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Industry Concentration and Risk

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Presentation delivered by Jiachen Lee and Alastair Townsend of UW's Masters of Science in Real Estate program to the ULI's Industrial and Office Park Product Council at the 2017 Spring Meeting in Seattle.

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Industry Concentration and Risk

  1. 1. Industry Clusters and Risk Jiachen Li Univ. of Washington MSRE ’17 Alastair Townsend Univ. of Washington MSRE ‘17
  2. 2. Agenda • Which cities’ are growing and why? • How does tech drive rapid growth? • What makes a tech cluster? • Is competition among tech hubs heating up? • Are there risks, and how might we manage them? • What can we learn from Seattle’s past?
  3. 3. Tech’s Appetite for Space US Leasing Trends by Industry High-Tech Financial Services Business Services Healthcare/Life Sciences Creative Industries Legal Insurance Government Energy 2016 2015 2014 2013 Source: CBRE Research 0% 5% 10% 15% 20%
  4. 4. Runaway Tech Growth for Tech & Creative Jobs High-Tech Software/Services Media Entertainment Biotech Telecom U.S. Total Non-Farm Office Jobs (excl. tech) High-Tech Manufacturers Design Services Source: CBRE Research
  5. 5. 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% 5.0% Orlando Nashville Jacksonville Atlanta Dallas-Fort Worth Riverside Charlotte Las Vegas Salt Lake City Seattle Tampa Raleigh Grand Rapids Kansas City Austin High in Tech Comparative Year-on-Year Job Growth (Feb. 16/17) Source: Bureau of Labor Statistics, Employees on nonfarm payrolls by state and metropolitan area, not seasonally adjusted
  6. 6. 4.3% 3.9% 3.9% 3.6% 3.5% 3.5% 3.2% 3.2% 3.1% 2.9% 2.8% 2.8% 2.8% 2.7% 2.7% Orlando Nashville Jacksonville Atlanta Dallas-Fort Worth Riverside Charlotte Las Vegas Salt Lake City Seattle Tampa Raleigh Grand Rapids Kansas City Austin High in Tech Comparative Year-on-Year Job Growth (Feb. 16/17) Source: Bureau of Labor Statistics, Employees on nonfarm payrolls by state and metropolitan area, not seasonally adjusted
  7. 7. Software [packaged] Internet Services Telecommunications Services 9.6% Tech Workers Seattle 178,766 Source: CompTIA, Cyberstates 2017, CBRE Research $53bTech’s Economic Impact:
  8. 8. Dallas- Ft. Worth Telecommunications Services Engineering Services Internet Services 209,568 6.3% Tech Workers Source: CompTIA, Cyberstates 2017, CBRE Research $52bTech’s Economic Impact:
  9. 9. Software [packaged] Measuring and Control Instruments Mfg. Engineering Services 10.4% Tech Workers Raleigh 60,269 Source: CompTIA, Cyberstates 2017, CBRE Research $12bTech’s Economic Impact:
  10. 10. Austin Computer, Peripheral, & Software Distr. Semiconductor Mfg. Computer & Peripheral Equipment Mfg. Tech Workers 113,176 12.1% Source: CompTIA, Cyberstates 2017, CBRE Research $25bTech’s Economic Impact:
  11. 11. Small But Significant Tech % of overall employment 29.6% 12.1% 10.4% 9.6% 6.3% 50.7% 20.7% 16.8% 15.5% 10.8% San Jose Austin Raleigh Seattle Dallas-Fort Worth Tech Share of Employment Tech's Economic Impact Source: CompTIA, Cyberstates 2017
  12. 12. How does tech fuel rapid growth?
  13. 13. $$$ Traded Sector Non-Traded Sector Global Marketplace $$ Traded vs. Non-Traded Comparing stimulative effects
  14. 14. Jobs That Produce More Jobs Comparing stimulative effects Hi-Tech Worker X 5.0 Manufacturing Worker X 1.6 Source: Enrico Moretti, The New Geography of Jobs
  15. 15. Hi-Tech Worker X 5.0 Manufacturing Worker X 1.6 Jobs Produce More Jobs Comparing stimulative effects Pros Non-Pros Source: Enrico Moretti, The New Geography of Jobs
  16. 16. $$$ Traded Sector Non-Traded Sector Global Marketplace $$ Tech Jobs Produce Even More Jobs
  17. 17. What makes a tech cluster?
  18. 18. Academia Raleigh Duke, UNC, NC State
  19. 19. Spinoffs Dallas-Fort Worth Texas Instruments
  20. 20. Luck! Seattle Microsoft
  21. 21. Forces of Agglomeration
  22. 22. 1 - Thick Labor Market Source: Enrico Moretti, The New Geography of Jobs
  23. 23. 33% 45% 46% 47% 48% 48% 48% 49% 49% 55% 59% US Average Madison Portland Boston Austin Raleigh-Durham Minneapolis SF Bay Area Atlanta Washington, DC Seattle Well-Educated 25+ Years Old, Bachelor’s Degree or Higher Source: US Census Bureau (City/County), 2014.
  24. 24. $103K $108K $109K $145K $169K $217K $52K $57K $58K $68K $83K $114K Raleigh Austin Dallas Seattle San Francisco San Jose Median Wage Tech Wage Source: CompTIA, Cyberstates 2017 Tech Salaries Average Annual Tech Wage vs. Median Wage
  25. 25. 2 – Resources [ VCs ] Source: Enrico Moretti, The New Geography of Jobs
  26. 26. Seattle $727m [2.5%] Raleigh (Durham) $258m [0.9%] Dallas $308m [2.1%] San Francisco $6,471m [21.8%] San Jose $4,175m [14.1%] Total VC Investment Total investment in millions [% North American Total] Austin $626m [2.1%] Source: The Martin Prosperity Institute
  27. 27. Seattle $198 Raleigh (Durham) $475 San Francisco $1,415 San Jose $2,146 VC Investment Per Capita Austin $323 Source: The Martin Prosperity Institute
  28. 28. 3 – Knowledge Spillovers Source: Enrico Moretti, The New Geography of Jobs
  29. 29. More Skilled Workers More Tech Companies Startups & Spinoffs Knowledge Spillovers Resources VCs Tech’s Virtuous Circle
  30. 30. The Seattle Tech Universe Image: Madrona Venture Group , Washington Technology Industry Association
  31. 31. MICROSOFT
  32. 32. AMAZON
  33. 33. UNIVERSITY OF WASHINGTON
  34. 34. Academia
  35. 35. $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 0 100 200 300 400 500 UNC [Raleigh] U. of Washington [Seattle] Duke [Raleigh] U. of Texas [Dallas/Austin] UC Berkeley [San Francisco] Stanford [San Jose] VC-Backed Firms Founded (2010-2016) Capital Raised in Millions (2010-2016) Universities as Incubators Startups (grey) & VC capital (green) generated Source: 2016 Scoring Tech Talent, CBRE Research
  36. 36. Competition Among Clusters?
  37. 37. Income and Opportunity Tech Renters’ Disposable Incomes vs. Job Opportunity Sources: LinkedIn, Zillow
  38. 38. Tech Renters Tech Renters’ Disposable Incomes vs. Job Opportunity Sources: LinkedIn, Zillow Percent Hired Last Year %Post-TaxDisposableIncome
  39. 39. Tech Home Owners Tech Owners’ Disposable Incomes vs. Job Opportunity Sources: LinkedIn, Zillow Percent Hired Last Year %Post-TaxDisposableIncome
  40. 40. Where the Grass is Greener What Zillow’s Website Metrics Reveal Source: Zillow
  41. 41. Comparing Costs to the Valley $217K $109K $145K $103K $108K San Jose Dallas Seattle Raleigh Austin $50/sf $25/sf $35/sf $21/sf $34/sf Office Cost Direct asking rent Wages Avg. Tech. Wage Sources: JLL, Technology Office Outlook | Zillow | CompTIA Properties, LLC.
  42. 42. Seattle Bay Area companies with Seattle offices 375k SF (2016*) 607k SF (2019) 335k SF (2016) 543k SF (2018) Future Total: 982k SF Future Total: 878k SF *Google expanded its presence in Kirkland by 180,000 square feet in 2016.
  43. 43. What are the risks, and how might we manage them?
  44. 44. Location Quotients MSAs with the highest location quotients Tech Healthcare Biotech 1 San Jose 5.24 Inland Empire 2.62 N. New Jersey 3.67 2 Austin 2.53 Memphis 2.43 Boston 3.66 3 Raleigh 2.08 Nashville 1.92 Memphis 3.08 4 San Francisco 1.95 Indianapolis 1.76 Orlando 2.80 5 San Diego 1.74 Norfolk 1.72 San Diego 2.43 Sources: Pacific Coast Capital Partners, BLS
  45. 45. Location Quotients MSAs with the highest location quotients Finance Energy Defense 1 Stamford 1.84 Houston 9.84 Orlando 4.31 2 New York 1.66 Oklahoma City 9.50 Washington, DC 3.49 3 Charlotte 1.66 New Orleans 5.45 Norfolk 2.99 4 Minneapolis 1.29 Richmond 2.64 Baltimore 2.06 5 Jacksonville 1.27 San Antonio 2.55 Boston 1.77 Sources: Pacific Coast Capital Partners, BLS
  46. 46. [Location Quotient-Based] Diversification by LQ Efficient Frontiers 1973.4 to 1990.4 (Mueller)
  47. 47. 1.3 1.1 1.7 1.3 1.1 1.5 1.3 1.8 4.3 1.7 1.4 1.3 1.3 1.2 1.5 2.1 1.4 2.5 1.9 1.6 2.6 1.1 1.6 1.2 1.1 1.1 1.2 2.8 2.0 1.2 Finance Energy Defense Tech Healthcare Biotech Location Quotients Growth MSAs’ high LQs (>1.0) Sources: Pacific Coast Capital Partners, BLS
  48. 48. Seattle, A Lesson in Risk and Diversification.
  49. 49. -80,000 -60,000 -40,000 -20,000 - 20,000 40,000 60,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 *2017 Growing Since the Recession Annual Job Growth in Seattle’s Metro Area Source: WA Employment Secutiry Dept.; 2017 *: Windermere Economic Forecasts
  50. 50. 10,000 9,100 7,400 7,400 5,900 5,300 -6,500 Retail Trade Education & Health Leisure & Hospitality Pro. & Business Services Information Government Aerospace Manufacturing Beyond Boeing Annual Job Growth in Seattle MSA ‘17 Source: WA Employment Secutiry Dept., Feb-16 to Feb-17 note seasonally adjusted
  51. 51. Transportation & Logistics Technology Retail Financial Life Sciences Institutions
  52. 52. 0 50K 100K 150K 200K 250K 300K 350K 400K 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Amazon Takes Off Worldwide Number of Employees (‘05-’16)
  53. 53. What Could Go Wrong? NASDAQ Composite Index 1995-2001: dot-com bubble ?2007-2008: financial crisis
  54. 54. Thank You! Jiachen Li jiachenl@uw.edu Univ. of Washington MSRE ’17 Alastair Townsend alatown@uw.edu Univ. of Washington MSRE ‘17

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