Tech Sector Driving Chicago Economy and Office Demand

Transcription

1 Tech sector driving Chicago s economy and office demand

2 02 Tech Sector: Driving Chicago Economy And Office Demand Described by J.B. Pritzker as a fifteen year overnight success, Chicago has witnessed rapid growth in its technology industry, emerging as one of the most recognized and respected technology hubs in the nation. The city s success is due to a combination of rising access to venture capital funding, increased mentorship networks coupled with deep industry demand for products, a highly educated and skilled workforce linked to a critical mass of world-class institutions and the infrastructure required for innovation, all supported by home-grown public-private partnerships. With significant growth and development in a technology ecosystem that encourages both original thinking and investment, Chicago s innovation economy is driving success and demonstrating a sustainable future.

3 04 Tech Sector: Driving Chicago Economy And Office Demand Big Money Flowing Annual Funding Raised by Chicago Start-Ups With nearly $1.6 billion in total funding (50 percent higher than 2013), more venture capital flowed into Chicago startups in 2014 than any prior year. Crossing the $1.0 billion threshold for the second year in a row is another sign that Chicago s tech industry has staying power, indicating the city is taken seriously in venture capital (VC) circles as a major producer of high-growth companies. Like many other local firms increasing their level of investment in Chicago startups, First Analysis Managing Director Howard Smith stated to Crain s Chicago Business. We ve stepped up the pace of deals in Chicago because of opportunity, he said. 1,800 1,600 1,400 $1,585,000,000 There are more companies staying here and getting to meaningful revenue run rates. More entrepreneurs are sticking around, and we ve got more entrepreneurs who are on their second and third startups. $ Millions 1,200 1, $1,453,000,000 $1,055,000, Investors from large funds on the coasts are showing up more frequently as well: The rest of the world is taking notice (that) there are great entrepreneurs, engineers and companies coming out of Chicago. Now there is a community of success, Roger Lee of 400 Menlo Park, Calif.-based Battery Ventures told Crain s. At the same time, Chicago-based banks such as PrivateBank, are following suit, launching specialty groups focused on lending to the local tech industry. Still, local VC funding and debt investment remain extremely disciplined, resulting in a heavy focus on profitability, a higher quality of Chicago-based companies and a sustainable 200 $295,000,000 $391,000,000 outlook for the sector * Source: Built in Chicago *Groupon raised $972 million

4 06 Tech Sector: Driving Chicago Economy And Office Demand Major Idea Factories in the Chicago CBD Tenant Location SF Space type Submarket UI Labs Goose Island 94,000 Research center Near North Side 1871 Merchandise Mart 75,000 Incubator River North Tech Nexus 20 N Wacker 45,932 Incubator West Loop MATTER Merchandise Mart 25,000 Incubator River North An Ecosystem That Encourages Innovation And Investment The significant development of Chicago s tech ecosystem in recent years has also led many entrepreneurs to choose to start and grow their businesses in Chicago rather than moving to traditional tech strongholds like the Bay Area. Critical to its success, Chicago offers a highly educated labor pool coming out of Northwestern University, the University of Chicago, the University of Illinois and other world-class institutions across the Midwest. Commitment from Chicago s respected universities to the technology sector has been demonstrated by Northwestern University which announced last spring that it will launch its own incubator for student entrepreneurs. Additional examples include the new partnership between the University of Chicago s Booth School of Business and the University of Illinois College of Engineering connecting students in the nation s third-ranked MBA program to the sixth-ranked engineering program. WeWork 210 N Green 25,000 Coworking River West WeWork 111 W Illinois 25,000 Coworking River North Industrious 320 W Chicago 17,000 Coworking River North Office Port 9 W Washington 14,383 Coworking Central Loop Work Spring 30 W Monroe 13,428 Coworking Central Loop Assemble 1165 N Clark 13,000 Coworking Gold Coast Grind 2 N LaSalle 10,692 Coworking Central Loop Following in the footsteps of successful tech hubs such as Boston, local universities and private groups have started to partner together, opening tech centers to breed the next generation of startups. At the forefront is 1871, a 75,000-square-foot (and growing) startup hub located at the Merchandise Mart. Held up as a symbol of the city s bustling tech sector, 1871 offers a connection point for entrepreneurs, venture capitalists, academics and industry officials. In an effort to replicate the 1871 model and capitalize on the city s entrepreneurial energy, more than a dozen additional idea factories (encompassing a variety of space types) have either opened or are in planning stages. One of the most recent examples is UI Labs, a public-private partnership between the University of Illinois and more than 70 corporations and universities including Boeing and Illinois Tool Works both locally headquartered Fortune 500 companies. UI Labs will be located on Goose Island in a 94,000-square-foot facility. In addition, MATTER, a new bio-tech incubator, opened in early 2015 next door to 1871 in the Merchandise Mart. All of these partnerships and facilities are breaking down the barriers that once existed between corporate board rooms and academia and are now facilitating the crucial process of commercializing academic research into businesses that create jobs. Catapult 321 N Clark 10,358 Accelerator River North Space 444 N Wabash 10,000 Coworking River North Coalition 18 S Michigan 9,000 Incubator East Loop Enerspace 1046 W Kinzie 8,700 Incubator River West Next Space Coop 230 W Superior 5,428 Coworking River North Source: JLL Research

5 08 Tech Sector: Driving Chicago Economy And Office Demand Soaring Acquisitions And IPOs Indicate Strong Long-Term Prospects On the exit side the payday that occurs when a venture-backed company is acquired or goes public last year was a good one. In 2014 alone, acquisitions and IPO valuations approached $8 billion, an increase of more than 161 percent year over year, with companies like Cars.com, GrubHub, Fieldglass and Apartments.com enjoying enormous liquidity events. Notably, Chicago software pioneer Fieldglass was acquired by SAP AG for $1.0 billion and Apartments.com was purchased by CoStar Group for $585 million. Public-Private Partnerships Creating Strategic Synergies Coming up fast behind those are at least 30 companies that are late-stage pre-ipos as well as several hundred early- and growthstage companies with billion-dollar potential. These investments and exits show the Midwest is emerging as a leading region for digital technology investing, and Chicago is making significant progress toward Mayor Rahm Emanuel s goal of turning Chicago into Startup City, J.B. Pritzker said. Liquidity and a proven track record of highly successful exits is serving as a catalyst for entrepreneurs to make the choice to start and grow their businesses in Chicago, a stark contrast from the 90s when innovators like Marc Andreeseen, a graduate of the University of Illinois, moved to California to launch Netscape. Chicago enjoys a mature business community and strong customer base, both of which help make the city an attractive location for startups. The city s multitude of Fortune 500 and Fortune 1000 companies provides an embedded base of corporate consumers demanding products and innovation as well as a connection point for entrepreneurs and mentors. Mayor Rahm Emanuel has made the growth of the Chicago technology economy a key priority, attracting thousands of technology jobs to the city and working directly with dozens of companies to promote growth. This is true of Chicago native Dag Kittlaus, creator of Siri. After selling his company to Apple, Dag is now working on his next Chicago-based company an artificial intelligence, next generation of Siri product called Viv. Dag credits the availability of experts in design, branding and creativity in Chicago as key players in the success of his new venture. Key Tech Exits of 2014 Under the Emanuel administration, the city has reported 30 percent growth in the tech sector and, in November 2013, the Mayor committed himself to an initiative aimed at doubling the size of the city s tech sector by adding 40,000 new jobs over the next 10 years. Company IPO value Type Acquiring Company Motorola Solutions* $3.5 billion Acquisition Zebra Cars.com $1.8 billion Acquisition Gannett Fieldglass $1.0 billion Acquisition SAP Apartments.com $585 million Acquisition CoStar To further economic progress and development, the public sector has proactively partnered with the private sector, implementing programs to expand networking opportunities by engaging Chicago s business community in providing direct support to the start-up community. An example is the mayor s work with World Business Chicago to establish ChicagoNEXT, which applies pro-business initiatives to drive growth and attract more ventures in the fields of science, technology, innovation and entrepreneurship. Mayor Emanuel deftly placed J.B. Pritzker at the organization s helm. Widely acknowledged as the leading proponent of entrepreneurship and a stronger technology sector focus in Chicago, Pritzker has dedicated himself to ensuring that Silicon Prairie becomes an enduring moniker for the city. bswift $400 million Acquisition Aetna Trunk Club $350 million Acquisition Nordstrom GrubHub $192 million IPO IPO Paylocity $119 million IPO IPO Optionshouse Undisclosed Acquisition General Atlantic Trademonster Undisclosed Acquisition General Atlantic Source: Built in Chicago * This acquisition was not included in Built in Chicago s 2014 exits total

6 10 Tech Sector: Driving Chicago Economy And Office Demand Fundamental Driver Of The Local Economy A key result of Chicago s surging tech ecosystem has been job creation. In 2013, Chicago s tech employment growth of 8.0 percent placed the city among the top three on a national scale of major tech markets for annual tech employment growth. Chicago is showing more growth than established tech markets such as Boston, LA and Dallas. Benefiting from a much lower cost of living than major markets on either coast, businesses vying for top talent with top wages have a competitive edge in Chicago. According to Forbes, a technology engineer costs a company in Silicon Valley $30,000 a month, but due to the lower costs of living and doing business in the Midwest, Chicago-area tech employers can snatch up top talent for roughly one third of that price. Companies such as Google, Uber, Yelp, Twitter, Salesforce.com and Facebook have increased staffing or announced plans for Chicago expansions in the past few years and, given the relative bargain of Chicago real estate when compared to coastal markets, other big-name tech firms are expected to enter the market as well. Conservative estimates suggest Chicago s tech ecosystem will fuel another 4.3 percent job growth in the tech sector by % Tech Services Employment Growth for Major Markets*, 2013 At a more macro level, the demand tech employers are showing for talent is also driving accelerated economic recovery through multiplier effects. The tech workforce is more educated and earns an average of almost $80,000 per year in Chicago, twice the average local earnings for the region. Based on the current tech employment, it is estimated that the gross purchasing power of this workforce is more than $13.7 billion annually. A surge of high paying jobs is driving a transformation of Chicago s urban core. Downtown Chicago s residential population grew by 48,000 people, or 36 percent, from 2000 to 2010, the greatest rate of growth for any major U.S. city during that time period, in both nominal and percentage terms. 12.0% 10.0% 8.0% 12.9% 8.6% The multiple construction cranes now seen across the skyline are another reminder of tech s impact. New tech jobs helped fuel a flurry of high-rise apartment construction in the city, as developers anticipate swelling ranks of the Millennial demographic cohort (the 81 million born approximately between ) who want to live and play near their workplaces. This residential population growth has expanded into burgeoning areas such as the West Loop and River West, previously not considered as locations for such high-end residential development. With more permanent residents, these areas are supporting more restaurants, hotels, and hospitality venues making the Chicago CBD a more vibrant, 24-hour destination to live, work and entertain. 8.0% 8.0% 6.0% 6.5% 6.1% 5.7% 4.0% 2.0% 2.4% 0.0% Bay Area** New York Chicago Seattle- Bellevue Dallas Boston Los Angeles Atlanta Source: BLS, JLL Research * major markets include markets where tech employment surpasses 50,000 jobs ** includes the Bay Area markets of San Francisco, Silicon Valley, East Bay and SF Peninsula

7 12 Tech Sector: Driving Chicago Economy And Office Demand Rapidly Growing And Sustainable Industry Is Changing The Office Landscape The greatest amount of tenant demand in Chicago is coming from technology tenants, fueled by robust hiring. Chicago technology firms continue to demonstrate a voracious appetite for real estate, absorbing more than 4.6 million square feet in the CBD over the last three years ( ), an average of more than 1.5 million square feet per year. Tech s impact can be felt at the very top end of the spectrum, too. Prior to 2011, tech s share of the market s top 20 largest leases wavered below five percent and in 2009 there were no tech-related lease transactions among the 20 largest in the CBD. From 2011 to 2014, tech s share of the large lease market exhibited a compounded annual growth rate of over 21.9 percent and in 2013 and 2014, the sector accounted for 36.0 and 25.7 percent, respectively. In the medium and large transaction segments (>20,000 square feet) an additional pipeline of 11 firms seeking nearly 790,000 square feet will continue to drive market absorption. True to past preferences, these tenants are chasing office space in the most desirable, amenity-rich, transit-oriented locations, which are extremely limited in supply, thereby driving meaningful rent growth. As the high-growth firms located in incubators such as 1871 or boutique brick-and-beam buildings expand their operations and outgrow the limited supply of space in River North, they look afield to the other CBD submarkets, particularly the adjacent West Loop as it similarly provides these progressive tenants with the live-work-play environment they are seeking. Tech s accumulation of office space is also a vivid example of a shift taking place nationwide. In the past, companies that needed large amounts of space often fled to low-slung campuses in the suburbs. But now, more fast-growing employers, especially technology companies, are eschewing the suburban campus for clusters in the city. A chief reason: they are following the younger workers they prize, those in the Millennial generation who today are in their 20s and early 30s. Another key indicator is that Chicago has a resilient lead over the U.S. average with approximately 15 percent of its workforce aged between 25 and 39 years, the largest surplus in local workers by age grouping. Tech Sector s Percentage Share of Top 20 Leases, % 36.0% Annual CBD Tech Leasing Activity, % 2,000,000 25% 25.7% 1,800,000 1,600,000 1,776,508 SF 20% 15% 23.8% 1,400,000 1,574,795 SF 10% 14.2% 1,200,000 Square Feet 1,000, ,000 1,205,303 SF 5% 0 4.5% 1.9% 3.6% 3.6% 0.0% 2.8% 600, , ,000 0 Source: JLL Research Source: JLL Research With collaboration at the core of the tech culture, tech companies tend to gravitate to either buildings with a critical mass of tech tenants or buildings clustered near tech hubs such as the Merchandise Mart. Historically, much of the demand by tech tenants was concentrated in River North, leading to a precipitous decline in the submarket s vacancy rate, now standing at only 6.4 percent (the lowest in the CBD) as well as significant rent growth, up 15.3 percent over the past four years. As River North office occupancies have strengthened, tech startups and creative firms have swung their attention to the other traditional CBD submarkets (e.g. West Loop, Central Loop and East Loop) in addition to emerging submarkets such as River West and Fulton Market. With this transfer, the positive impact the tech sector has on the real estate market has spread throughout the entire CBD.

8 14 Tech Sector: Driving Chicago Economy And Office Demand Bright Outlook Shows Tech Industry s CBD Momentum There is no doubt that Chicago s high tech sector is in the midst of a growth stage. Momentum is driven by a lower cost of living, access to a highly educated talent pool, expanded and increasingly specialized start-up workspaces, a cohesive business community partnered with burgeoning R&D facilities, growing availability of venture capital and debt investment and the broad presence of highly respected universities and global research institutions. Demand for talent is creating an extremely competitive market for skilled labor and as startups launch, they are demanding more office space. That need will open second-generation stock in newly tapped submarkets to investors that have shown a keen interest in purchasing value-add properties and investing in upgrades to make them appealing to tech and creative occupiers. Owners willing to make the investment are benefiting from positive demand from the market. And Chicago s tech sector is showing no sign of slowing down. As it continues to mature, we will see that Chicago s collaborative tech ecosystem will leverage the region s historic strengths including manufacturing, logistics and consumer products. Doing that will allow Chicago s tech sector to differentiate itself from competing markets and it will complement the industries that have historically dominated the local economy creating a sustainable forecast for both investors and occupiers alike in the Windy City s office landscape.

9 For more information, contact: Robert Kramp Midwest Research Director robert.kramp@am.jll.com Joe Klosterman Research Analyst joe.klosterman@am.jll.com jllblog.com/chicagoblog Jones Lang LaSalle 2015 Jones Lang LaSalle IP, Inc. All rights reserved. All information contained herein is from sources deemed reliable; however, no representation or warranty is made to the accuracy thereof.