Facebook’s Impact on Silicon Valley Housing Industry

Facebook’s Impact on Silicon Valley Housing Industry

Ken DeLeonFebruary 13, 2012

Entry Level Housing in Palo Alto is the Leading Indicator of Upcoming Strong Competition and Appreciation

While most of the nation’s real estate is mired in a quagmire of foreclosures and continued declines, Palo Alto and Silicon Valley’s real estate market is rapidly resurging in value. In fact, Palo Alto’s entry level housing is poised to set new all-time highs in 2012 as the tight housing market faces a rapidly increasing demand amongst a small supply of Palo Alto homes, resulting in as many as 20 offers and prices often well in excess of asking.  As of mid-February, there are currently only 29 single-family homes on the market in Palo Alto, a city of over 65,000 people. While some question whether the Facebook IPO will positively impact Palo Alto real estate, the empirical data suggests that it already has begun to do so.  The median price for Palo Alto homes in January, 2012 was $1,515,000, a 9.4 % gain from 2010 and prices only need to appreciate 3% to hit a new all-time high.  If early 2012 is an indicator, this increase will likely occur by the middle of 2012 due in large part to the Facebook IPO.

Silicon Valley home sellers and buyers are eagerly awaiting the upcoming Facebook IPO.  We want to take a moment to talk about its impact on the local housing market. The impact from Silicon Valley IPOs and acquisitions occur in stages – in other words, there are different points at which an influx of capital hits the housing market. Initially, when a company is capitalized, a few people have money to purchase. During secondary market transactions, stockholders classified as “insiders” become liquid. However, when a company as large as Facebook, with a potential valuation of $100 billion, actually makes its IPO and sells shares to the public, a few things occur in the housing market:

  • Anticipating sellers hold off on putting homes on the market, hoping to cash-out in a supply crunch, which drives prices higher.
  • Speculators look to purchase properties that have potential for tearing down and rebuilding, or merging two lots together to build a much larger home and sell into the rush.
  • Motivated buyers trying to get into the market before it runs away again.

Although these events are dramatic in the short term, homebuyers and sellers often times tend to overlook the long-term effect of this type of liquidity event in the marketplace. This is an exponential process, not just a one-time IPO event. When employees’ and venture capitalists’ investments in a large IPO become liquid, they invest in and start new companies, which raise employment and salaries.  This enables buyers to pay more for homes, positively impacting the equity in existing owners’ homes, which can then be used to start and invest in more companies and purchase goods and services in the communities.

While it is likely that there will be a short-term boost to the already hot Silicon Valley housing market as a result of the Facebook IPO, numbers and history don’t tell the whole story.  Before one can attempt to predict the impact of the Facebook IPO, consideration must be given to the Facebook culture.  Unlike many companies, and similar to Google, there is a unique focus on more than the bottom-line.  Facebook employees have largely adopted Mark Zuckerberg’s, Facebook’s founder, focus on a social rather than purely economic mission.  The culture does not emphasize the accumulation of wealth or the flashing of “bling.”  Additionally, the work force is relatively young and many of Facebook’s employees currently live in San Francisco and may initially buy or rent in San Francisco.  However, as the work force matures and start to have children, we anticipate significant relocation to the better schools and family-friendly environment that the prime areas of Silicon Valley offer.  These factors lead us to believe that there will not be a frenzied rush to buy the biggest and flashiest home possible.  Rather, the economic impact on the housing market, while undeniable, will be more controlled and sustainable.  Thus, our expectation is a robust and sustainable market appreciation for the next 3+ years and not just a one-time spike in housing values.

A similar impact was seen at Google.  Google’s 2004 IPO, which raised less than $2.8 billion and resulted in an estimated market capitalization of a “mere” $24.9 billion, helped Palo Alto home prices appreciate 22% in 2004 and 15% in 2005.  Even in 2007, when most of the nation was declining, Palo Alto saw double-digit appreciation. Without question, Google’s employee growth from 3,000 in 2004 to over 32,000 helped sustain the local housing market, which was amongst the last in the nation to fall and one of the first to bounce back.

Based on Facebook’s SEC S-1 Registration Statement, it is estimated that the Post-IPO value of the company should be in the $90-$100 billion range.  Although Facebook only has approximately 3,200 employees, that number is up from 2,127 as of December 31, 2011, and they expect “headcount growth to continue for the foreseeable future.”  The veracity of this assertion is supported by Facebook’s long-term leasing of a 1,000,000 square foot office campus in Menlo Park, CA.  As a result of this anticipated expansion and the upcoming liquidity event that should be the largest in Silicon Valley’s history, housing demand has spiked as buyers try to beat the anticipated competition and resultant appreciation.  As Facebook continues to expand the number of employees and those who live in San Francisco come down to the Valley as they focus on schools this will put long-term upward demand on Silicon Valley housing with strong schools.

The leading indicator for appreciation of Silicon Valley real estate prices is entry level Palo Alto homes. This micro market, which has consistently high and volatile demand coupled with a chronic shortage of supply, has made it among the first to become competitive and rise as multiple offers become the norm. Entry level homes in Palo Alto, defined for the purposes of this article as those homes below $1,600,000, should eventually spread to other sectors of the market over time. As January 2012 has proven to be a good predictor of stock market profits, so too has it set the tone for the rest of the year.

There is no other way to describe the entry level Palo Alto home market than “feverish.”  In 2012, there have only been 6 closed sales of Palo Alto homes listed between $1,000,000 and $1,600,000 that have closed by February 10. Amazingly, these 6 homes sold for an average of 129% of the list price.   These 6 sales are as follows:

  1. 812 Lincoln, Palo Alto had 10 offers, jumping nearly half a million dollars from $1,599,000 to $2,086,000. ($1,465.00. per sq. foot of living space).
  2. 1136 Webster, Palo Alto went from $1,599,000 to $1,950,000 (at $1,830 a  sq. foot).
  3. 769 Rosewood, Palo Alto had 21 offers, increasing nearly 50%, going from $1,050,000 to $1,515,000. ($1,277 per sq. foot).
  4. 2928 Bryant, Palo Alto with over 10 offers, going from $1,098,000 to $1,523,000. ($1,238 per sq. foot).
  5. 185 Walter Hays Drive, Palo Alto had 14 offers, going from $1,398,000 to $1,655,000. ($1,145 per sq. foot).

Almost all of the winning offers were all cash, non-contingent offers with very quick closes.

Generally, Palo Alto entry level home sales serve as a precursor for Silicon Valley real estate more broadly.  As Palo Alto appreciates and buyers who cannot afford Palo Alto start to focus on other neighboring cities, such as Los Altos and Menlo Park, those cities should see an increase in their markets.  Historically, these cities lag Palo Alto by approximately 6 to 9 months, although they generally do not reach quite the fevered pitch of Palo Alto multiple offers.

This increasing frenzy will likely build until the Facebook IPO, at which time prices should stabilize for a while.  Then we anticipate a second boost six months later after the typical lockup period for employee’s restricted stock units expires.  Additional lock-up periods expire 3 months, 12 months, and 18 months after the effective date of the SEC registration statement.

How much appreciation Palo Alto real estate will realize in 2012 is open to debate, but it should be lower than the 22% that Google fueled in 2004 and the 37% appreciation at the peak of 2000 bubble.   One of the reasons this spike should be lower is that several home sales have already occurred as Facebook employees had the opportunity to sell some of their shares privately and buy in homes in 2011, beating the anticipated housing frenzy.  The ability to sell shares of private companies on the secondary market was not available when Google went public as a secondary market for private companies has only been around for the last few years. The appreciation rate should be strong but at a sustainable pace and will likely continue for at least another 3 years as the many positive economic forces in Silicon Valley continue to play out.

While the liquidity provided by the Facebook IPO will boost local real estate, the continued success and expansion of Facebook should be a sustainable, driving force in the appreciation of Palo Alto, Menlo Park, and Atherton, just as Google has been for Mountain View, Palo Alto and Los Altos. Google, which like Facebook, had just over 3,000 employees during its 2004 IPO, now has over 32,000 employees.

Our prediction is that the intense bidding that we are experiencing in Palo Alto entry-level homes will continue with the same intensity and expand to other cities and price points (upper end Palo Alto, …Menlo Park and Atherton will also pick up) as 2012 progresses, fueled by strong demand from tech sector buyers, fear of the Facebook IPO, and the historically low interest rates currently available.

Although a believer in and future buyer of Facebook stock, it appears that Palo Alto real estate may possibly be as good of an investment when tax advantages and leverage are factored in.