Reinventing residential real estate in Silicon Valley with $275 million in sales in 2011

Silicon Valley, particularly upper end cities like Palo Alto and Atherton, are faring very well.  We were one of the last markets in the nation to be hit during the economic downturn (multiple offers on homes were occurring right up to Lehman Brother’s collapse) and one of the first to recover.  We bottomed out over 18 months ago, have seen appreciation since then, and are starting to approach our old peak numbers.  Paradoxically, the new market is becoming the old market, with many homes now generating multiple offers; just last week I had 5 sales (3 listings, 2 buyers) where all of the homes sold for well above list price including some several hundred thousand above list price.   Both sellers and buyers are awaiting the upcoming round of Silicon Valley IPO’s, Mergers and Acquisitions so sellers are holding off on putting their homes on the market and motivated buyers are trying to get into the market before it runs away again.  This is resulting in low supply and high demand with multiple offers again becoming the norm.

 

Silicon Valley has already been rebounding for the last 18 months.  Additionally, my analysis projects that we will see price appreciation for the next two years as well.  At the end of those two years prime Silicon Valley cities like Palo Alto and Atherton will likely see new all time highs above where they were in 2007.   Silicon Valley has some very strong fundamentals that are driving the price appreciation.  Exhibiting an export driven economy, most Silicon Valley companies such as Facebook and Google earn well over 50% of their revenue from overseas.   Thus, the weak dollar helps drive earnings and also Silicon Valley’s future is tied to the rising economies of the developing world.  The focus of Silicon Valley company locations has moved north.  While the larger companies of the 1990’s such as Cisco, Ebay, and Intel are headquartered in San Jose or Santa Clara, the companies that are doing well now are in the search and social networking space and are located in cities such as Mountain View (Google, LinkedIn) or Palo Alto and Menlo Park (Facebook is in both cities).  So within Silicon Valley the cities farther north including Mountain View, Palo Alto, Menlo Park and Atherton will see greater appreciation than the cities down south such as San Jose and Santa Clara. This will likely continue to be the case as the world moves to a more software based economy.  Companies create value much quicker once they own a particular sector of the market.  It is the leaders of these companies, people who know how to put a team together and build value in the new model, that are buying homes and driving this market.

 

While Silicon Valley real estate is becoming frenetic again (I had $14 million in sales last week for example), this time it is not a bubble driving tech and real estate valuations but a sustainable wave of innovation.  After years of lean funding when the economy slowed down but fund raising did not, many successful companies became profitable and are now being acquired; many tech companies are heavy on cash, such as Google, which is very fearful of Facebook.

 

One of the biggest changes in the tech world that is driving real estate appreciation now is the strength of the secondary market for private companies.  In the past employees had to wait for a liquidity event such as an IPO to get funds and buy a home.  There is now a strong secondary market where shares of Facebook, LinkedIn (pre IPO), Zynga, and many other companies are trading.  This has resulted in quicker liquidity for early employees, which is driving the housing market.  I discuss the impact of this on the housing market in the next topic.

 

I will combine these two topics as they are very closely related.  I would agree that elite Venture Capitalists are buying up the homes over $20 million and this upper end (hyper-luxury) market has enjoyed a renaissance. However, the luxury market in the $5-$10 million dollar range is actually most active with early employees of the pre-IPO firms.  Let me focus on Facebook, but my analysis applies to other companies as well.  The early Facebook employees are already multi-millionaires and have a lot of liquidity from selling shares on the open market (Facebook last traded with a market cap of $87.5 billion on the secondary market).  While Facebook has done really well, Facebook employees are still very bullish on the company’s future and are only selling a fraction of their shares, but that fraction is still worth tens of millions generally if they were early employees.  They want to buy in before the frenzy of the IPO pushes more wealth to home prices, with neighborhoods near the new Facebook campus in Menlo Park likely to do very well.  This is causing home prices to go up as these early employees get in now and beat the IPO.

 

However, there should be 4 waves of purchasers buying homes.  The first wave has already hit, which is that many early Facebook and LinkedIn employees have bought homes of late by selling shares on the secondary markets.  Regular home buyers (entrepreneurs, Googlers, attorneys) are seeing these homes go and are fearful of price appreciation once Facebook does go public in about one year so they are motivated and pushing prices up and are part of a second wave that is building up now.  This second wave is composed of buyers trying to get in before the IPO market really explodes in 2012.  The third wave of liquidity that will be released and indirectly go to Silicon Valley housing will occur when the IPOs occur and the Venture Capitalists get their funds and trade up their homes.  The final wave is when the 6 month lock up period for the employees of the companies expire and the midlevel employees of Facebook, Zynga, LinkedIn can buy their mid-level home of $2-$3 million.  Due to these 4 waves and with the Facebook IPO likely a year away, I project strong appreciation for Silicon Valley housing for the next 2 years.  The appreciation may last longer, but it is hard to project beyond that.  This appreciation will be solid but like tech growth, at a slower and sustainable pace so appreciation over those 2 years will likely be around 10%, about 5% for each of the next 2 years.

 

Overseas investors are buying some luxurious homes here, but they generally have ties to Silicon Valley such as having an office in China or India and also in Silicon Valley.  Investing for speculation is usually done at the lower level, while the upper end is usually as a primary or secondary home for those with some ties to the Valley or seeking Palo Alto schools for their children from China.

 

What are some of the recent multimillion dollar deals you are working on? 

Last week involved $14 million in sales.  A $5.5 million dollar listing was purchased by a venture capitalist for above list price, all cash, no contingencies and closes in one week.  He will likely tear the home down and build a new home to make a $10 million estate.  A CEO purchased a lot to also tear down for just below $3 million.  There are a lot of tear downs currently because no speculative homes are coming on now since they take 2 years to construct (if they are very large) and the economy was in shambles 2 years ago; a lot of new custom home building is now occurring by Venture Capitalists and others.  I also had a LinkedIn Senior Executive get in a bidding war and have to pay several hundred thousand more than list price to get the home.  Two other listings I had both received multiple offers, with one selling for nearly $200k over and the other one for $100k over.