Surging rents, skyrocketing real-estate prices and booming tech companies. Sounds like San Francisco in 2015, right? It also describes the city just before the tech bust of 2000, according to a recent report.
John Burns Real Estate Consulting of Irvine, Calif., and Pacific Union, a San Francisco real-estate brokerage, say that based on the appreciation (and apparent correlation) of venture capital deals and rent prices, the rise in the Bay Area’s rapid real estate and rent price appreciation today is looking more like a repeat of the dot-com bust of 2000.
“The San Francisco Bay Area is on our watch list for a correction,” said John Burns, his company’s chief executive, in an interview. He said that while San Francisco has become a permanently more expensive place to live and should be one of the most expensive places to live in the world because of its status as the center of the high-tech and Internet economy, the recent increases in home prices and rents have been fueled mainly by speculation.
“Affluent older buyers, often for investment reasons, have identified San Francisco as a place they want to own or live and have driven up prices dramatically,” he said. About a third of all-cash buyers in the Bay Area are purchasing property only as an investment, he said.
In the City of San Francisco, the median value of homes has skyrocketed, from $670,000 in the beginning of 2012 to $1.1 million this month, a gain of more than 67%, and a gain of 15% in the past year alone, according to Zillow.com.
But to gauge when such a correction might occur, you need to look to venture capital deals — and rent prices, he said.
Burns and Pacific Union noted that the size of the average venture capital (VC) deal rose from $4.9 million in 1997 to $17 million in 2000, a 243% increase. At the same time, apartment rents in San Francisco and San Jose increased by 52% and 60%, respectively.
Burns also noted that in the three years that followed — as VC funding collapsed during the 2001 recession and the turmoil that followed the September 11 attacks — rents fell in with the decline in VC funding, which plunged from an average of $16 million per VC deal in 2001 to just over $7 million by 2004, a decline of over 50%.
During the same time frame, average rents in San Francisco plunged from about $2,300 a month in mid-2001 to about $1,600 by 2004, a decline of about 30%, according to data compiled by Burns’ group from PricewaterhouseCoopers, Axiometrics Inc. and Thomson/Reuters.
Rents in San Jose fell even further, from a similar average of $2,300 a month to $1,400 a month, or a decline of about 39%, Burns’ research showed.
The current tech sector upswing in the Bay Area is presenting a similar relationship between VC funding and apartment rents, said Burns.
In 2010, the average VC deal in the Bay Area was $6.9 million, but had risen to $23.5 million in 2015, a 240% increase, Burns says.
At the same time, just like in the 1997 to 2000 period, average monthly rent for apartments in San Francisco and San Jose have shot up. In San Francisco, average rents have soared from about $1,900 a month back in 2010 to more than $3,200 today, a gain of 68%. In San Jose, the average rent in 2010 was about $1,600 a month. Now it’s $2,800, a gain of 75%.
“Rents in San Francisco and San Jose have respectively eclipsed prior dot-com bubble peaks,” Burns said. “We think another decline this time around is inevitable.”