Issi Romem is chief economist for Trulia and a fellow at the Terner Center for Housing Innovation at the University of California at Berkeley. His work has been featured in the The New York Times, The Wall Street Journal, Bloomberg and more.
The impending wave of San Francisco tech IPOs is substantial and will influence San Francisco real estate, but the hype about its impact is likely overblown. In particular, despite being centered on San Francisco instead of Silicon Valley, its impact is still likely to diffuse throughout the broader Bay Area. Rather than breaking with the past, the current wave of IPOs is likely to reinforce existing trends: undulating but maintained pressure on the gas pedal, not an abrupt kickdown.
Lyft’s recent offering, combined with a series of anticipated IPOs this year — headlined by Uber, Airbnb, Pinterest, Slack, Zoom and others — has prompted numerous alarming headlines suggesting a coming flood of stock-enriched home buyers. “[E]ven conservative estimates predict hundreds of billions of dollars will flood into town in the next year, creating thousands of new millionaires,” reports The New York Times. “And they want houses,” warns the report, quoting a real estate agent promising investors that single-family homes in the city selling for a mere one to three million dollars will soon be a thing of the past.
The estimated value of the companies going public sums up to about $200 billion, and their combined San Francisco workforce probably ranges somewhere from 10,000 to 15,000. But does that mean 15,000 new home buyers will descend on the City of San Francisco in 2019 and spend $200 billion on homes? Certainly not, for several reasons.
Employees’ share of the pie is but a fraction. Investors, founders and a few key executives usually own the lion’s share of stock before an IPO. The Information estimates that as of late 2017, only 17 percent of Uber shares were in the hands of employees (excluding its founder and two other key executives).*
The vast concentration of wealth going to investors, founders and key executives may result in a handful of grand estates exchanging hands, but it generally won’t find its way into the Bay Area’s common housing stock. If we conservatively take 25 percent of $200 billion to be employees’ share, we arrive at a $50 billion figure, but that too is an overestimate of the employees’ likely windfall in the wake of the offerings.
Most employee equity hasn’t fully vested, stock options need to be exercised and taxes need to be paid. Employees’ initial equity grants typically vest over a four-year period. Given the rapid growth of these companies over the past few years, most employees are relatively new and their equity grants won’t fully vest for years. Uber, for example, had about 5,000 employees in San Francisco in early 2018 — but in 2014, it had only 550 employees in total (not just in the Bay Area).
Despite the stereotypes, not all San Francisco tech workers are young, city-dwelling millennials.
At best, those employees that joined more recently will have only a fraction of their full equity grant available to sell this year, diminishing their immediate buying power (and if the past is a good indication, many won’t stay long enough to see the full equity grant vest). In addition, many employees obtain their equity in the form of stock options, and for all but the earliest employees the strike price is not negligible, i.e. an employee exercising an option and selling $100 worth of stock will generally pocket far less. Finally, employees must pay tax on their IPO windfall, keeping yet another slice of it out of the housing market.
Not everyone receiving an IPO windfall will buy a home. Those compelled by the windfall to purchase a home in the next few years — and who wouldn’t have done so otherwise — are likely a small subset of the total employee pool. Suppose they number 5,000 and each buys a home during the next three years: That’s about 2 percent of the 243,575 homes purchased in the Bay Area over the past three years. Also: Some of these firms’ employees own homes already. And some employees may not want to buy a home: Maybe their personal life is in flux, maybe they appreciate the freedom of renting or maybe they would like to use the IPO cash for other purposes (ever dream of bootstrapping a startup?).
The IPOs won’t happen all at once, and many would-be buyers won’t buy immediately. Among those compelled to buy a home, many will wait: For the hype to pass, for their partner to say “yes” or for their second child to fully illustrate the inadequacy of their rent-controlled two-bedroom. And the IPOs themselves aren’t all going to happen on the same day either. In fact, part of the 2019 wave is already anticipated to take place in 2020.
A large portion of IPO-enriched home buyers will seek homes outside the city. Despite the stereotypes, not all San Francisco tech workers are young, city-dwelling millennials living nearby. Downtown San Francisco and adjacent SOMA (where the wave of IPOs is headquartered) are arguably within the single most accessible section of the Bay Area, drawing commuters from throughout the region. The immediate housing impact of the IPO windfall will extend in all possible directions: South along the San Francisco Peninsula, north along the ferry lines to Marin County and east past Oakland and Berkeley to the I-680 corridor. And the secondary impacts — those that occur if and when those selling to IPO-enriched buyers use the proceeds to make another home purchase — will extend even farther, diffusing the housing component of the IPO windfall throughout the region.
Newly wealthy employees are likely to bid up home prices only to a certain point. An early employee with $10 million in newfound wealth might decide to pay $4 million to ensure they get what is otherwise a $3 million home. But they probably won’t put down the full $10 million, because even very wealthy people don’t like to give away money. And despite this buyer’s personal $10 million infusion of wealth, it’s only the $1 million difference between the IPO-driven buyer’s bid and the price that would have been obtained otherwise that fuels appreciation.
IPOs are just one of many ways in which wealth arrives in the Bay Area.
Some spectacular bidding wars could make headlines when IPO-fueled buyers compete for homes against each other, but they will most often be competing with everyday buyers, and while they may have more resources to bring to bear, they won’t be eager to spend more than they must.
IPO-driven buyers will add an affluent but small contingent to the Bay Area buyer pool and they will help support the Bay Area’s ongoing price appreciation — perhaps even substantially — but they will be extending a long history of price appreciation in which IPOs have played a part, not breaking from it. Between 1970 and 2017 there were 1,987 IPOs by California-based companies, with a large share being in the Bay Area. The scale of the current wave of IPOs, although it is exceedingly large, is not very different from Facebook’s in terms of home-buying power. After its 2012 IPO, Facebook was valued at $104 billion — but because Bay Area housing prices have roughly doubled since, that’s equivalent to the same home-buying power as $200 billion-plus today.**
The underlying cause of concern around this latest IPO surge and housing — the long-term erosion of housing affordability in the Bay Area — is serious. But the wise way of mitigating the upward pressure of the IPO wave on home prices is not to stoke fear of it, and certainly not to demonize the employees rewarded for creating it. Indeed, IPOs are just one of many ways in which wealth arrives in the Bay Area. Instead, the wisest course is “simply” to add more homes, allowing the local housing stock to accommodate more people — the well-heeled and less well-off alike.
The short-term fears of an IPO wave flooding San Francisco with cash are overblown, but the long-term fears of the Bay Area failing to accommodate people and growing unaffordable to all but the most affluent — those fears are very real.
* Part of the reason current IPO valuations are so high is that IPOs are currently taking place later in the company life cycle, at which point employee equity tends to constitute a decreased fraction of the total.
** To put that $200 billion number into perspective, consider that only a small fraction of that wealth will find its way into the housing market — for the reasons spelled out here — and that as of 2018, residential real estate in the Bay Area was worth a total of about $2.38 trillion.