The present economic slump is hardly the first time that dirge compositions have been readied by those wanting to be the first to predict the demise of the San Francisco Bay Area and its star child, Silicon Valley.
The region has been through many volatile economic cycles in its history and every time seems to rise like a phoenix from the ashes. However, the current episode is singular in nature. Bay Area Council President and CEO Jim Wunderman called the shift to remote work a “wild card” and said that the situation presents an opportunity to strategically remake the region into an even more attractive place to live and work than before.
“This one is totally different — the housing market has remained strong,” Santa Clara County Assessor Larry Stone said. “It’s not a recession of commercial properties because the economy turned down. It was because these companies were ordered to close and people were ordered to stay home.”
Unlike the more recent dot-com bust and Great Recession caused by human decision-making sending market fundamentals into discord, the coronavirus pandemic hit as a natural disaster following years of economic expansion. The theory is that in the absence of the virus’s hold on society, the underlying fundamentals should still be healthy. Among other metrics alluding to this, the median Bay Area home price went up by 20% during the pandemic, according to Wunderman.
“This is the deepest recession we’ve seen in the U.S. It’s also the shortest,” Beacon Economics founding partner Christopher Thornberg said at a Colliers International Silicon Valley Trends 2021 event on Feb. 24.
Thornberg pushed back on the notion that we are in the middle of economic Armageddon, saying that the recession actually ended in April, though the recovery was stalled by an enormous surge in infections during the holiday season. As of Feb. 24, it would take about 145 days until everyone in the U.S. receives their first vaccine shot, according to Colliers National Director of Research Steig Seaward. Although development of the Johnson Johnson single-shot vaccine could speed things up, mutations of the virus popping up around the globe could result in further delays to a full recovery. Yet, there are some promising signs for commercial real estate, especially in Silicon Valley, which showed resiliency in 2020.
“It’s going to be the tech-led cities that are going to not only be the first ones to pull out of this but are going to be the ones driving the economy going forward, and we’re projecting that not only GDP growth but employment growth as well is going to be driven by these tech-led markets through 2025,” Seaward said.
Last year, the Bay Area accounted for over 40% of venture capital spending in the U.S, the second-highest amount on record behind 2018, according to data presented by Colliers Executive Managing Director Reed Payne. Colliers’ research also showed that overall vacancy in Silicon Valley ticked up mildly from 5% in 2019 to 6.5% in 2020. Much of the resiliency is attributed to Google, Apple, Facebook and Amazon, which collectively occupy more than 51M SF in Silicon Valley. Those tech giants remained hungry for space throughout the pandemic.
Things haven’t been entirely bright for the region. The pandemic’s shuttering of urban amenities like retail and entertainment venues makes cities less attractive alongside the shift to remote work, allowing employees to live in cheaper locales. Postal service change-of-address data indicates a net migration of 53,000 households out of S.F. from March to November in 2020 compared to 17,000 in 2019, S.F. Chronicle reported. The migration resulted in steep drops in apartment rents in S.F. Yet the data also shows the majority of the departures were to other parts of the Bay Area.
Some companies such as Oracle, Hewlett Packard and Digital Realty have moved their headquarters to other cities. Still, as Colliers Executive Vice President Dave Sandlin pointed out, despite the talk of exodus, HP is not actually giving up space in Silicon Valley and will have more employees in the subregion post-exit than prior.
“Oracle is going, HP Enterprise is going, but at the same time, we’ve had several IPOs,” JLL Senior Vice President Sofi Choi said. “We’ve had record-breaking venture capital investments, and so nobody would know that we had COVID if you just looked at the amount of money that was invested in the Bay Area from a venture capital perspective and the number of IPOs that we had and the amount of net valuation that we added to the Bay Area.”
Although continued remote work has shrouded the short-term outlook with uncertainty, Choi expressed confidence that Silicon Valley will continue to be an economic leader in the nation, as the present climate is just another opportunity for renewal. She chronicled the valley’s tech cycles beginning with the dot-com bust resulting in over 40% vacancy rates, but that ultimately made room for subsequent innovations from social media to shared economies and, more recently, autonomous vehicles. Today there is a biotech boom spreading from the S.F. Peninsula to Silicon Valley and into the East Bay.
Even remote work itself, which has resulted in population loss for the region, particularly S.F., has been enabled by technologies like Zoom and Cisco Webex, both born in Silicon Valley. The numbers point to the notion that the region could continue to be an economic giant. Silicon Valley leads West Coast markets with 69M SF in the construction pipeline, with about 10M SF under construction currently 70% pre-leased, according to data presented by Colliers Senior Research Manager Lena Tutko.
“As far as VC funding, California is definitely in the lead,” Tutko said. “Even if we double the amount of VC funding in Texas, it would still be just 10% of what we’re seeing in California. And what’s really important to recognize is Silicon Valley remains the epicenter of innovation. We have a deep talent pool, proximity to VC funding and this is very difficult to replicate in other markets. We’ve seen them try. It remains a very competitive place. So some displacement of companies to lower-cost markets is natural.”
One main reason Silicon Valley has shown more pandemic resilience than S.F. proper is the larger presence of Big Tech companies, according to Cushman Wakefield Senior Director of Research Robert Sammons. Another reason is that S.F. and Oakland are more reliant on mass transit than Silicon Valley, he said. Workers who had previously relied on public transportation to get to offices in S.F. and Oakland were wary due to the threat of infection. Sammons warned that workers would have to get comfortable taking transit again for things to open up fully.
“It’s less of a concern down in the valley because what you’ll recognize is that more people drive, there’s more parking obviously available in those markets,” Sammons said. “A lot of the Big Tech players have these large corporate campuses, whereas, of course, San Francisco is much more dense. The same thing goes for downtown Oakland. The CBD of Oakland is very dependent on BART.”
Transportation is at the heart of the main challenges facing the region that existed well before the pandemic. During much of 2020, relatively empty freeways created an ease of travel around the region that was previously a distant memory for many. It also facilitated migration to Bay Area cities farther from core markets. Yet, it has been a thorny issue for years when rents and housing prices in core areas skyrocketed in the recovery from the Great Recession, leading to some lamenting the population growth. Many had to choose between paying exorbitant rents and braving formidable traffic congestion commuting from outlying areas. With the median home price in San Jose at $1.4M, according to Thornberg, homeownership continues to be out of reach for most.
“I think a region is successful when it’s a popular destination,” said Wunderman. “The solution isn’t to put a cake plate over it. I think the solution is to solve the challenges by normal approaches to building housing and infrastructure that are common to great regions of the world.”
Wunderman cited the housing and homelessness crises and the lack of adequate transportation infrastructure as the Bay Area’s most significant issues. He said that lack of high-speed rail that could connect with other parts of the state and short housing supply lower the quality of life and hinder sustainable growth. Stone, who said that Silicon Valley is still the world’s entrepreneurial capital, echoed the warnings.
“The threat is — and it’s a serious one — if we don’t solve the housing problem, affordable and worker housing, I believe we are headed toward becoming a Detroit,” Stone said.
While the transit issue is in part dependent on the success of vaccinations, the drop in apartment rents could add points to S.F.’s current desirability rating. Simultaneously, there is much multifamily product being delivered now in the region, which Sammons said could be advantageous in the short term with people taking advantage of discounted rates.
Part of the sustainable growth outlook depends on funding from the federal and state governments and relevant policies at the local and regional levels. One possible outcome is that more live-work housing units could be built along with flexible buildings that could be used for either housing or offices, depending on demand, Wunderman said.
“There is an opportunity to get it more right this time,” Sammons said. “We’ll see if the city and the state are up to the challenge. It remains to be seen. There is no crystal ball, but we all hope that we learn from past mistakes. Our forecast is tempered, but it is for improvement.”
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