When I last visited the USA for work, I took advantage of the new Qantas leg from Sydney to San Francisco.
Wow, hasn’t the city changed in the 20 years since I was last there. I guess that could be valid for most cities too after 20 years, but this was different.
There was a certain vibe around the city, where everybody enjoyed walking & cycling. It was definitely a fit city. And you could actually smell the wealth in the town.
The first sign I noticed that indicated it was a wealthy city were the hotel prices. Insane! I’m sorry…I only wanted a room for the night, not buy the hotel!
This all came from a decision that the Mayor made a few years ago…
Almost an hour to the south, is the famous Silicon Valley, home to the Tech Start Ups. Literally thousands of new Tech Start Ups were moving to San Fran to try and make it big in the Tech world. But because San Jose (the centre of the Silicon Valley) was suburbia, the workers of these companies wanted to live in the high life of San Fran. So, the Tech companies hired coach buses to drive their workers from the city to the suburbs everyday, and back again. And there were literally hundreds of them.
So, the Mayor made a decision to offer these companies a tax break if they relocated their companies to San Fran. And that they did… in droves.
Now, San Fran is broken up into regions, not intentionally, but that’s just how it is. And the Techies moved into an area called the Tenderloin Region.
This decision created an explosion in the cities population growth, and not just people with money, but those willing to give up everything to be amongst the action. There are thousands of millionaire wanna be’s.
And what happens when money (or those willing to pay high fees) move in?
Property prices start to climb. And that they have, in a BIG way. So much so, that the median house price is cracking the million dollar mark. Now you may say so what, Sydney is also at the million dollar mark. The difference is that you don’t get much for a million in San Fran.
It comes as no surprise that the property owners in the area are cashing in on these Tech company workers who are willing to pay anything. We then saw houses being remodelled/renovated in a high tech way including all the mod cons and luxuries that the ‘techies’ could ever want, so that they pay an absolute premium to lease these houses.
Now, to put some figures around this, there were houses that were 1400 square feet (average size 4 bed home) being leased for $10k per month… yes, you read correctly.
How about a one bedroom studio for $5k per month = $1,150 per week? These are US dollars too.
That’s over double the rent of Sydney and Melbourne.
But it doesn’t stop there, commercial property owners are cashing in on the cash grab too. Buildings are now leased to Tech companies in an open office environment. I had to visit an App company for a project I am working on and their office was completely open plan – all 600m2 to the floor and there were around 12 companies working there.
The theory (and apparently it works) is that the different tech companies bounce ideas and get help from each other. They may have a solution to a project someone else is working on by simply modifying their code to suit that new application.
And just like in the movies, bike riding, playing ping pong & bringing pets to work is encouraged. It stimulates the brain and gets the juices flowing. In the building, there is generally one kitchen where everything is free for workers and the companies divvy up the costs.
It was overwhelming to see and by leasing this way, the owners of the buildings are reaping massive yields. But not content with only this, they also lease their basements. What is usually a dark, dingy, dirty basement, gets remodelled, they make them funky and then lease them cheaper to ‘Incubators’. An ‘Incubator’ is a very early Start Up company that has an idea and wants to be amongst the action but cannot afford the massive rent prices of the higher floors. Now, that’s smart thinking!
And it’s not just property owners cashing in. There is a restaurant that sells hamburgers for $56! I am happy to have a nice meal and pay a premium for it but I’m not paying US$56 for a hamburger.
Funky restaurants were everywhere, which I loved. Sure it wasn’t cheap for a drink and a coffee is US$6 but ‘when in Rome…’
But all this comes at a price. Big money is buying up old buildings and evicting the lower income tenants and remodelling or rebuilding into new condos. There is a legal loophole for new property owners called the Ellis Act. This allows new owners of property to give their tenants one years notice to evict for no reason, even if they have many years on their lease to go. The owner then remodels and then puts the rent up to new market levels. These tenants are being forced further and further out of the city, to make way for the wealthy Techies.
Now, the same could be said for the property prices of Sydney and Melbourne and rents of Sydney. But the problem has gotten so bad that property owners who have recently purchased, are forced to Air BnB some of their rooms out each week to be able to pay the mortgage.
And for those Techies renting, many are moving back to the ‘burbs on the weekend and Air BnB’ing their property out just so they can make the rent payments each month.
In what world does that make any sense?
The Techies have now literally priced themselves out of the market. Any change in their circumstances could see them go bankrupt in a matter of weeks. I see this as very dangerous and could easily see San Fran looking at a property bubble bursting.
The problem is not limited to just San Francisco but also places like Portland, a country town in Oregon, home to Nike and clothing company, Columbia.
Recently, New York outlawed property owners leasing their property to short term stays under 30 days. This literally cuts Air BnB out of the picture. Many property investors purchased with the idea of renting their properties out to Air BnB to maximise their yields. That’s now all done and dusted. And so might be many investors financial health.
This legislation could easily spread onto more cities, including San Fran. And all this in the slim hope of being part of the 5% of Tech companies that will make an App, that will make money. That’s one huge gamble – Look out San Fran, this could all tumble at any stage!