When we think of expensive office space, a few prime locations come to mind -- New York City (which, lately, has seen much less demand); Seattle; and, of course, Silicon Valley. But some companies are getting tired of paying a premium for office space in high-end real estate markets. Goldman Sachs (NYSE: GS), for example, is looking at shifting employees to Florida, where commercial space is cheaper to rent and the absence of a state income tax holds appeal. And now, Oracle (NYSE: ORCL) is following suit. The software giant is moving its company headquarters from Redwood City, California, to Austin, Texas.
Of course, Oracle is not the only big name to announce or contemplate such a move. Tesla (NASDAQ: TSLA) CEO Elon Musk has repeatedly talked about moving the company out of California, and Hewlett Packard (NYSE: HPE) is leaving the state and building a massive campus in a Houston suburb for its headquarters.
All of this brings up a valid question: Will tech companies start bidding adieu to Silicon Valley in short order? And will real estate investors get slaughtered as a result?
A strategic move that's a blow to real estate investors
California is home to some of the most expensive office submarkets. As of 2019, the average cost per square foot of commercial space in Mountain View was $1,554.16. In San Francisco's South Financial District, it was $970.92.
The average cost per square foot in Houston's Central Business District, by contrast, was just $364.50. In Northwest Austin, it was $313.92.
Clearly, there's savings to be reaped by picking up and abandoning Silicon Valley, and in an age of remote work, that's an easier thing to pull off. For many companies, remote work will be a long-term trend even once the coronavirus pandemic is over and it's safe to return to an office building. Allowing long-term remote works opens up the talent pool for employers and allows them to reap major savings on office leases. While being at the center of the action may have been an important thing a year ago, now the lure of Silicon Valley may be waning -- and the companies that pay rent there may have a prime opportunity to slash their costs.
Of course, that's not great news for real estate investors in California's priciest corridors. On the other hand, it could, in the coming years, spell opportunity for new investors if real estate prices start to come down.
It'll be interesting to see what moves other companies make in the wake of the pandemic. A lot of big-name players, like Google (NASDAQ: GOOGL), are already announcing long-term remote-work policies, and more may follow suit even once coronavirus vaccines become widely available and gathering in office buildings becomes a safer notion. Twitter (NYSE: TWTR), meanwhile, says employees can do their jobs from home indefinitely. Office-building investors across the board could get hammered if working from home becomes the new norm, but those in already inflated markets like Silicon Valley ultimately stand to get hurt the most.