We have seen it before, when a boom in one sector acts as a leverage for recovery in the other, or slowdown in one area of the economy having a ripple effect on other sectors. A popular example of this phenomenon was how the expanding housing sector in the early 2000’s helped in offsetting the dot com bust of late 1990’s.
Another wave of IT boom has been spreading since 2007, social networking and blogging has emerged as a new contender in the IT sphere. Social medias are the most notorious stocks these days, and these companies have been establishing new offices and businesses rapidly. As the tech businesses flourish in the Silicon Valley and other areas of San Francisco, a general stability and wellness spreads in the Californian economy. But, at the same time, the economy becomes prone to the volatility of these enterprises. A good example is how Facebook’s unsuccessful attempt in the open market has spiked concerns about declining revenues from taxes in California. As Twitter, Zynga Inc (NASDAQ:ZNGA), and Yelp spread their wings in San Francisco, apartment prices soar sky high and analysts see the gap between middle and upper social classes expand. Moreover, the greater these cities reliance on IT sector, the more they discourage other businesses. Following the footsteps of the cities of California, New York City is now hosting not just the big guns, but many tech startups as well. A city which was known for its quintessential reliance on the financial sector has now fully unleashed itself in the technology sector.
Over the past years, many businesses have set up shop in NY, including Facebook Inc. (NASDAQ:FB), Twitter, Zynga Inc (NASDAQ:ZNGA), and Groupon Inc (NASDAQ:GRPN). Seasoned players like Microsoft Corporation (NASDAQ:MSFT) and Google Inc (NASDAQ:GOOG) have expanded their offices. Other relatively smaller companies are also springing up, such as Tumblr, Esty, MarketBot, and Songza. The ‘Silicon Alley’ (as the NYC tech startup was called) has spread beyond Manhattan area to Long Island, Queens, and Brooklyn.
The city is still a step behind its big brother aka Silicon Valley, but it is the fastest growing tech hub of the country. A fact that was celebrated in Internet Week NY (May14-21). More than 500 tech businesses have opened since 2007, which has lead to the creation of over 10,000 jobs. A study by The Center for an Urban Future details how the massive tech boom led to the crowning of the IT sector as the forerunner in job growth in NYC. Moreover, New York is the only place where venture-capital deals have increased in ratio, while in the rest of the country they declined by 11 percent. The big chunk of these deals were made in the tech sector.
Moving on to how this recent flourish in tech is effecting the real estate market. As the housing and CRE of the country are slowly recovering, only modest growth is seen in the real estate of New York. Vornado Realty Trust (NYSE:VNO) (NYSE:VNO-E) (NYSE:VNO-F), one of the biggest real estate investors of NY, said in their Q2 earnings call that rents for NYC street retail are above their previous highs, but the existing market is only growing modestly with limited new supply. The shortage is apparent in NYC’s lowest office vacancy rate of 10.0 percent, according to NAR’s latest Commercial Real Estate Outlook, of the past few months.
Vornado was able to strike new deals in almost all areas of business, including tech, finance, insurance, law, advertising, and fashion. Handsome growth was seen in all sectors except in finance, and it is also worth mentioning here that one of the reasons for the new status of NY as a tech paradise is the shrinkage of financial sector. It is strongly believed that growth in the IT sector multiplied with the meltdown in finance and NY being the hub of banking business, created the largest gap which needed to be filled.
But so far the tech boom has no signs of slowing down, at least not due to the gradually recovering CRE market. Jonathan Wasserstrum, co-founder of TheSquareFoot, a commercial real estate leasing company, says that the tech boom is here to stay, as the economy of NYC is more flexible and diverse and therefore, is not prone to similar pitfalls. He believes that if the CRE is slowed in one sector, another industry will fill the void.
Jacob Frydman, CEO of United Realty Partners, currently raising a $1.3 billion REIT called United Realty Trust, is also optimistic about the CRE prospects in the IT sector. However tech companies come into the low commercial office market and as rentals and space are short in the midtown south area, he thinks that startups will be pushed downtown where rents are cheaper.
Deutsche Bank AG (NYSE:DB)’s research on the metro area job growth sets NYC on top of all the other major cities of the US. The city grew in jobs by 126k from August 2011 to July 2012, making up 11 percent of the country’s total, and increasing 2.4 percent year over year. This beats out the national average for the past eight months. Interestingly the city’s average for unemployment is strangely higher than other areas of the US, as the State Labor Department’s July 2012 statistics show that the average rate of unemployment was 9.1 percent for the month. The reason behind this apparent disparity between the booming job market and consistent unemployment could be the flood of job seekers entering NY, due to the healthy growth and also because the major hirer, that is the tech industry, chooses to recruit engineers and developers from other areas, like, California.
New York is doing well in the tech business so far, but the fact remains that Silicon Valley has the upside of having Stanford and Berkeley around, and Boston is furnished with the likes of MIT and Harvard. The tech startups are more inclined to recruit the brains from other areas. Thus the NY job market keeps booming but the actual hiring comes from elsewhere. The lack of indigenous engineers and developers could be alleviated to some extent by the establishment of Cornell University-Technion Applied Sciences Campus at the Roosevelt Island site.