Real Estate Market

Wall Street didn't particularly 'like' Facebook's IPO, SF Bay Area home values will

by Broderick Perkins

(5/21/2012) - Home values in select San Francisco Bay Area pockets eventually will get a 5 to 10 percent boost from Facebook Inc.'s initial public offering (IPO) May 18, 2012, according to a recent analysis.

Unfortunately, that boost may take some time to really take hold.

Facebook opened it's first day of trading at $38, and ended the day at $38 and change. Not quite the barnstorming IPO expected.

"I think it was way over-hyped, so no matter what happened it would have been perceived as a flat deal. If it had gone to $50 they would have said it was not enough of a bounce. Also, too many shares were offered which meant that every retail day trader was getting in and out," said Carole Rodoni, president of Bamboo Consulting, Inc., a San Mateo-San Francisco, CA-based real estate consulting firm. "

And look at it this way - the employees and investors who got the stock at $1 are probably not thrilled, but they did okay. The problem was everyone thought Facebook would be the end all - and what we have never learned is that things like science you can predict, but when it comes to finance, risk, and investing, nothing is predictable," Rodoni added.

Word on the street remains that the "Facebook Effect" on home prices in the Bay Area will add $1 to $2 billion to property values, linger for up to 18 months, and have a trickle-down effect on property values outside the Bay Area's poshest neighborhoods.

That's because some company employees rolling in first-dibs access to buckets of discounted shares are already nouveau riche. Others from rank-and-file employees to venture capitalists stand to become millionaires, even billionaires if the IPO moves past first-day jitters and becomes the success most Wall Street pundits believe it will be.

Facebook IPO

Before the Friday IPO, Facebook Inc. increased by 25 percent the size of its IPO originally scheduled. The boost was expected to raise as much as $16 billion, according to conservative estimates, putting to rest doubt about the No.1 social network's long-term potential to rake in dough.

Due to initial demand, Facebook also raised the target price range from the original $28-$35 per share to $34-$38 per share and opened at $38.

The larger public offering and the higher per-share price was expected to value Facebook at $90 to $100 billion, surpassing Amazon.com Inc. and Hewlett-Packard Co and Dell Inc. combined and making the IPO the third-largest in U.S. history, behind Visa Inc and General Motors, according to Reuters.

By comparison, Google's 2004 IPO raised "only" $1.7 billion with a $23 billion valuation and created 1,000 millionaires.

Real estate experts say loaded twenty-somethings holding Facebook shares or winnings from Zynga, Yelp, Groupon and other IPOs are already "friending" upscale Bay Area neighborhoods with all-cash offers or sufficient holdings to quickly leverage their way through even the toughest mortgage application process.

Money - and buckets of good tech stocks - talks.

"Competition to buy listed homes in desirable Bay Area ZIP Codes is already discouraging for the average home buyer," said Mark Brandemuehl, vice president of marketing and business development at Movoto.com, a San Mateo-based real estate brokerage of 1,800 agents in 30 states.

"The Facebook IPO will only add to the millionaires competing to buy a small number of homes and it seems inevitable that prices will be driven up," Brandemuehl added.

To calculate the Facebook Effect, Movoto tapped Rodoni's Bamboo Consulting, Inc. for an analysis.

Rodoni said areas most likely to enjoy appreciation from the Facebook IPO are Hillsborough, Atherton and Palo Alto in Silicon Valley and San Francisco's Pacific Heights, Noe Valley and SOMA (South of Market Area) district.

Facebook is based in Menlo Park, to the north of and adjacent to upscale Palo Alto and Stanford University, the "garage" for many tech startups.

"It will be in the trendy areas. It will bring havoc with more cash offers. It will be a bubble. Not like the last bubble where anyone could get a house. This is only in trendy areas. It will be a different kind of bubble and I don't think it will last as long or be as frenetic. These people are looking at the price and they are looking at the numbers. They aren't day traders," Rodoni said.

Pre-IPO action

Rodoni, Brandemuehl and others said the small bubbles were inflating before the IPO launched.

By some estimates, Palo Alto home values have risen 10 percent this year in anticipation of the IPO and Zillow says central Palo Alto home prices zoomed 29 percent from a year ago. "Housing prices began to increase in December in anticipation of the IPOs in the queue for the second quarter. A 1,200 square foot home in prime Palo Alto could have been purchased for $1.1 million. Now one would be fortunate to locate such a home for $1.4 million," said Helen Pastorino founder and CEO of Los Gatos-based Pertria, a real estate investment and financial consulting company.

Pastorino said the Silicon Valley real estate market adjusted in anticipation of the IPO just as the stock market does and that anticipation has spawned maxed-out multiple offers of "20, 30 and 50 in January."

"We have experienced all cash offers, 15-day closes, with no loan, appraisal or inspection contingencies. This has been going on for enough time now that the market has adjusted to this and separated into two pricing strategies," said Pastorino.

One is to low-ball price to bring on a frenzied bidding war and jack up the selling price, the other is to price the home at the anticipated value but still sell for more than the asking price.

Brian Chancellor, vice president and sales manager of Sereno Group in Palo Alto says even those unable to yet sell Facebook shares leverage them with a brokerage that allow them to collateralize the stock.

"If it's for the down payment, the income has to carry the loan," he said.

Trickle down

Chancellor also said while Facebook IPO is the latest factor contributing to local market housing booms, other tech-sector IPOs, Silicon Valley job creation, growing national economic strength and financial turmoil abroad also attract home buyers.

"People who have made money elsewhere are moving assets into the U.S. to hedge against upheaval in other countries," Chancellor said.

Those conditions are likely to boost real estate markets outside the more affluent areas as the younger tech-savvy crowd that doesn't make it quite as big go after the urban lifestyle.

"Palo Alto will be the epicenter. San Francisco will benefit hugely as well, but I wouldn't be surprised to see spillover demand going across the (San Mateo) bridge into the East Bay as well. The Facebook campus is a nine iron from the bridge, giving easy access to areas like Fremont and Pleasanton," said Stefan Walker, a broker with Alain Pinel Realtors in Los Gatos, CA.

"Those areas are nowhere near as trendy or prestigious, but nowhere near as pricey either, so they could be good draw for those who aren't quite as flush after the IPO. Pleasanton has a beautiful downtown," Walker added.

"Los Altos and Menlo Park should see good bumps as well - excellent downtowns and easy access to Facebook headquarters. 'Old School' destinations like Woodside, Portola Valley and Los Altos Hills won't do as well, as rural is not the draw for the younger crowd. The old schoolers will probably not be overly disappointed by this," Walker also said.

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