Silicon Valley Powers the West’s Emerging Construction Boom

Many of America’s most influential companies are of relatively recent origin and are huddled in a handful of West Coast locations, with Silicon Valley representing the world’s most impressive and impactful innovation hub.

Built on 178 acres in Cupertino, Calif., Apple’s new $5 billion facility represents a significant upgrade from the company’s humble beginnings in Steve Jobs’ garage. Meanwhile, contractors working on behalf of Amazon are putting the finishing touches on a massive new headquarters in Seattle’s Denny Triangle. 

Facebook moved into its Disneyland-esque campus in California’s Menlo Park in 2011, and last year it purchased an additional 59 acres of adjacent land with plans to add one million square feet of office space. Not to be outdone, Google is building enough space to accommodate 1,500 employees on four acres in the Rockies.

America’s tech boom should not be taken for granted. While U.S. companies led the way to create the Internet and more recently the world’s most popular social media outlets, many companies in China, Japan, Germany, Israel and Australia are seeking to create the next generation of technologies and platforms. The growth of these businesses has predictably spawned higher construction volumes.

While construction projects attached to companies like Facebook, Google and Apple capture headlines, construction is hardly relegated to tech giants. During the past year, businesses throughout Silicon Valley have been driving up demand for new office space as they expand in the context of flourishing capital markets and improving demand for new products. During the third quarter alone, Silicon Valley experienced the addition of 1.3 million square feet of office space, a 728,000-square-foot increase compared to the previous quarter. Much of this was due to the completion of the Sunnyvale, Calif., headquarters of LinkedIn, one of the many Northern California companies that recently raised money through an initial public offering and now has plentiful capital with which to expand. 

It is estimated that 80 percent of tenant demand in Silicon Valley is emerging from the technology sector. Based on a recent report from CBRE, the asking rate for office space in Silicon Valley has expanded for 16 consecutive quarters, a winning streak that has not been observed since the dot-com boom era of the 1990s. Silicon Valley’s 9 percent office vacancy rate is the lowest in seven years and is consistent with the notion that more construction is forthcoming.

The commercial expansion observed in Silicon Valley also is apparent in many Western markets, helping drive job growth and demand for newly constructed properties. In Los Angeles, a renewal of rapid economic expansion has brought the regional office space vacancy rate down to just 5.8 percent. In fact, California added 344,000 jobs during a recent 12-month period, one of the better performances in the nation. 

In Colorado, the number of jobs has expanded 2.3 percent during the past year. The same is true in Oregon, due in large measure to dynamics in the Portland metropolitan area, which continues to experience job growth in electronics manufacturing and software publishing. In Utah, home to many growing technology operations, 44,000 jobs were added during a recent 12-month period, which represents job growth of 3.4 percent. Not coincidentally, construction employment in Utah has increased more than 10 percent during the past year. 

Construction employment is up nearly 9 percent in Washington, by more than 6 percent in California and 5 percent in Colorado. Denver experienced positive net absorption of office space exceeding 860,000 square feet during the final quarter of 2014, bringing that region’s direct vacancy down to 12.5 percent, according to CBRE. That represents a decline of 100 basis points in direct vacancy during the past year.

Office vacancy is declining rapidly in many of the Western region’s largest markets, in part because of the high multiplier effect on technology jobs. Enrico Moretti, an economist at the University of California, Berkeley, writes that five additional jobs are produced for every one of these new jobs created. 

Looking Ahead
While there is certainly more to economic recovery than activities associated with high-tech establishments, innovation and commercialization are what set the West apart and render it likely to enjoy the most rapid increases in private nonresidential construction during the years ahead. Until recently, the most rapid construction growth has tended toward communities attached to America’s energy production renaissance, but construction activity in these areas is positioned to slow a bit going forward given the recent dip in oil prices.

Investment in technology, by contrast, shows few signs of slowing down. Consumers remain hungry for new products, and an improving U.S. economy has helped increase the population of consumers available to purchase them.   


Anirban Basu is chief economist of Associated Builders and Contractors. For more information, visit www.abc.org.