San Francisco Bay Area Real Estate Correction

80 Replies

So how much longer can this boom continue around here?  I live in Palo Alto, where I have my main residence.  I own rental properties in San Mateo, Foster City and East Palo Alto.  The one in East Palo Alto I only purchased a couple of months ago, and already I am sure it has appreciated by 60K, if not more.

I am looking to purchase more real estate but there are problems.  Right now I am maxed out in terms of liquid cash.  I have a LOT of equity on my houses, but, as many of you know, around here you've got a lot of deep pockets (and some of it dirty overseas money) that shows up with a suitcase of cash and pays straight out (beating out those who have to acquire loans).  

The other problems is I am just wondering how much longer this boom can continue.  Am I going to get caught holding the hot potato? :)

Given the above two issues, what do you think?  Should I look outside of the San Francisco Bay Area to invest?  If so, where?

Originally posted by @Thomas Seay :

So how much longer can this boom continue around here?  I live in Palo Alto, where I have my main residence.  I own rental properties in San Mateo, Foster City and East Palo Alto.  The one in East Palo Alto I only purchased a couple of months ago, and already I am sure it has appreciated by 60K, if not more.

I am looking to purchase more real estate but there are problems.  Right now I am maxed out in terms of liquid cash.  I have a LOT of equity on my houses, but, as many of you know, around here you've got a lot of deep pockets (and some of it dirty overseas money) that shows up with a suitcase of cash and pays straight out (beating out those who have to acquire loans).  

The other problems is I am just wondering how much longer this boom can continue.  Am I going to get caught holding the hot potato? :)

Given the above two issues, what do you think?  Should I look outside of the San Francisco Bay Area to invest?  If so, where?

 Much of California is going to have many of the same qualities as SF: high property prices, and stiff competition. 

That being said, given the difficulties of investing out-of-state, if you are concerned about a boom (and consequent bust in the future), perhaps instead of diversifying your RE portfolio, you could instead focus on 100% equity in your current portfolio, thus increasing your cash flow, and then cash out at a pre-determined sale point you set for yourself at some point in the near future?

If anyone knew when we were going to end a "boom", they'd be golden! If you find that individual, let me know!

Yes I can tell you the exact day and time of day its going to happen, When the boom is going to end. Just buy my book and you can also be one of the lucky ones that will know exactly when to make your move, hehehehehehhehe

Much of CA does not have the same problems - but has more reasonable property prices and little competition.  Certainly sounds like it's time to diversify to me.

I know nobody has a crystal ball.  I was just wanting to get people's sense of things.

from my perch as an investor in San Francisco, I think a lot has to do with how much property appreciates in the next year or two. SF has had tremendous appreciation 2012-14. Like a hot stock, it gained the windfall quickly. If 2015-16 shows modest gains, say 4-6% as opposed to > 10%/year, then a future correction may be softer. There is a potential tech correction everyone is speculating on, but that is countered by continuing improvements in the general economy and the rest of the USA RE market. So I'm watching were prices end up this year and next as indicators.  But I don't expect a crash anywhere near 2008-11. If anything I'm planning to line up dry gunpowder if we get a correction in the next two years :)

To add some conjecture to this topic, I'm of the opinion that the area in which you are heavily invested will also be dependent on the Start up community in the area remaining liquid. When the start up bubble bursts, and I'm of the opinion one does currently exist, then the ripple affect will be felt throughout the overall tech economy. 

When this happens it could be a catalyst for more pain felt throughout the general economy since so many private and public pension funds, insurance companies, private equity companies, and local high net worth individuals have a significant capital flowing through the local SF bay economy in the form of start up investments. When starts ups have to forgo new hires, and then begin to lay high salaried workers off the local economy, read local real estate, will begin to feel those impacts.

Just my opinion, and I'm certainly one to hope I'm wrong, but looking at the tech industry from a cyclical perspective I wouldn't want to place a bet on it. 

03/31/16 Update

Interestingly, I reread this post today as someone had voted on my previous answer. Yesterday, a well known VC firm put out an article on the slowing state of the 'layoffs' in Q1 2016 in Silicon Valley. The 1st quarter of this year tech companies where forced to reevaluate their businesses either do to a shortage of new investor dollars flowing into companies or as a result of pure survival until the climate of tech investment changes.

The Bay area and Silicon Valley have seen their worlds begin to change since the beginning of the 4th quarter 2015. Its been reported in spades that tech investments have slowed, and as a result, as indicated above companies have begun to lay off workers, and hiring has slowed considerably. This has been followed in early 2016 with the technology companies in SF and Silicon Valley having to continue to lay off some of their high salaried tech workforce.

Nothing of catastrophic proportions in the present. However, its something to watch going forward into 2016 and beyond. Should the temperature of investors continue to cool, and or our national economy begin to falter then this area may experience pricing adjustments at a rate more advanced than other areas. 

One final thought, for whoever is interested in macro themes: The thing to watch for on a global basis is the state of the Chinese currency. If China's Yuan is further devalued then then cat will be out of the bag and two things are sure to happen (i) China's banks will be on the precipice of failure. Without continued support and capital contributions from the Chinese state they will go to zero (ii) The fallout will be global with many industrialized nations being pushed into recessionary conditions (iii) real estate will feel the impact of Chinese financial markets destabilization. 

I would advise property owners in the Bay area to watch these conditions carefully. If you're sitting on gains you might consider taking them off the table. If your investments are highly leveraged you might want to deleverage or absent the ability to do so sell your investments before the market resets and prices on real estate begin to fall.

This isn't written in the view of pessimism. These are economic realities which may or may not impact real estate.

Disclosure: I do not own real estate in the Bay area, and have no intention on buying any soon.

What a terrific thread!  I am in Silicon Valley too.  I think the signs are there that a slowdown is already in process. There's a great deal in favor of the argument to take your profits and redeploy.  My experience is that when markets fall, they fall quickly.  They take longer to rise again due to fear of the experience and memory of that recent fall.

I wrote a book that I recommend you read called "Cashing In Tax Free".  It will provide you a guide to my strategy for real estate investing.  The most important criterion I employ is to only choose markets with well diversified industries- 5 or more different industries such as education, financial, technology, military, etc.  No one industry should dominate the local economy.  In this way, if one industry goes sideways, your investment is somewhat protected from lost tenants and lower rents.  

Silicon Valley is a fantastic place to invest if you have the capital.  Now is not the time to buy here, however. And whenever you invest here, you must be prepared for your investment being entirely correlated to the tech industry. I would wait for the next major downturn if you are wedded to investing here, however, I think it would be good for your to at least consider to sell some now and diversify.

Best of luck to you.

@Thomas Seay , yes the start up climate in the Bay Area is changing quickly.  But keep in mind that start-ups/unicorns are only a part of the overall economy in the region.  As @Leslie Pappas has pointed out, look for areas that have a diversified economic base... People seem to miss the fact that the Bay Area is exactly that, a diversified economic base.  Apple, Google, HP, Intel, Symantic, Pixar, Genentech, Tesla, Stanford University, Safeway, The Port of Oakland, 3 international airports, just to name a few companies/entities in various industries that make their homes in the greater Bay Area, and none of these are "start-ups".

The Bay Area is not a one trick pony.  It will have its ups and downs, but search BP for charts spanning decades on the real estate prices, and you will see the charts rise to the right.  

Also keep in mind that we have Prop 13. This is the golden ticket for long term buy and hold investors. I am an old school buy and hold guy. Don't sell your properties in this prime market. Position your finances so you can take advantage of any down turn. Get refinance down any high interest rate loans you have and get HELOC's in place. If/when the local market does go down, you will be in position to be the guy with cash to buy.

-Arlen

@Leslie Pappas I did not say that the technology was not a big part of the Bay Area.  As a matter of fact I referenced in my post several technology companies, along with many other companies that are not tech related.  My point was that there are many industries here in the Bay Area.  To be more clear, what I stated is that the Bay Area is not "start up" or "unicorn" dependent.  Here in the BA, there are software, hardware, and chip design companies along side companies that are involved in biotech, pharmaceutical, banking, shipping, etc. I was agreeing with you that diversity is a key component to a market.  If the Bay Area is not a diverse market, please tell me where you believe is a more diverse region.

@Arlen Chou @Leslie Pappas I would agree with Leslie here. In 1998 I had +/- 3,000 acres of land under contract as we mapped it out into a master planned development to support the overflow of workers who could no longer afford to buy homes in the tech areas of South SF, Silicon Valley, and parts of San Jose. 

As we worked the project the capital markets shut down from the Long Term Capital Hedge Fund implosion. Then by the time there was capital there was no longer an employee market from tech to support this outlayer project (think Inland Empire to Los Angeles comparison).

Three major Bay area submarkets would have supported this (not to mention Santa Clarita) and not one lender would touch this based on the state of the tech industry, alone.

We were lucky to flip out of the project to a substantial home builder who had excess capital capacity.

The entire region is heavily dependent on the technology industry. 

Originally posted by @Christopher Telles :

@Arlen Chou @Leslie Pappas I would agree with Leslie here. In 1998 I had +/- 3,000 acres of land under contract as we mapped it out into a master planned development to support the overflow of workers who could no longer afford to buy homes in the tech areas of South SF, Silicon Valley, and parts of San Jose. 

As we worked the project the capital markets shut down from the Long Term Capital Hedge Fund implosion. Then by the time there was capital there was no longer an employee market from tech to support this outlayer project (think Inland Empire to Los Angeles comparison).

Three major Bay area submarkets would have supported this (not to mention Santa Clarita) and not one lender would touch this based on the state of the tech industry, alone.

We were lucky to flip out of the project to a substantial home builder who had excess capital capacity.

The entire region is heavily dependent on the technology industry. 

Are you really basing this on your ONE bad deal?  Where was this 3000 acres?  Ever hear of Ruby Hills? 

Leslie, probably most of those empty offices were still collecting rents.

@Bob Bowling basing what on one bad deal. I was simply agreeing with the OP that the area is highly dependent on the technology industry.

My deal wasn't bad, we ended up doing very well on it financially. It didn't, however, run the course we wanted it to run. Had we been able to execute to plan we would have made at least 10x on the project.

No, can't say that I know of a Ruby Hills. I'm not from the Bay area, but over the years I've bought several projects in the region.

There's some good info available from the major commercial real estate companies that can help give you an idea where we are in the current real estate cycle. Just remember than the stronger markets are better protected against a market correction ie. San Francisco will not go down by as much in terms of capital value (%) than lets say Detroit. 

See below what CBRE thinks. 

The Bay Area can and has done well without tech.  If they leave/reduce they will be replaced.  

If I was doing 3000 Acre developments in the Bay Area then Ruby Hills would be on my radar.

http://rubyhillfinehomes.com/

@Christopher Telles where was this giant track of land?  I am not sure what your geographic boundaries of the Bay Area are, but if you had that much land inside the actual Bay Area, you would be as rich as King Midas.  Over flow areas South of San Jose or East of Livermore will always be dependent on what happens in the Bay Area, but I would not consider part of the Bay Area proper.

The issue I have is that people lump everything that they don't understand into the catch all phrase of "technology".  The "tech-industry" is much more nuanced then people give it credit. 

As an example, Pets.com and Netscreen were both in start up mode in 1998.  Back in the day, ".com" was the buzz term, now it is "tech", but the effect is the same: a generalized definition for those who are outside of the market.  Pets.com went belly up in 2000, Netscreen leveraged what was happening around the ".com" phenomenon and went on to be bought by Juniper Networks for $4 Billion dollars.  Those who were not carefully following the ".com" world saw total disaster.  Those who understood the underlying technology and value in companies made money.

I am just saying that to read only the headline news and to believe the generalities of a few articles is akin to "the sky is falling" mentality of the ".com" bust.  Sure the was a bust, but those people who really looked at and understood the details of the market made some serious cash.  There are hundreds of start ups getting funded every month.  Most will die and never see the light of day.  Others will make a splash and disappear under the waves.  A select few will remain and dominate their market segment.  That has always been the way of Silicon Valley and the Bay Area at large.  

There is more to the Bay Area then just start ups, unicorns, tech or bio companies.  Tell me where there is a larger and more established diversified micro economy.

By the way how much would that 3000 acres you had back in 1998 be worth today?

The incomes I see in the Bay Area are staggering, even those that are not tech related. Public school teachers are pushing $100k in many districts. My favorite restaurant in SF has about 12 seats and does about $2.5m in sales. It is not a normal economy. Tech is very important but it is far from the only game in town. When folks in the Bay Area feel
a pinch, they dump their second or third house in Carmel, Santa Cruz or Tahoe.

@Arlen Chou The land was east of Patterson. As mentioned it was then, and perhaps even now, an outlier development.

That's a great question, I've never looked at the valuation after selling our position, but in the end it doesn't matter. Everyone who was involved in that project me, my partners, our capital sources, and the buyer all made good money on that deal. I have't been affiliated with that project for many, many years. 

The buyer completed the master plan and built residential, and commercial to support the new neighborhoods. 

@Christopher Telles , I would consider William Shockley and Shockley Labs which started in Mountain View Ca in 1956 as the genesis of what is now called "Silicon Valley".  If I use that as a starting marker, Patterson is an approximately 2.5 hour commute one way... If the business model of your development in 1998 was for people to buy homes in Patterson and commute to the Bay Area for work, I am pretty sure the reason why those banks would not touch that project was not because of the tech industry...

The REI world West of the "tri-Valley" is a completely different animal. The original poster is IN the Bay Area proper.  He holds property in San Mateo, Foster City and East Palo Alto.  @Thomas Seay is in the middle of one of the longest running and hottest markets around AND holding 3 winning tickets that most investors could never touch.

When the market wobbles, is when true investors really need to analyze the nuances of their individual market, and not base decisions on anecdotal observations of empty windows and far away dead projects from a distant past.

I stand by my original recommendation that the OP, hold his properties, refinance and get finances in place for when the market does take a dip.  That way he will be in a strong position for the next up turn.  More importantly, I believe that the Bay Area will continue to go up and to the right when averaged over a long period of time.

@Arlen Chou   I worked for a development company in the 80's based out of San Mateo.. We had multiple 1000 acre projects going in the San Martin and Gilroy area the foothills on the eastern side of the valley.. the 1989 quake and WAR put a big fat halt to those...

We also did a few deals out in Los Banos area as those folks would drive to south SJ.

And lest we all forget that SF and the peninsula in 89 to 92 fell 20 to 50% in value in the SFR market.

TEch had not really been the driver it is now.. but it happened. I lived through it as a lender was not pretty only thing worse was 08 crash..

Originally posted by @Jay Hinrichs :

 

And lest we all forget that SF and the peninsula in 89 to 92 fell 20 to 50% in value in the SFR market.

Jay, I bought a SFR in 1986 and it doubled in value in two years. From that value it dropped at most 12.5%. So I lost nothing on my purchase price. People that bought at double saw a 12.5% loss IF they had to sell but otherwise ho hum. I am sure that people that bought in more speculative areas saw the more dramatic decreases that you describe but that is to be expected. It was not the norm for stable neighborhoods. If I remember correctly.

@Jay Hinrichs I appreciate and respect those reminders of the market from a veteran like yourself. My real estate working knowledge in the area only goes back to 1997 when I purchased a 2 bed 2.5 bath town house in Mountain View for $298k, and then purchased a 3/2.5 in Mountain View in 2000 for $699k. I sold the first place in 2004 for $616k to flip into a 3/2 ranch in Los Altos and then sold the second place in 2006 for $838k to cover construction costs of my home.  I made money on both deals and ended up with a nice home in Los Altos. But I kind of wish I had figured out a way to hold on to them both and get my home in Los Altos.  Market value on each MV property is well over a million each.  But the appreciation on the Los Altos place makes me feel better ;-)

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