Businessweek Archives

Silicon Valley: How Sweet It Is


News: Analysis & Commentary: CALIFORNIA

SILICON VALLEY: HOW SWEET IT IS

Gino Blefari loves stock options. Not that the Silicon Valley realtor owns any. But the high-tech execs who shop for homes at his Contempo Realty branch in Cupertino certainly do. And this year's extraordinary runup in technology stocks--chip stocks are up 93%, software 40%--has given a long-awaited boost to the housing market in this island of California prosperity. "My clients are watching their stocks doubling, and doubling, and doubling again," Blefari crows.

While most of the Golden State deals with persistent economic problems, happy days are back in Silicon Valley. Just consider one of Blefari's most recent sales. An executive at network-switch builder Stratacom Inc. plunked down $1.1 million for a hillside home in tony Saratoga, moving up from a $740,000 number. "His salary hasn't gone up much," says Blefari. "But his equity in Stratacom has grown quite a bit." Todd Hill, a salesman at Ferrari of Los Gatos, sees similar euphoria. "The new Ferrari market is booming," he says.

SUPERHOT. In the Valley, even trickle-down economics seems to work. Lower-level employees, who also take some of their pay in stock options and grants in this enclave of entrepreneurism, are spending big, too. Kristin Laymon, a 29-year-old marketer for the superhot networking company Cisco Systems Inc., thought she might never be able to afford a California home. But she recently pooled her stock gains with a friend to buy one. How many fellow employees are doing the same? "Zillions," she says. Looking out the window at the Cisco parking area, Laymon says: "I see lots and lots of new cars out here. And I see new Harleys, lots of new motorcycles."

The consumer boom sparked by stock runups is the frothy topping on a cake that started baking last fall, when the Valley perked up after years of flat results. After the most recent peak in 1990, Silicon Valley lost nearly 40,000 jobs, as the aerospace industry tanked, military bases closed, and manufacturing jobs moved to cheaper states and overseas. But job growth is rising fast in the Valley--even as the state's economy can't seem to get cooking (chart).

The statistics are remarkable. In recent months, Santa Clara County, the heart of the Valley, has added 6,000 jobs, bringing the total back near the peak of 800,000. The county's unemployment rate stands at 5.4%, compared with 7.9% in the state as a whole. Since January, classified ads in the San Jose Mercury-News are up more than 40% vs. the same period last year.

The plummeting vacancy rate for commercial real estate has created "probably the hottest market in the country right now," says Michael L. Evans at Ernst & Young. Office vacancies along the peninsula south of San Francisco dropped from 6% to 5.4% in the second quarter, says Evans. That compares with rates of 10% to 13% in healthy cities such as Portland, Ore., and Phoenix, and about 16% statewide in California. Valley rents rose nearly 7% from the first to second quarters, to $24 a square foot. That compares with just $18 early last year.

ONCE BURNED. The tight squeeze isn't surprising, given that there has been virtually no new commercial construction in the Valley during the past nine years. Even now, banks that were burned by bad loans in the 1980s are reluctant to finance commercial-development loans. So companies are building to suit, many using off-balance-sheet financing so their earnings aren't hurt. Graphics software maker Adobe Systems Inc. is one of many companies that is expanding: It's putting up 350,000 square feet of new office space in San Jose and could add as much as 420,000 more by next year.

Residential real estate is picking up, too. Already, prices are higher in the poshest Valley locations. Coldwell Banker Corp. says the average price of a four-bedroom home in ritzy Saratoga has risen 11.1% in the past six months, to $619,000. Then there's the jam-up in the apartment market. Keith R. Guericke is president of Essex Property Trust, which owns 2,000 multifamily units in the region. Engineers flooding in from out of state have boosted rents by 4% after four years of no increases at all, he says. "We're 98.9% occupied."

Of course, all this activity could be a signal that the high-tech bubble is about to burst. "Many of us are nervous over the level reached by initial public offerings and technology stocks," says Richard C. Carlson, chairman at Spectrum Economics. "It is very unlikely that this will last an entire year." Party hearty, Valleyites.By Russell Mitchell in San Francisco


Best LBO Ever
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus