Home Prices Are Relaxing in Silicon Valley’s Most Expensive Pockets

Although Silicon Valley still ranks among the country’s most expensive places to buy a home, prices in the region are leveling off, with Atherton losing its title as the priciest ZIP code in the U.S.

That’s according to Forbes’ latest annual rankings of America’s most expensive real estate markets, which places two Silicon Valley ZIP codes — one in Atherton and one in Los Altos Hills — among the country’s 10 priciest. The study includes both single-family homes and condominiums using a rolling average for the 90-day period ending Nov. 18. ZIP codes with fewer than 10 homes for sale were not included, which the report says eliminated some expensive Northern California enclaves.

Atherton’s 94027, which had ranked as the country’s most expensive ZIP code for the past three years, fell to the No. 3 spot, with a median list price of $7.2 million. With homes listing for $6.08 million, Los Altos Hills‘ 94022 is America’s eighth most expensive ZIP code, up three spots from last year’s list.

Prices have cooled significantly in Atherton, where homes listed for $10.56 million last year. Pacific Union Silicon Valley real estate professional Carol MacCorkle told Forbes that fewer homes at the highest end of the Atherton market — those priced in excess of $20 million — have sold this year when compared with last year. At the lower end of the market, properties in the affluent town are no longer the subject of bidding wars and are staying on the market longer.

Hillsborough‘s 94010 ZIP code ranks No. 16, with a median list price of $5.08 million. With homes listing for $4.78 million, 94062 in Woodside places No. 20. Last year, Forbes ranked both of those ZIP codes in the top 10.

Relaxing prices are evident in other parts of Silicon Valley and the Bay Area, with local ZIP codes slipping down this year’s list from 2015. Palo Alto‘s 94301 dropped from No. 36 in 2015 to No. 48, with a median list price of $3.59 million. After finishing at No. 13 last year, Belvedere‘s 94920 fell to the No. 54 spot. ZIP codes in San Francisco, Tiburon, Los Altos, Kentfield, Saratoga, and Los Gatos also ranked lower on this year’s list than last year’s.

A recent analysis by Pacific Union Chief Economist Selma Hepp illustrates the slowdown that some Silicon Valley markets have seen, with Palo Alto, Menlo Park, Los Altos, Belmont, and Saratoga all seeing annual home price declines. At the same time, more affordable cities — including East Palo Alto — have seen home price appreciation in excess of 15 percent.

Article and images sourced from http://blog.pacificunion.com/home-prices-are-relaxing-in-silicon-valleys-most-expensive-pockets/

The Federal Reserve’s D-Day: Interest-Rate Hike Reflects Confidence in the U.S. Economy

Executive Summary:

• The Federal Reserve’s decision to raise interest rates by 25 basis points was well anticipated by the markets and already built into the increases in mortgage rates that have occurred since the election.
• Currently at 4.16 percent, 30-year, fixed-rate mortgages remain very close to the highest levels in more than two years. But since the rate increase was considered a foregone conclusion, it will unlikely move the markets further past today’s increase.
• Nevertheless, the Fed suggested that more aggressive action possibly be taken in 2017 than was previously thought, including an intent to raise interest rates by 25 basis points three times over the next year rather than the anticipated two 25 basis-point increases.
• The more aggressive path is a reflection of stronger economic conditions since the middle of the year — as well as a faster pickup in inflation and a sharp drop in unemployment rates — but also an incorporation of expected fiscal-policy changes by some Fed members. Also, the hike reflects the Fed’s confidence that the economy has proven resilient and will continue to grow “moderately.” Estimates of gross domestic product growth and the U.S. unemployment rate over the next two years have also been revised more favorably.
• In the meeting’s follow-up interview, Fed Chair Janet Yellen acknowledged that 2017 will be poised with uncertainty and that future action will depend on what policies are put in place and the resulting impacts on the economy.
• Another note of caution is that President-elect Trump’s appointees generally have no experience with the workings of the government, thus the transition process may be rife with hiccups, and policies may take longer to implement.
• However, given the Fed’s vote of confidence in the U.S. economy and anticipation of higher inflation, higher mortgage rates will be top of mind for those who have been thinking about buying or selling a home.

Table 1 summarizes the impact of an increase in mortgage rates from 4 percent to 5 percent:

• With a 33 percent mortgage payment (including PITI) to income assumption, about 38 percent of Bay Area households could qualify for a home priced at $800,000, which translates to a $640,000 mortgage loan with a 20 percent down payment. An increase in mortgage rates reduces the share of households who qualify by about 90,000. Similarly, the number of households who qualify for a $1 million mortgage, or a home priced at $1,250,000, drops by 120,000 households. Figure 1 illustrates the change in the number of households who can qualify for $1 million and $500,000 mortgages under four interest-rate scenarios.

Figure 1:



Selma Hepp is Pacific Union’s Chief Economist and Vice President of Business Intelligence. Her previous positions include chief economist at Trulia, senior economist for the California Association of Realtors, and economist and manager of public policy and homeownership at the National Association of Realtors. She holds a Master of Arts in Economics from the State University of New York (SUNY), Buffalo and a Ph.D. in Urban and Regional Planning and Design from the University of Maryland.



Article and images sourced from http://blog.pacificunion.com/the-federal-reserves-d-day-interest-rate-hike-reflects-confidence-in-the-u-s-economy/

U.S. Jobs Report Suggests Interest-Rate Hike but Also Wage Growth

Executive Summary:

• One of the most closely watched economic indicators released by the U.S. Department of Labor this morning indicated that jobs grew by 178,000 in November from the month before. The increase was higher than expected and confirms that job market growth remains strong.
• Overall, the U.S. has had one of the longest streaks of overall employment growth on record, with businesses adding 15.7 million jobs since February 2010.
• In addition, the national unemployment rate declined to 4.6 percent from 4.9 percent in October. However, the drop was led by 400,000 people leaving the workforce.
• The drop in labor participation is mostly due to large groups of baby boomers retiring and exiting the workforce.
• Nevertheless, strong job growth and falling unemployment provide support for the Federal Reserve to increase interest rates in December, though Federal Open Market Committee members have suggested lately that strong economic data has already given them enough reason to move forward.
• Despite this month’s setback in hourly wage growth, wages are up 2.5 percent from last year, which has helped spur the strong consumer spending that we have seen in 2016. The monthly hourly wages data, however, is very noisy, and the drop comes after a large October spike due to more overtime hours following September’s hurricane activity.
• The strongest gains in wages were in the leisure and hospitality, information, and construction sectors, the industries that have been growing solidly in California. With the labor market continuing to tighten and rising inflation expectations, further wage growth is anticipated.
• For the housing market, the job growth among young adults ages 20 to 34 is favorable and has outpaced all other age groups this year. This will continue to fuel household formation going forward. And while wage growth has been slower among young adults, a continued increase in the number of these workers who are trading up for higher-paying jobs suggests that wage increases are forthcoming, especially since young adults will be replacing retiring baby boomers.
• Job growth in the construction sector — particularly residential — remains among the strongest of any industry, with a 3.5 percent increase over the last year. The largest growth in construction employment was among home-improvement remodelers.
• Lastly, tech employment grew for the fifth consecutive month, adding 5,400 new jobs. So far this year, the IT sector has created 79,500 new jobs. IT occupations in other industries have grown by 114,000, for a total of about 200,000 tech jobs created in 2016. With the unemployment rate among IT professionals remaining among the lowest of any occupation, at 2.9 percent, the pressure on wages will continue. Demand for professionals with security, the Internet of Things, and cloud-computing skills has been increasing.

Selma Hepp is Pacific Union’s Chief Economist and Vice President of Business Intelligence. Her previous positions include Chief Economist at Trulia, senior economist for the California Association of Realtors, and economist and manager of public policy and homeownership at the National Association of Realtors. She holds a Master of Arts in Economics from the State University of New York (SUNY), Buffalo, and a Ph.D. in Urban and Regional Planning and Design from the University of Maryland.

Article and images sourced from http://blog.pacificunion.com/u-s-jobs-report-suggests-interest-rate-hike-but-also-wage-growth/

The San Francisco Condo Market Takes a Breather

Executive Summary:

• San Francisco condominium sales are currently 8 percent lower year to date compared with the same time period last year, although August sales are on par with 2015 numbers. The annual decline follows some of the strongest historic years for condominium sales in the city.
• While sales in most price segments have slowed this year, the weakness is most notable among units priced between $2 and $3 million. That is a small share of the market — about 6 percent.
• Other market indicators — including price growth, the share of homes selling over the asking price, premium over asking price, and time on market — all suggest normalizing market conditions.
• Combined citywide new construction and resale prices are up 4 percent, however The Mark Company’s August Condominium Pricing Index for San Francisco was down 5 percent from July and 11 percent from August of last year. Increased inventories of similar new condominiums, along with concerns over volatility in the financial and technology markets in part explain changes in the Index.
• Despite the recent spike in new construction inventory, future inventory will be constrained and remain well below the historical peak reach in 2007.
• Short term, slower price growth and more inventory to choose from, along with continued favorable interest rates, put buyers in a better position to shop around.

On the heels of some of the strongest years in history for San Francisco’s housing market, much of the discussion since the beginning of the year has been about slowing conditions. Slowing, however, is relative when compared with the frenzied and unsustainable market that we have seen over the last several years.

Similar to single-family home sales, there have been fewer condominium sales in 2016 in San Francisco when compared with the same time period last year. For the first eight months of this year, total sales are 8 percent lower than for the same period last year. Nevertheless, there is more to the story. Figure 1 displays monthly sales of condominium units in San Francisco, with the red brackets comparing January through August of 2015 with the same period for 2016. While this year started off on par with 2015, spring and summer months suggested that the market is taking a breather. August sales, however, are in line with August 2015 sales, indicating that we may still see some improvement in the remainder of the year.

Editor’s Note: The following analysis uses data from the San Francisco MLS, which historically includes about 15 percent of newly constructed condominiums.

Figure 1: Monthly number of condominium sales in San FranciscoSource: Terradatum, Inc., from data provided by local MLS

A look at longer-term trends helps put the current market into perspective. Figure 2 illustrates historical monthly sales of condominiums in San Francisco. While the total 1,042 sales in the first two quarters of 2016 have fallen from the 2013 cyclical peak of about 1,265 for the same period, this year’s sales are still above the historical average of 1,021. Certainly, they are at least 30 percent higher than averages seen during the 1990s or the housing market collapse between 2008 and 2010.

Additionally, the buildup to the sales peak reached in 2013 followed the 2008-2009 housing collapse and resulting sizable inventories of homes for sale and historically high affordability in San Francisco. In 2012, San Francisco reached the highest affordably point for all types of homes since the California Association of Realtors started tracking the data in 1991, at 29 percent. The only other time when homes were relatively more affordable in San Francisco was at the beginning of the 1990s, when affordability hovered in the mid-20-percentile range. Since peaking in 2012, affordability has dropped to 10 percent today.

Figure 2: Historical monthly sales of condominiums in San Francisco

Source: California Association of Realtors

Returning to current trends, Figure 3 illustrates that while overall condominium sales in San Francisco are 8 percent lower year to date, the largest decrease in transactions was for units priced between $2 and $3 million, with volume falling by 28 percent from the same period last year. Sales at the lowest price segment — less than $1 million — were 10 percent lower, but the decrease was largely driven by price appreciation that pushed part of the inventory into a higher price range. Sales of units priced between $1 and $2 million were down only 3 percent, which translates to 25 fewer units. The highest-priced segment, $3 million and higher, saw a 4 percent increase in activity, with two more units sold year to date. Overall, about 152 fewer units were sold so far in 2016 when compared with 2015.

Figure 3: Year-to-date change in sales by price range

Source: Terradatum, Inc. from data provided by local MLS.

Nevertheless, when reconciling the changes in sales activity by different price categories, it is critical to understand how the distribution of price ranges compare with one another. Though impacted the most, homes priced above $2 million comprise less than 10 percent of overall sales. Figure 4 depicts the distribution of sales by price range and highlights that sales over $2 million passed 10 percent only during the first two quarters of 2015. Prior to 2014, they accounted for a much smaller share of the market. What is also interesting to note is the dwindling share of the lowest-priced condominiums, less than $1 million. Their share of the market fell from 68 percent in 2013 to 42 percent of sales currently. The dominant category is condominiums priced between $1 and $2 million, which has grown notably from 30 percent three years ago to 50 percent today.

Figure 4: Distribution of sales by price ranges

Source: Terradatum, Inc. from data provided by local MLS

Though rapidly rising prices are in part due to the falling share of the most affordable condominiums, Figure 5 takes a longer look at the distribution of sales among price ranges for newly constructed condominiums. Until 2013, the majority of newly constructed condominiums were in fact priced below $1 million. The turning point began in 2013, when affordable condominiums fell from accounting for eight in 10 new sales to only one in 10 sales today. Again, the majority of the new inventory today consists of condominiums priced between $1 million and $2 million. In addition, higher-end condos, priced at $2 million to $3 million, now comprise 10 percent of the market, which is historically the highest share they have ever reached. Unfortunately, (see Figure 3 above), that appears to be the segment of the market that has been hit the hardest this year. Nevertheless, Figure 5 clearly highlights how the change in price distribution for newly built condominiums has adversely impacted affordability in the city.

Figure 5: Distribution of sales of newly constructed condominiums

Source: The Mark Company

Other indicators also confirm that the homebuying frenzy that characterized the market over the last few years is normalizing. Figures 6 and 7 compare market conditions among the various price ranges between August of this year and August 2015. And although homes are selling slower at all but the highest price range, the relative increase in the number of days on the market was the highest for condominiums priced between $2 and $3 million. For all condominiums, the median days on market is now 38 days, which is consistent with historical average dating back to 2002 according to CAR data.

Also, there was a notable drop in the share of listings selling above list price at all price ranges (Figure 7). The segment priced between $2 and $3 million fell from 36 percent of units sold for a premium to 15 percent. Lower-priced segments also experienced notable drops. Still, at least half of sales priced below $2 million continue to sell for more than asking price. Among the most expensive condos, none sold above their asking prices. Again, the most expensive price point represents a very small share of the market, so caution should be used when evaluating the numbers.

Furthermore, diminished competition among buyers is leading to smaller premiums. Within each price segment, the premium fell to about half of what it was last year. The premium over asking price averaged 8 percent this August, down from 13 percent last August.

Figure 6: Median days on market                                                     Figure 7: Share of sales selling above the list price

Source: Terradatum, Inc. from data provided by local MLS

Finally, annual price growth cooled this summer after several years of double-digit-percent appreciation. The slowdown began abruptly in February, when annual appreciation dropped from 18 percent year over year to flat. Since February, appreciation rates have picked up — albeit inconsistently — and August prices were 4 percent higher than last August, with the median price at $1,085,000.

Again, it’s important to keep in mind that lower annual price appreciation comes on the coattails of highly aggressive market conditions and home price growth that was unsustainable.  According to The Mark Company’s August Trend Sheet, the Condominium Pricing Index for San Francisco declined by 5 percent from July and 11 percent from August of last year. The Condominium Pricing Index is The Mark Company’s tool for tracking the value of a new construction condominium without the volatility of inventory changes. The Index uses a proprietary quantitative method to model the price per square foot of a new 10th floor, 1,000 SF condominium.

The decline in the Index can be attributed in part to three major factors. First, while new construction inventory is still low by historical trends and well below the peak of over 3,000 units reached in 2007, new construction inventory nearly doubled between the end of 2015 and August 2016. The sharp increase from 569 units to 1,101 units will impact pricing. Second, newly constructed condominium projects, particularly at the higher end, have been impacted by concerns over volatility in the financial and tech industries. And lastly, sales in the South of Market neighborhood have been somewhat affected by recent news surrounding Millennium Tower.  Notably, the majority of the product type reflected in the Index is located in the city’s South of Market neighborhood, which also explains the drop compared to citywide numbers, which are more diverse.

Still, despite the cooling of last summer’s frenzy, demand for condominiums in the city remains consistently strong, as evidenced by minimal changes in the absorption rates. Across all price ranges, and even for newly constructed inventory tracked by The Mark Company, absorption rates in August were generally on par with last August.  Approximately 315 new construction units were put into contract since the spring of 2016.

Figure 8: Year-over-year price changes of condominiums in San Francisco

Source: California Association of Realtors

What should we expect from the San Francisco condo market going forward? After a long period of very tight inventory, recent trends suggest that some relief is in sight. Also, with new construction ramping up over the last year across the city, newly constructed condominiums will supplement existing inventory. Figure 9 tracks the unsold inventory index across price ranges for homes listed on the MLS. And while it appears that inventories of existing condominiums are rising across the price spectrum, at about a 2 to 2.5 months’ supply of inventory, there is still a long way to go before San Francisco reaches its historic average of a 3.9-month supply. Inventory of new units remains historically low, and there are just 1,101 new units available for sale today, compared with approximately 3,000 units available in 2007.

Looking forward, only 672 new units are expected to enter the market by the end of 2017. This marks a 48 percent decrease from the number of units that have entered or are expected to enter the market in 2016 and a 7 percent decrease from the number that entered in 2015. During the previous cycle, 1,519 units began selling in 2006, and an additional 1,591 were added in 2007. In addition, future inventory in upcoming developments consists of predominantly small, neighborhood projects where the average size of developments is less than 100 units. Currently, 450 units are under construction and not yet selling in the South of Market neighborhood.

What does this mean for condominium buyers in San Francisco?  More predictable prices, normalization of market conditions, historically favorable mortgage rates, and more housing options for buyers to choose from. That comes as a welcome break in a city where the housing-affordability crisis has become nearly synonymous with its name.

Figure 9: Unsold Inventory Index by price range

Source: Terradatum, Inc. from data provided by local MLS.

Selma Hepp is Pacific Union’s Chief Economist and Vice President of Business Intelligence. Her previous positions include Chief Economist at Trulia, senior economist for the California Association of Realtors, and economist and manager of public policy and homeownership at the National Association of Realtors. She holds a Master of Arts in Economics from the State University of New York (SUNY), Buffalo, and a Ph.D. in Urban and Regional Planning and Design from the University of Maryland.

The Mark Company is one of the nation’s premier urban residential marketing and sales firms. We provide a full range of core consulting services including analytics, design, marketing and sales for urban high-rises and suburban attached properties throughout the Western United States. The Mark Company has represented more than 10,000 residences and generated over $5 billion in sales for some of the nation’s most notable and successful new construction developments. The Mark Company is a subsidiary of Pacific Union International, one of the San Francisco Bay Area’s top-performing resale brokerages.  For more information about our services and to download our latest Trend Sheets, please visit www.themarkcompany.com.

Article and images sourced from http://blog.pacificunion.com/the-san-francisco-condo-market-takes-a-breather-though-august-sales-are-on-par-with-last-year/

Brexit: Something Is Rotten in Denmark

Executive Summary:

• The United Kingdom’s unexpected vote to leave the European Union, otherwise known as “Brexit,” was not accounted for in global financial markets prior to the vote. Thus, stock market volatility is sorting out the anticipated effects going forward.
• While the financial market volatility will persist, the direct impact on the U.S. is minimal.
• U.S. economic fundamentals remain strong, as they are based on domestic activity.
• Indirect impacts may actually bode well for U.S. housing markets, as investors seek safe, stable investments.
• However, more volatility may be in store in the weeks to come.

To say that global financial markets were not pricing in Brexit prior to the vote is an understatement. Financial markets have gone haywire overnight, with many recalling the sell-off following the Lehman Brothers collapse in 2008. While volatility will stay with us for some time, the current situation is nothing like the 2008 financial crisis. And though no market was spared again, Europe’s fragile markets suffered from a severe lashing and will likely to continue on the rollercoaster ride.

Nevertheless, the Brexit vote still does not mean that the U.K. will leave soon; the referendum is not legally binding, and only Parliament can pass the legislation to leave the EU. Even if this happens, it would take at least two years for the EU and the U.K. to renegotiate their bilateral agreements. However, since no one yet really understands the full implications of Brexit, a period of volatility and much uncertainty is likely to persist.

Who Wins and Who Loses?

Unfortunately, it is easier to surmise Brexit’s direct effects than its indirect effects. In principle, the exit decision should have little direct impact on the U.S. or global economies. The U.K. economy accounts for only 4 percent of global gross domestic product. Also, U.S. exports to the U.K. comprise only 0.4 percent of our GDP, while the U.S. receives just 3 percent of its imports from the U.K. Additionally, our country’s bank exposure to U.K assets represents only 3 percent — thus a potential U.K. recession would have a limited impact on U.S. financial systems.

Among all parties impacted, the outlook for the U.K. is the haziest, followed by the uncertainty that will shadow over the EU. And while the direct impact on the remaining 27 EU countries is somewhat limited, the indirect effects cannot be fully foreseen at this point. The volatility and debate over what the next steps should be will not bode well for confidence or economic growth, and it may lead to further loosening of monetary policy.

Indirect Effects on the U.S. Could Help Our Housing Markets

Brexit’s indirect effects on the U.S., however, may not be so gloomy. First, the Federal Reserve’s decision to raise interest rates will most likely be further delayed due to this development. Also, with global financial uncertainty seemingly everlasting, U.S. Treasuries are continuing to look very attractive and will probably woo many investors. Both factors are going to keep interest rates low — particularly mortgage interest rates.

Also, U.S. economic fundamentals are essentially unchanged, and the country should continue to post solid job and wage growth. U.S. housing markets may further benefit from global uncertainty, as they are still perceived as safe, relatively stable, and to some extent underpriced, especially when compared to London’s exorbitant real estate market.

Selma Hepp is Pacific Union’s Chief Economist and Vice President of Business Intelligence. Her previous positions include Chief Economist at Trulia, senior economist for the California Association of Realtors, and economist and manager of public policy and homeownership at the National Association of Realtors. She holds a Master of Arts in Economics from the State University of New York (SUNY), Buffalo, and a Ph.D. in Urban and Regional Planning and Design from the University of Maryland.

Articles and images sourced from http://blog.pacificunion.com/brexit-something-is-rotten-in-denmark/

Positive Trends in Venture-Capital Activity to Impact Bay Area’s Tech Employment

Executive Summary

• Despite the drop in venture-capital (VC) activity and IPOs in the last quarter of 2015 and into the first quarter this year, confidence among professional venture capitalists improved at the end of 2015.
• During the first quarter of 2016, VC firms raised $13 billion, which is the largest total since the dot-com boom in 2000.
• The pause in VC deal and investment activity in Q1 2016 is due to the same reasons as the volatility in stock markets, China’s slowing economy, oil prices, an anticipated increase in interest rates, and the upcoming U.S. presidential election.
• VC activity outlook is still very encouraging, but investors are scrutinizing their deals more closely.
• Technology employment in the Bay Area is still extremely healthy. There were a total of 118,000 jobs created over the last year, and with more VC activity in the upcoming quarters, tech employment growth will pick up as well.

A recent article in The Wall Street Journal on sales of ping-pong tables to tech companies hinted that slower sales are due to troubles in the Bay Area’s high-tech sector. Admittedly, it is an interesting approach to assessing the economy, but while everyone is looking for the slightest signs of what’s on the horizon, ping-pong tables are hardly a reliable indicator. There are many possible reasons for slowing ping-pong table sales, including that it is a durable item that is rarely replaced.

Nevertheless, there are more reliable indicators on which we should gauge VC activity and how it will impact the Bay Area’s tech employment and housing markets. For example, the quarterly Silicon Valley Venture Capital Confidence Index (Figure 1) measures and reports the sentiment of 30 professional venture capitalists on the funding environment in the Bay Area over the next six to 18 months. The index reached 3.59 on a 5-point scale (with 5 equaling high confidence and 1 equaling low confidence) in the first quarter of 2016, up from 3.39 in the previous quarter. The index increased at the end of 2015 following three quarters of declines, suggesting that optimism is rising among venture capitalists.

Figure 1:

Still, with no technology IPOs in Q1 2016 and a drop from 35 overall IPOs in Q4 2015 to 10 IPOs in Q1 2016, — along with lower valuations of some unicorns — a lot of conversations have been brewing about slowing VC activity. Numbers pertaining to deals and investments have been particularly alarming. After promising to be the best year since the dot-com collapse, the last quarter of 2015 was characterized by a notable drop in VC activity, which bled into the first quarter of 2016. The deal count for both quarters remained at the lowest level seen in over three years. Figure 2 highlights California’s VC-backed investment activity in the first quarter and where the top deals happened.

Figure 2:

At the same time, VC firms raised $13 billion during the first quarter of 2016, which is the largest total since the dot-com boom in 2000. Robust growth in fundraising is not surprising given the amount of liquidity in global markets. However, the question is why has the investment and deal activity slowed so much? According to the Venture Pulse Q1 2016 report by CB Insights and KPMG, the factors leading to the pause are similar to the jitters that slowed the stock market, including an economic slowdown in China, a drop in oil prices, an anticipated interest-rate increase, and an approaching U.S. presidential election. Also at work are general developments across the globe, not the least of which is the U.K.’s possible exist from the European Union.

Clearly, the VC funds raised will be dispersed over the coming quarters, but investors’ expectations and concerns have changed. Funders are looking for greater transparency — companies with solid balance sheets and business models that can demonstrate profitability, and more importantly, manage their expenses (like those aforementioned ping-pong tables). Unlike the times when investments were based on pure potential, venture capitalists are now scrutinizing start-ups to a greater degree, and funders will become more engaged in companies’ decision-making and spending processes.

Furthermore, the underperformance of some high-profile companies has brought existing and potential unicorns under scrutiny, and investors are recognizing that some valuations are too high. The company that best exemplified the trouble among IPO valuations was Square, which earned a $6 billion valuation in December 2014 but managed only a $4.2 billion valuation in its IPO on November 19, 2015. Today the company’s market cap is at $3.39 billion. And while experts argue that comparing these numbers is like comparing apples and oranges, Square’s high-profile IPO brought attention to the objective valuation of unicorns.

Since then, the recognition that high market valuations may not be warranted is leading to a greater focus on creating revenue and positive growth margins, controlling expenses, and setting a clearer path to profitability. Falling valuations are similarly leading investors to change investment instruments that give them protection and guarantees tied to potential IPOs. For example, Spotify raised funds using convertible debt, which came with strict investor guarantees tied to an anticipated IPO. Also, with unrealized valuations, there has been greater corporate participation and merger-and-acquisition activity instead of IPOs. This trend is likely to continue, as corporations look for new technologies and innovations that they can leverage within their own businesses.

Generally, investors are looking for new opportunities and focusing their attention on technologies that are at the beginning of the innovation cycle. Thus, unlike previous fascinations with consumer Internet companies (Uber and Airbnb, for example), much of the funds raised in the first quarter of 2016 went to the health-care industry. In fact, all 10 IPOS in Q1 2016 were in the health-care sector. Because of two large health-care deals in New York, the industry was the only one in the U.S. that actually saw an uptick in VC activity from the end of 2015. And if the Technology Hype Cycle (Figure 3) developed by research firm Gartner is any indicator of up-and-coming technologies, we may see more investment going into cybersecurity and artificial- intelligence firms.

Figure 3:

Source: Gartner

All things considered, while VC market strategies may be shifting, returns in 2015 for the 10-year period were almost twice as high as the Standard & Poor’s (S&P) returns. With the U.S. economy and the S&P market recovering from jitters and a continued strong job market, long-term VC activity still looks encouraging. And as fundraising activity for the beginning of 2016 suggests, there is no shortage of buying interest.

What Does This Mean for Jobs, and Particularly Technology Jobs in the Bay Area?

San Francisco Bay Area job growth has outperformed California’s and the nation’s job growth since the recovery started. While the state’s unemployment rate reached 5.4 percent in March, the lowest level since 2007, most Bay Area regions have unemployment rates well below the state mark, generally ranging between 3 and 4 percent. The latest monthly employment gains came in lower than expected, but the numbers are expected to be revised up based on the number of total employed people.

Overall, the region gained about 118,000 jobs between March 2015 and March 2016. Unsurprisingly, the major employment centers, such as San Francisco and San Jose, accounted for most of those gains, but the composition of the job growth is encouraging.

Source: California Employment Development Department. San Francisco includes San Francisco and  San Mateo counties; Oakland includes Alameda and Contra Costa counties; San Jose includes San Benito and Santa Clara counties. Technology jobs are sum of Professional, Scientific & Technical Services and Information jobs.

In San Francisco, relatively large industries are growing jobs at the fastest clip — 13 to 16 percent over the last year — including jobs in computer-systems design and related services; construction, especially specialty trade contractors; and nondepository financial services (loan officers, for example). Fast growing, but relatively smaller in numbers, were jobs in higher education, performing arts, and food services.

About 8,300 jobs created between the first quarter of last year and the first quarter of this year were in computer-systems design and related services. While tracking technology jobs can be tricky, as they span across a number of industries, a solid annual gain of 13 percent in computer-systems design suggests that the technology sector in San Francisco is still healthy and strong. Also, it is natural that the pace of job growth moderates as the economy reaches full employment, and with the unemployment rate in San Francisco well below that, some softer numbers may not signal weakening of the local economy.

In Silicon Valley, job growth was relatively more broad-based, but among large industries, electronic computer manufacturing gained jobs at a faster rate than other industries. Again, similar to San Francisco, specialty trade contractors were in high demand and added a considerable number to overall new jobs. Faster job growth was also seen in administrative and support services and publishing, which includes software publishing.

In the greater Oakland region, trends follow the same patterns seen in other parts of the Bay Area. The fastest growth is again among specialty trade contractors, but trending close are jobs in computer-systems design and related services, publishing, and arts and entertainment.

The North Bay saw solid job growth in line with the region’s core competencies, including positions in tourism and food and beverage services. While there may be some growth in tech-related industries, it is still a relatively small number that may not point to any trends yet.

Clear growth in construction jobs across the entire region is welcome, as it points to greater housing construction. Generally, construction jobs have been growing at a relatively speedy pace over the last year. As a share of total employment, the construction sector contributes a much smaller share of jobs than it did during the mid-2000s housing boom.

Taken together, the trends outlined above suggest that technology employment is still robust and that job growth will continue. Another indicator that supports future tech employment growth is the number of job openings. According to an analysis of employment website Indeed.com, the San Jose metro area has the highest number of job openings per capita in the country. What is proving more difficult is finding the appropriate skill set and the right candidate for those open positions. Lastly, the anticipated increase in VC activity will help boost tech employment in general and possibly spur another round of ping-pong table sales.

Selma Hepp is Pacific Union’s Vice President of Business Intelligence. Her previous positions include Chief Economist at Trulia, senior economist for the California Association of Realtors and economist, and manager of public policy and homeownership at the National Association of Realtors. She holds a Master of Arts in Economics from the State University of New York (SUNY), Buffalo and a Ph.D. in Urban and Regional Planning and Design from the University of Maryland.

Article and images sourced from http://blog.pacificunion.com/positive-trends-in-venture-capital-activity-to-impact-bay-areas-tech-employment/