Last month, New York City notched a big milestone in the startup world. For the first time in history, New York County, which encompasses the island of Manhattan, had the highest number of early stage startups in the U.S. Notably, the Big Apple edged out San Francisco, which is typically at the top of the heap in terms of startups. New York’s tech industry has been growing rapidly over the past five years, with the number of tech jobs increasing by 30 percent, according to the New York State Comptroller’s Office. The city’s tech boom has helped in part to offset jobs lost during the pandemic. At the same time, in San Francisco, where the office market is heavily weighted toward the tech industry, tech companies have been shrinking their footprints or relocating altogether.
| City | Early Stage VC Total Rounds | Total Square Feet Leased | Gross Average Direct Asking Rents |
|---|---|---|---|
| Manhattan | 543 | 3.85 million | $75.17 |
| San Francisco | 486 | 1.16 million | $79.05 |
| Los Angeles | 348 | 2.2 million | $47.16 |
| Downtown Boston | 307 | 730,000 | $66.50 |
| Austin | 142 | 693,242 | $47.89 |
To see the correlation between startup activity and the office market, we looked at venture funding as a proxy for startup growth. Figures from Carta show that in March of this year, Manhattan posted 543 early stage venture capital rounds, followed by San Francisco with 486, Los Angeles with 348, Downtown Boston with 307, and Austin with 142. Looking at this year’s first quarter leasing numbers in the same cities shows that the five cities fall in almost the same order as the VC rounds. Manhattan recorded 3.85 million square feet of leasing, San Francisco posted 1.16 million square feet, Los Angeles recorded 2.2 million square feet, Downtown Boston had 730,000 square feet leased and Austin tenants leased 693,242 square feet.
Average asking rents during the same time period varied widely between some cities. In Manhattan, the average direct asking rent was $75.17, while in San Francisco it was $79.05. Los Angeles’ office market posted an average asking rent of $47.16, Downtown Boston posted $66.50, and in Austin’s office market average asking rents were $47.89.
The disparity between average asking rents is not unusual, given the typical price differences between cities. Coastal markets like Manhattan, San Francisco, and Boston are among the most pricey office markets in the country, while Denver and Austin, despite rapid growth, are typically more affordable to rent office space in. Overall demand for office space weakened across the U.S. in the first quarter, and that has played out in cities big and small. Leasing activity is down significantly in all five cities examined here, including a 36 percent drop in Manhattan.
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The tech sector has been hugely important to the office market over the last few years. Between the first quarter of 2020 and the fourth quarter of 2021, tech leasing made up an average of 21.5 percent of activity for deals more than 20,000 square feet, according to Savills. But in the first quarter of this year, leasing in the tech sector represented just 8.7 percent of demand, dropping leasing in the sector to a new low.
The economic factors that are affecting the office market at every level are certainly having an impact on tech companies’ office leasing decisions. The industry has been hit particularly hard recently, with many of the largest tech firms announcing layoffs and shrinking their office footprints. It can be helpful to look at VC funding among major office markets, but it isn’t a perfect indicator of the size and trajectory of a local startup ecosystem. While early stage startups may not be a significant driver of office leasing in major tech hubs at the moment, it will be interesting to look at figures several months from now when the industry will hopefully be in a better place.
