Silicon Valley Ultra-Luxury Properties Show Signs of Strength  

June 22, 2020

How has the coronavirus affected the demand for high-end properties in Silicon Valley?  At the Young Platinum Group, we’re fortunate to be buying, selling, and building homes for clients at the high end of the market.  In this analysis, we’ll look at the $10 million+ home market (the “ultra-luxury” segment), relate the anecdotes we are hearing, dive into an analytical view of the data, and then offer some prognostications for the future.

Anecdotes

As realtors, we are constantly talking to our clients about their goals, as well as talking to other realtors, lenders, and industry participants—all eagerly focused on trying to understand the market.  Below is our summary view of hundreds of conversations over the past 90 days.

Many people are looking at the limited shutdowns we have had in the Bay Area since March 16, the uneven nature of the American lockdown experience, the flare-ups in “safe” places like Beijing, the uncertain prospects for a vaccine, and the impacts on their families of the past three months, and are saying, “we better have a bigger place, because this could go on for a while.”

Many people suddenly need a home office (or two!), due to the shuttered companies and sudden prevalence of zoom calling.  Most people are cooking more at home, meaning that the fridge is feeling full, the counterspace is congested, and the pantry too paltry.  With gyms closed, people are jamming exercise bikes and rowers anywhere they will fit.  Media rooms are getting a lot more use, and people wish they had more space for their hobbies.  Most want more outdoor space, as backyards are the new kids’ playgrounds.  Younger children need more dedicated online learning spaces at home, while older adult children are leaving their exciting urban rental and moving back in with mom and dad in the suburbs.  Even having dedicated space for an “airlock” with PPE and disinfecting wipes to sanitize and process the endless parade of Amazon boxes has been mentioned!

With more working from home and less commuting, there is a surge of interest in more remote locations which feature plenty of space, but are further from (what used to be) “the action.”  The popularity of shared urban studio apartments is down, while expansive commute-unfriendly compounds are up. One prominent title officer mentioned that she has never seen so many $10-20 million properties in contract in San Mateo county (which includes Woodside, Atherton, and Portola Valley, where inevitably most properties in this price range are).  At lower price points, sellers might consider leaving the state.  At higher price points, despite being intrigued by the “resort towns” of the West (Vail, Aspen, Park City, Jackson, Sun Valley…), many people are anecdotally opting for the weather, politics, coronavirus response, and cultural vibe of California.

All of this leads to the need for more space.  This affects urbanites in San Francisco the most, but everyone, at every price point, would prefer 30% more space if it was available.

Conclusion

Unsurprisingly, due to coronavirus, everyone in the Bay Area would prefer more space.  There is an anecdotal flight from urban centers (like San Francisco) to the suburbs (like Palo Alto and Woodside).

Analysis

Many homeowners initially felt that this would be a terrible time for their planned home sale (due to reduced supply).  However, an unexpectedly large supply of buyers have started looking (increased demand).  The global economy is faltering (should decrease prices), but the stock market is strong (should increase prices) if volatile (just makes buyers and sellers jittery). Too add to the mix, the Fed is slashing rates (should increase sales) but travel is more difficult (should decrease luxury market sales).  All of these contradictory factors have been jostling for dominance, and for a while we were reluctant to declare any trends, as lockdowns made real estate transactions almost impossible at first, and scant until recently.  But now the business of selling homes has found a way to get things done (we are considered an “Essential Service”), and we feel cautiously willing to formally analyze recent data for trends.

In the overall real estate market, volume is down to 60-80% (depending on what/where/when you measure) of the prior year, but is rapidly approaching 2019 levels.  Volume is not obviously impacted in the $10 million+ sector.  Prices, however, remain roughly constant with pre-virus times.  Let’s examine these claims in detail.

If we look at Palo Alto, Atherton, Woodside, and Portola Valley, we can capture a good chunk of mid-Peninsula Silicon Valley luxury sales.  Specifically, for any property that transacted on multiple listing services, closing between Jan 1, 2010 and June 18, 2020, where the sale was over $10 million USD—what we’ll call the “ultra-luxury” market— the dollar value sum of such sales seems to be not obviously impacted by the coronavirus:

The chart above shows quarterly sums.  Q2 2020 was entirely during lockdown (it started on Mar 16 for Santa Clara and San Mateo counties), and even during Q1 most buyers and sellers at this price range were concerned about the future.  There does not appear to be a noticeable drop.  Where were those ultra-luxury sales happening?  We can break it up by locale:

Wow – look at Woodside pop in Q2!  There were in fact six $10mm+ sales in Wooodside thus far in 2020… several of which had been on the market for over two years.  Because Woodside (and Portola Valley) are known as places a bit further afield but with very large lots, it seems virus-related that there is such an uptick.  By contrast, Atherton is down and Palo Alto disappeared.  Is this alarming?  Is the high end in Palo Alto falling?  Well perhaps not; we have very small numbers of transactions to measure from:

While the uptick in Woodside is hard to ignore, the downturn in Palo Alto and Atherton may just reflect the inventory available.  In our opinion, several of the currently active listings of $10mm+ Palo Alto properties (there are only five) are priced in a very “seller-optimistic” manner at the moment. What is happening to the dollars per square foot calculation?  Is value really holding in the ultra-luxury segment?

To mitigate the thin (only 167 transactions over a decade) data, the chart above combines all 4 locations and annualizes data.  There is a tiny downturn with partial year 2020 data, but it is hardly conclusive.

Conclusion

The $10m+ market has been very resistant to the shelter-in-place orders and the coronavirus.  It is business as usual at the ultra-high end.  

Prognostications

Predictions are dangerous business in real estate, and doubly so given the unpredictable state of the coronavirus.  However, assuming that a cure, safe and at scale, is still a ways off, there are a few factors that might positively affect housing value in the local ultra-luxury category: restaurants, schools, rising share of wealth, and speed to emerge from lockdown.

Firstly, we in the Bay Area tend to take our pretty awesome climate for granted.  But the mild seasons and all our indoor-outdoor living is not just for stylish back decks at home, lovely though they are.  If restaurants are really only able to operate with increased social distance or outdoors, then we might expect to see an influx of Americans from Chicago, or Philadelphia, or New York, or Boston… who get really sick of eating mostly only at home.  Our climate and space just facilitate open-air restaurants better in this future.   The SF Bay Peninsula is a pretty incredible combination of affluence, climate, space, and international tastes to allow high cuisine to flourish in a lockdown future.

This climate advantage also extends to schooling.  Whatever children’s education becomes in the short-term, it will likely be grindingly hard to do it in New York City, as opposed to Palo Alto.  One could imagine schoolchildren doing something together outside for most of the year in the #1 primary school in California, but less so at PS 6 in Manhattan.  We just have more space, with more useable outdoors, but comparably interesting jobs.

Thirdly, in a world of lockdown, we’ve famously seen a flight of life to online.  People talk about the FAANG (Facebook, Apple, Amazon, Netflix, Google) stocks… well four of those five companies are headquartered right here, within 20 miles of Palo Alto.  Their top executives, by and large, are driving our property market’s high end.  One might expect that the digital providers of community, content, goods, entertainment, and information would enjoy relatively more success in a locked down world.  Does the stock market agree?

Of course the stock market agrees!  FAANG stocks alone are now more than 15% of the S&P 500.  (The charts above are a bit deceptive…  can you spot the unusual representation of data?  But overall point is valid.) Tech as a sector is even higher:

Tech as a whole is now above a third of the entire stock market (as measured by the S&P 500).  With Silicon Valley being the center of American tech, these benefits flow disproportionately to our high net worth locals, creating strong support for the local luxury property market.

Finally, the Bay Area seems likely to emerge faster from the lockdowns better than most places in America.  According to this new analysis by Bloomberg, the Bay Area is ranked #1 in the nation due to our ability to shelter in place (programmers in Mountain View can do it much easier than casino staff in Las Vegas, for example), our existing macroeconomic strength (household income, % in poverty, % homes with underwater mortgages, etc), our relative health, and our demographic makeup.  This strength should draw “high-end refugees” from the rest of the country who prefer a safer, less restrictive, place to live.

Conclusion

The Bay Area’s weather will be a distinct advantage for restaurants and schooling if the coronavirus lockdowns extend into the winter months.  The shift of life from physical to online benefits Silicon Valley more, potentially pulling more wealth into our area.   The Bay Area seems better able to emerge stronger from this pandemic.  These four factors suggest reasons for optimism for the Silicon Valley ultra-luxury real estate in the near future.  

The Young Platinum Group is a Palo Alto-based small business.  We are realtors, developers, and dream-builders for the finest homes in the heart of Silicon Valley. Our analytical approach, absolute discretion, and our fabled customer service can help make your next move a smooth and happy one.  We proudly affiliate with Golden Gate Sotheby’s International Realty for our realty activities, and the Peninsula’s finest builders, architects, and designers for our development projects. Contact us to discuss your real estate needs!