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New Tech Centers Sprout in Europe

This article originally appeared in the Wall Street Journal on March 6, 2018.

Lisbon, Kraków and Edinburgh are among the cities that have become popular for the industry

Barcelona is home to dozens of startups and e-commerce firms that cater to local demand. PHOTO: ALBERT GEA/REUTERS 

New technology centers are mushrooming throughout Europe, boosting office markets in unlikely places.

Technology and related companies are fueling 20% of the office space demand in small capital cities like Lisbon, Vilnius, Lithuania, and Tallinn, Estonia, according to brokerage firms. Leasing is equally strong in second-tier cities such as Barcelona, Kraków, Poland, and Edinburgh that are becoming popular with the tech industry for their lower rents and growing pools of talent.

Strong leasing demand from tech companies is helping to boost overall leasing activity in many of these markets.

For example, in Edinburgh, tenants leased over 950,000 square feet of office space in the first three quarters of 2017, more than all of both 2015 and 2016, according to CBRE Group Inc. In Lisbon, about 1.8 million square feet of office space was leased in 2017, up 16% from 2016, CBRE said.

“My clients are increasingly asking to consider second and third cities rather than just the capital cities because of the competition,” said Stephen Fleetwood, head of location advisory for Europe at CBRE Group Inc. “They’re saying, let’s start looking deeper and deeper for talent.”

Just a few years ago, tech centers in Europe were limited to a few cities such as London and Berlin, just like Silicon Valley, Seattle and New York dominated the U.S. But technology is no longer simply an industry onto itself.

It has pervaded all industries—from banking to the grocery business—creating a large demand for tech products and services that can’t be fulfilled only by the big tech hubs.

Barcelona, for instance, is home to dozens of startups and e-commerce firms that cater to local demand, and thus don’t feel beholden to set up shop in the traditional tech cities. Barcelona-based allows customers to book a cleaning service via an app or online, while promises to deliver supermarket products within an hour.

“You might say every company is a tech company now,” said Tom Carroll, European head of corporate research at real-estate services firm JLL.

Several European cities are riding on the availability of venture funding. Last year, venture-capital investors poured $15.4 billion into companies based in Europe, versus $7.6 billion in 2014, according to data provider Preqin.

Also fueling this trend are initiatives by local governments to build their tech industries by doing such things as funding startup incubators and organizing mobile and other tech conferences. Barcelona, for example, just hosted the Mobile World Congress.

In Barcelona, leasing by tech companies between 2016 and 2017 was 66% greater than the 10-year average, according to JLL. Tech companies in Vilnius, Kraków and Lisbon leased 196%, 39% and 28% respectively more during the same time frames, JLL said.

Historic buildings in the Lisbon city center, for example, have been converted into incubators and co-working spaces. In 2016 and 2017, tech firms acquired 28% more office space than their 10-year average, according to JLL. New tenants planning to open operations and support centers this year include Alphabet Inc.’s Google and Uber Technologies Inc.

To be sure, it is still important for startups to be connected to the traditional tech hubs such as Berlin and London for large clients and funding. But some firms are moving from those cities because it is easier to compete for talent against the major tech businesses.

Brainnwave, a data analysis platform, was founded in London in 2015, but its headquarters was moved to Edinburgh a year later, partly to tap academic research and talent from local universities but also for the convenience of starting up a business. “Five or six years ago, I would have thought that it’s all happening in London and Silicon Valley; why would you move out of that,” said Steve Coates, the firm’s co-founder.

Meanwhile, some regions are seeing new tech businesses evolve out of outsourcing operations and shared service centers. Consider Vilnius, a northern European city that has for years been home to technology and business support centers for firms like British bank Barclays and money-transfer company Western Union Co.

Vilnius is now attracting technology development operations by big firms such as Uber, and smaller firms like American software maker Unify Square Inc. and Belgian data science company Sentiance NV.

Toon Vanparys, chief executive of Sentiance, said they chose Vilnius because the city has a large pool of engineers and data scientists locally, plus they can attract senior engineers living elsewhere who want to move away from the chaotic lives of large tech cities. “We will probably build smaller tech hubs in the future, based on the quality of living and the availability of talent,” said Mr. Vanparys.

There has been a flurry of construction of modern offices in Vilnius lately. Office space is expected to go up by 9% by the end of this year, to 8.2 million square feet, according to Ober-Haus Real Estate Advisors.

Kraków, the second-largest city in Poland, also is now building on its background in outsourcing work to attract new technology development. New York Stock Exchange-listed software developer EPAM Systems Inc., which has a market capitalization of $6 billion, in 2016 opened its second office in Kraków to service clients and to work on software development.

EPAM has several offices in central Europe but the one in Kraków will be its largest in this area, ultimately with a staff of about 1,000 people, said Balazs Fejes, EPAM’s co-head of global business. “Cost is one driver, but the second driver is availability of talent,” said Mr. Fejes.

Other European cities have capitalized on the success of one or two technology companies. For example, Tallinn, the capital of former Soviet state Estonia, was the home of the early development of Skype, the internet-phone service provider. Skype was bought by Microsoft Corp. for $8.5 billion in 2011, but continues to have a development office in Tallinn.

The founders of TransferWise, a global money transfer startup that has been valued at more than a 1$ billion, are Estonian. Tech companies leased 21% of all office space taken up in the city between 2012 and 2017, according to JLL.

Some larger technology companies are going to cities that aren’t on the tech map yet. EPAM, the American software developer, this year plans to open an office in Malaga, the sixth-largest city in Spain.

Mr. Fejes calls Malaga the San Diego of Europe, and said they hope to attract talent from everywhere in Europe looking for a better quality of living.

“In every city today, I think there is a tech scene,” he said.