IPO’s – San Francisco Real Estate and Southern California

In March, a New York Times article observed that the rush of announced IPO’s, logjammed to go public in the second quarter of 2019, might have a staggering effect on the price of homes in the San Francisco area, where many of these companies are based.

Hundreds of Billions of Dollars could be unleashed as various “unicorns” (defined as $1 Billion plus private value companies) suddenly become liquid public companies, giving their insiders, and the local economy, an enormous windfall. Such companies on the docket, or expected, include Uber, Airbnb, Lyft, Pinterest among others. As of this writing, Uber, Lyft and Pinterest have gone public, along with several others. But more unicorn listings are still to come.

The Times article posits a few interesting expectations of this new money on a rather small slice of real estate:

  • Estimated 10,000 instant millionaires created, many will be looking to spend on an upgrade to their homes and cars (Tesla anyone?);
  • Average home prices could exceed $5 million in San Francisco (and I’ll bet that’s for a “tear-down” because its about the location, not the home itself that is being purchased);

The article further notes that these millennial buyers prefer to stay in the city where upscale eateries and entertainment abounds; thus reducing the geography in which buyers will hunt for homes.

So, the simple rules of supply and demand will surely drive up prices. Keeping pressure on the home market are the sellers, some of whom are holding houses off the market until after the IPO money flows.

As it is now, the article points out, the rental market is already red hot. The current average rent for a one bed / one bath flat ranges from $3,550 – $3,690 a month. Its no wonder that renters use the common space in apartments as an additional room to rent, in order to hold down the cost somewhat for all occupants. Even closets might be rented out! So I have heard first hand.

Look to Southern California Next:

My observations about this comes from my southern California home, and occasional business trips to the Bay. The high rents and limited office spaces and homes available in the San Francisco-Silicon Valley market has some start-ups and tech firms looking to the south to relocate or add new offices. The west side of Los Angeles-Santa Monica area has their own “Silicon Beach” scene with businesses such as Snap, Hulu, Google/YouTube among others making their mark in this “relatively” more affordable market.

But it doesn’t stop there. Continuing south on the 405 and you arrive at Irvine and the “OC” (Orange County), also attracting unicorns like Houzz.

And not to be left out, San Diego, all the way down the 5 near the border,  is already home to Qualcomm and its own tech “halo” effect, plus a host of biopharma companies, and is now seeing some of the fleeing Silicon Valley businesses add new campuses in the area, like Apple, in order to find convenient and affordable (again, a relative term) housing for workers, new local engineer talent (Qualcomm poaching); and a better quality of life. The extra sunshine and milder climate is an added bonus.

Commuting from Southern Cal:

It was only a matter of time before Silicon Valley would have to look beyond the Bay for business expansion. After all, flight from San Diego to San Jose, the hub for Silicon Valley, is a little over an hour, which is not that bad.

I used to make that “commute”, in my case flying up to San Jose on Mondays ands returning to San Diego on Fridays. I would see a lot of regulars on the same flights doing the same.

The difference this time is that more offices are locating in the various southern California coastal communities, reducing the need for regular commuters like this. It will be interesting to see it unfold.

 

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