San Francisco's Perfect Storm--------Dotcom/2000 And Housing Bust/2008 Combined

**I would love to get comments from those in the tech or biotech sectors, pre-IPO especially; VC’s; “virtual” tech millionaires who may have put off buying a $2 million downtown SF condo recently because they don’t trust the value of their “stock”; anybody from any of the 149 other “unicorns” that aren’t Uber, Airbnb or Pinterest; tech or biotech workers taking free company buses several hours per day in order to afford their slice of the dream four counties away;  tech or biotech recruiters; high-end Realtors in the Bay Area and Houston; luxury condo or apartment developers/managers; commercial prop managers; and anybody else with insight into what I think is unfolding right now under everybody’s noses.

 

Anyway, moving on…

This letter may sound draconian, but based on how quickly things have changed and what’s happening between the sheets, it could wind up being optimistic. At the present time, I am isolating and drilling down on sectors and names that will be most impacted from a combo 1999/2007 style tech/real estate event over the next 18 months.

Since 2016 began, throughout the Bay Area, I have been doing a lot of local area resi open house, Realtor, and commercial office/apartment visits in addition to spending a tremendous amount of time talking to friends, relatives, acquaintances, pre-IPO investors, and VC’s. In short, for all, this year has not started out well. On the real estate front, the higher-end segment is experiencing notable weakness (so is macro “housing”, as evidenced by the very weak national January New and Pending home sales reports released over the past week).

Bottom line on San Francisco Bay Area Residential / Commercial Real Estate & the macro economy:   Until further notice, I will refer to the San Fran Bay Area as Houston 2.0That’s because the implosion in asset values of non-cash or profit-generating tech companies is very much akin to how the oil sector crash has played out thus far. But, a cyclical implosion of the Bay Area led by tech and biotech will be much larger and far more destructive, nationally, than Houston’s energy driven collapse.

 

Houston and the San Francisco Bay Area are mirror images of each other; when oil/tech does poorly, so the does Houston/Bay Area economy and real estate, and visa-versa.

In Houston, house prices have tumbled with the higher-end down over 30%+ and average prices down about 20% in the past 18-months…so far. But, these numbers are wishy-washy because little is trading. Deals – natural and distressed — need to go off to solidify prices, which will happen this spring and summer, inevitably. When this happens, people will learn it’s still early in Houston’s real estate downturn cycle with much more room to run to the downside.

For certain, tech is as impactful to the entirety of “Northern CA” and macro economy as energy is to Houston.

However, there is a key and significant distinction; equity ownership by the rank and file. Paper millionaire worker-bee’s running out buying million dollar houses – for hours in all directions due to free employee busing from 100 miles out — is far more common in tech/biotech than in the oil patch. Sure, founders and VC might be made whole when most of the unicorns die or are bought out for considerably less than their present day, massively haircut valuations.  But, the worker-bee paper millionaire was the cohort that drove the real consumer and real estate economy for the past several years and if lucky, they will end up with a handful of options from the acquirer of the unicorn’s remains.  This makes regions like the Bay Area far more “volatile” by nature.

At year-end, four of five of the largest companies in the US were headquartered in the Bay Area and are in the same sector…tech. Further, seven of the ten largest tech firms in the US were in the Bay Area. Additionally, NorCal has the highest concentration of biotech companies of anywhere in the US.  Just the crumbs from these Goliath-sized firms provide a generous living to millions in smaller firms and other sectors.

Bottom line: The undiversified NorCal economy — the hottest of the hot sectors over the past five years — has driven a disproportionate share of wealth to the entire NorCal region, as far away as Lake Tahoe, and once again driven house prices and rents far past fundamental and sustainable levels.

 

The collapse in housing demand in higher-end markets of the Bay Area in the past two quarters is meaningful. There is little doubt this is related to the tech and biotech rout. Factor in the other threepillars of unorthodox demand” that I have identified as largely responsible for driving sand-state real estate values to new mega-bubble 2.0 highs, which are either sagging or crumbling, and present conditions are easily as volatile as 2007.

Now, we await the ripple effects over next 12-24 months. And those ripples won’t stop at the Bay Area boundaries, or with residential real estate (CRE in deep trouble too)…bubbles don’t blow in isolation. It’s already in the can.

Where the fall-out will land is something I am digging deeply into.

This is all so 1999…and so 2007 at the same time.

Mark Hanson

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