Few correlations are more prominent than the one between the success of the San Francisco real estate market and its local business economy. In fact, you could argue that San Francisco real estate wouldn’t be where it is today without the support of local startups. Last year alone, 26 companies in the Bay Area went public; raising a total of $3.7 billion and completing 35 deals in the neighborhood of $4.75 billion. Not surprisingly, such an influx of money simultaneously supported the economy and increased demand for housing.
However, the same companies that are widely believed to have brought the San Francisco housing market to prominence are now threatening to temper appreciation rates in the same area they previously raised them in (irony at its finest).
The performance of the stock market just two months into 2016 has been anything but encouraging. Turbulent oil prices and the decline of the Chinese economy have certainly made it difficult for the U.S. index to gain any footing. Investors have therefore sought refuge in safer alternatives, as now is simply not the time to take unwarranted risks. And just like that, sentiment favoring stable, secure stocks has sent initial public offerings (IPOs) reeling; people aren’t willing to take a chance on them in this economy.
But what does that mean for San Francisco real estate? In an area that is practically dependent on IPOs, what will happen when the well of incoming startup money dries up?
Some experts would argue that a reduction in IPO activity would hurt San Francisco real estate; essentially diminishing appreciation rates and ending the city’s reign at the top of the real estate landscape. While I can’t necessarily argue with their logic, I can certainly take a contrarian approach to their conclusion. That said, there is a chance that the recent performance of IPOs, or lack thereof, could in fact help San Francisco real estate. There is always the chance that the tech slowdown isn’t a threat, but rather a blessing in disguise.
Let’s examine the recent performance of IPOs and what that may mean for the future of San Francisco real estate.
An initial public offering, otherwise known as an IPO, represents a company’s attempt to go public. According to Investopedia, it is “the first sale of a stock by a private company to the public.” Not surprisingly, they are often initiated by smaller startups in search of capital to support future growth. However, it’s common to see large companies go the same route in an attempt to become publically traded.
If the concept sounds familiar, it’s because it is; Apple, the most valuable company in the world, can be traced back to an IPO. Approximately 35 years ago, Apple went public, and is now one of the most beloved companies the world has ever seen. No more than four years ago, Facebook went public and managed a modest $16 billion from its IPO. The following year, Twitter managed to get $1.8 billion.
However, if the current state of the stock market has told us anything, it’s that these IPOs may be the exception rather than the rule. In fact, IPOs are struggling to remain relevant in the face of a sputtering stock market. According to NBC News, “Of 14 widely watched Wall Street IPOs over the past 12 months, half are now in the red.” Seventy percent of the last 10 companies to go public are now trading below their offer price. According to FactSet, four of those 10 companies are down at least 20 percent.
“There are definitely some dark clouds on the horizon, and there are questions about the real prospects of some of these companies,” said James Angel, associate professor of finance at Georgetown University’s McDonough School of Business. “If you’re not a steady customer and all of a sudden you get a call from your broker saying he can get you some of an IPO – run!” he added.
The facts are undeniable; IPOs, for the most part, are in trouble. But what does that mean for a city (San Francisco real estate) that has come to rely on tech startups?
I am of the opinion that a decrease in IPO activity could potentially help the San Francisco housing market. With fewer tech startups looking to purchase land in the area, demand for higher-end homes will wane. We have already seen interest in luxury homes take a hit.
“Somebody who might have pulled the trigger at $5 million last year now might be a bit more cautious,” said Josh McAdam, a top producing real estate agent with Pacific Union in San Francisco. “It’s not the same environment.”
It’s only a matter of time until that lack of interest tempers the blistering rate of appreciation. The basic principals of supply and demand dictate as much; price appreciation should slow down in the face of tapering interest. But is that necessarily a bad thing? In one word; no. In fact, San Francisco real estate is probably overdue for an easement in appreciation rates.
The San Francisco housing market is in a league of its own, and rightfully so. Few markets in the world are capable of matching the blistering pace set by The Golden Gate City. According to a recent report issued by Fitch Ratings, “San Francisco home prices hit an all-time high in third quarter of 2015 and are now 62% above their post-recession low in early 2012.” That puts the average home on the San Francisco real estate market at $1,135,000, according to Realtor.com.
For all intents and purposes, San Francisco real estate is firing on all cylinders. Home prices continue to set records. However, while the current rate of appreciation is great for those that already own, it is preventing many from entering the market altogether. There is an entire population just waiting for prices to slow down before they make the commitment to actively participate in the market. That said, should a lack of IPO activity temper appreciation rates, people that were previously on the fence about buying may make the leap, essentially increasing activity. Any attempt to buy a San Francisco home should become easier.
While I am certainly sympathetic to the state of the stock market and subsequent IPOs, I am encouraged by what a lack of startup activity may mean for the hottest housing market in the country. Home price appreciation is likely to ease, and I wouldn’t be surprised if that was all it took for activity to spike in the San Francisco real estate market. It is entirely possible that slower appreciation rates could reignite what is already considered to be the hottest market in the country.