressive economics to lure tenants to their space.

JM & AL: There are still growth opportunities in tech, as long as the firms align with government priorities. China is undergoing massive digitalisation of its economy, and there are tremendous unrealised opportunities that could result from this. As the global position of Shenzhen is rising fast, we are expecting sustainable growth opportunities for the financial sector, alongside others as well.

SV & CR: Offices remain the centre of operations for businesses in France, with younger employees seeing the benefit of the mentorship and informal interactions between peers and management. It is both cultural and generational, and that is changing slowly with younger generations and the tech industry. But most managers still like to have their team around them in the office, and a city-centre location for many tech companies is a way to attract new talent, attract people back to the office and offer a good office experience compared to working from home. Tech companies are very fond of offices in the heart of Paris, where there is very little supply. It is therefore not certain that they will have many opportunities over the next few months, due to the lack of supply.

On the other hand, occupiers looking for larger spaces and wishing to benefit from advantageous financial conditions will be able to gain from numerous offers in markets such as La Défense and the Western Crescent, where the vacancy rate is high and where landlords will be inclined to grant generous incentives.

_{Read the articles within Spotlight: Savills Prime Office Costs – Q1 2023 below.}