Worldwide Real Estate Impact on Silicon ValleyDecember 10, 2014
Discord is a better teacher than concord. Consequently, I make it a priority to travel; its unique experiences are an important component of a lifelong education. I have recently focused my travels on learning more about real estate markets around the world to bring the best practices back to DeLeon Realty. Over the last two years, my itinerary included China (plus Hong Kong and Taiwan), India, and Russia. By the end of 2014, my business partner, Michael Repka, and I will have also visited Japan, Singapore, Vietnam, and Thailand. We both have learned a great deal from our travels while connecting with top real estate agents in these markets.
My latest epiphany from these travels is my new perspective on the prices of our local market. I have found how home buyers view Silicon Valley real estate prices as less of a reflection of our market and more indicative of where these buyers are coming from.
My out-of-area buyers come from two groups: domestic and international. The majority of my domestic buyers come from other tech centers of America, such as Boston, Seattle, San Diego, and New York. These buyers are usually surprised by the high cost of our region. However, since they come from sophisticated, affluent urban areas with relatively high prices, these buyers are not shocked and continue with the buying process. In sharp contrast, my buyers from smaller cities or university towns, such as Austin or Ann Arbor, are always astonished at the prices of our local real estate. As any large employer or recruiter will confirm, the disparity in regional costs of living is a major barrier to relocation in the Bay Area. A common strategy for these clients is to rent for a year so they can assimilate. Understanding the quality of life in our communities is the first step to accepting and paying local prices.
My international buyers, however, have a completely different point of view: they are often surprised at how reasonable our prices appear. While our prices are amongst the highest in America, my travels and research confirm that they are low by international standards. With the increasing global mobility of both people and capital, international investors will continue to play a growing role in the appreciation of Silicon Valley real estate.
The expansion of a market from a regional perspective to a worldwide one has also occurred with other high-end investments and luxury items, such as wine and artwork. For example, the market for exclusive first growth Bordeaux wines such as Château Laffite Rothschild rapidly appreciated when the buying pool expanded from rich Europeans and a few Americans to a worldwide market, with particular interest from Chinese and Russian buyers. Due to this international demand, premium wines are achieving new record highs and appreciated 176% over the last ten years (The Wealth Report, Knight Frank 2014).
There are a myriad of reasons why foreign buyers find our market attractive, but the two greatest ones are the stability and security of our market, as well as our exceptional local schools. As wealth in emerging markets continues to increase, so too does the desire to safeguard it. Silicon Valley real estate provides a secure investment with excellent appreciation potential and actual ownership of the land (as opposed to some countries, such as China, where you can never own the land). This gives buyers confidence and provides diversification against their other investments overseas. For confirmation of the relative stability of local real estate, see First Republic Bank’s Prestige Home Index ( https://www.firstrepublic.com/resource/san-francisco-bay-area-home-values). Since 1985, the bank has tracked real estate prices in California’s major markets. The conclusion is clear: Bay Area real estate has weathered a myriad of economic issues, recovered quickly, and continues to grow in value.
The globalization of prime residential real estate markets, including Silicon Valley, is being led by Asian investors, particularly buyers from China and India. In the United States, 62% of overseas investors are from Asia. (The Wealth Report, Knight Frank 2014.) A recent study by the National Association of Realtors confirmed that California is the top destination for Asian investors due to its proximity and familiarity, and the existence of a large Asian community. Moreover, 60% of these transactions are “all cash.” These wealthy investors often come from Hong Kong, Shanghai, Beijing, and Singapore: four of the world’s ten most expensive housing markets, where prices are much higher than those in Silicon Valley.
The average price per square foot for the top cities is $1,013, slightly more than half the price per square foot of Shanghai ($2,010.89). Indeed, while Palo Alto is Silicon Valley’s most expensive city on a dollar per square foot basis, real estate here is valued at less than 25% of comparable properties in Hong Kong.
One interesting corollary is that the investment by overseas purchasers will further increase the scarcity of local inventory. Traditionally, local inventory turns over every five to seven years. However, international purchasers tend to have a buy-and-hold strategy. If exchange rates do not shift drastically and their buying patterns remain unchanged, then the available supply of housing will tighten further.
Truly, it is all a matter of perspective. The global view is that local real estate is a value proposition. For the period April 2013 through March 2014, the total volume of international clients purchasing in the country was estimated to be $92.2 billion, a 35% increase from the previous year. (NAR, 2014 Profile of International Home Buying Activity, June 2014.) Moreover, a significant portion of that activity is concentrated in California.
My bold conclusion: Barring any major macroeconomic event, overseas investors and local tech buyers will push the price for prime real estate in North Palo Alto and West Atherton to $2,000 per square foot in the next 5 years.