Unicorn affect on San Francisco real estate
Will the unicorns affect SF real estate?
I've had a couple of questions swirling around my mind recently, and for whatever reason they all had to do Unicorns (startups valued at $1b or more).
- How much are the unicorns worth in aggregate?
- Where are they based? Is SF as dominant as you would expect?
- If there are a lot that are SF based, how much are those worth?
- How much do the employees own through employee stock options?
- Assuming the IPO markets open up a bit, how much will the employees in San Francisco based Unicorns drive housing prices up in SF?
- Does that make purchasing a condo here more attractive now?
I downloaded some datums from the WSJ and got cruising.
How much are the unicorns worth?
This was an easy one. After some quick rounding, in total the unicorns are worth around $300b. Of course, $100b of that is tied up in Uber, AirBnb and Palantir, but that still leaves $200b elsewhere. Moreover, we really have no idea what most of these companies would be worth if they went public, but given the recent Snap, Mulesoft and Alteryx IPOs it seems like private valuations are holding fairly true in the public marketplace for now.
Where are they based?
Coming from Seattle, I had a healthy dose of skepticism that the Bay Area would be THAT dominant. I was totally wrong. Fully 58 of the 92 unicorns on the US WSJ list are based in the Bay Area. They're worth a total of $234b, again well over 2/3 of the total.
Notable surprises other than that? Seattle, my hometown, had ONE Unicorn: the shame. Austin also came in with one. Florida had 3, which surprised me a tad, but not as much as the 4 in Utah. Busy over there in the Beehive State.
Boston, SoCal and New York were relatively well represented, as expected.
How much will stock options from employees in SF based Unicorns affect housing prices here?
Ok, I'll admit it isn't a compact question, but it's certainly interesting. There's a perception that the latent value being locked up in all of these unicorn companies is going to burst once they IPO, but I'm curious if it's actually a large enough number to make a difference.
In keeping with the spirit of this post, this is totally back of the napkin, so disagree as you will.
First of all, we have to find a reasonable number for the percentage of each company owned by non-insider employees. Quora says 10-20%; of which around half is owned by non-C-level folks, giving us around 5%-10% of each company.
Multiplying our $258b current valuation for SF Unicorns by 10%, we get $25.8b. That's pretty incredible; again we've removed most of the plutocrats here so that number is largely made up of people with $1m-$5m stakes in these unicorns. I've also added the aggregate by company to the Google doc, in case you're curious about any particular company.
The second part of the question is much harder to answer.
Is $25.8b a drop in the bucket of SF area real estate, or a huge tsunami?
Admittedly, this is where the back of the envelope calculation becomes a little more back of the envelope. I have to have a reasonable way of determining the total value of San Francisco real estate in order to see whether our Unicorn employee stock grants might affect it in any way.
Zillow says that in 2015 the aggregate US housing stock was worth $27t. We can get a decent guess for Bay Area housing value by comparing US GDP ($18t) to Bay Area GDP ($800b). In other words, since Bay Area GDP is about 1/20th of US GDP, we can assume housing stock is a similar percentage, giving us ($27t * 1/20 = $1.35t). Wow... Bay Area residential real estate, in aggregate, is worth around a trillion and a third dollars. That's a big chunk of change, and I would imagine that my GDP calculation above is actually making that a fairly conservative guess, since property in SF is so inflated relative to GDP.
Of course, only a small portion of that real estate is sold each year. Zillow Research comes to the rescue again, with a 3.65% turnover rate, which I will round up to 4%. This means that $1.34 * .04 = $53.6 billion of real estate is sold each year in the Bay Area.
Bringing it all together
If you're still along for the ride, we're almost done. The biggest remaining question is how much of the $25 billion dollars in Unicorn employee stock options would conceivably be spent on housing, and over how many years? Realistically, we know that a huge chunk of that money will go to taxes (30% in aggregate seems fair). I would imagine that college funds, impulse buys, savings and other expenses will take up around 2/3 of the remaining money, leaving the other 1/3 for real estate purchases. That isn't the only thing to consider though: realistically only 50-75% of the employees of those companies will live in the Bay Area.
In math, that means the total "Unicorn Real Estate Fund" is: $25b * .70 (taxes) * .333 (other expenses) * .5 (people who are Bay Area) = $3b. Assuming that is spread over 5 years, plus or minus, that gives us $600m per year. Of course, that could fluctuate significantly by changing any of my assumptions up or down, but I think we can be fairly certain that once these companies go public it'll be more then $200m a year and less than $1b/year.
So... will the Unicorn employees affect San Fran real estate or not?
I think they will, but probably in a limited way. $600m amounts to a little more than 1% of total real estate transactions in San Francisco. That extra demand will probably be soaked up in small price increases... and in an already crowded market that's almost impossible to notice.
But, they might still have an outsize affect on the market if they don't smoothly transition to the public markets at a steady cadence. I can imagine a cluster of 20-30 IPOs, along with perhaps 1-2 Uber sized mega-IPOs in the same year, followed 6-12 months later by a micro-boom in housing prices of 2-3%.
In short, the Unicorns don't make real estate in San Fran any less exciting, but I'm not sure that anyone needs to rush into the market today just because of them.
Will definitely need to follow up on this at a later time, however.