[This article “The Bay Area’s Golden Age” first appeared on San Francisco Business Times. ]
When it comes to money, technology and talent, right now all roads lead to the Bay Area.
That includes Wall Street, Hollywood Boulevard and the streets of the financial districts of Shanghai and Hong Kong.
The Bay Area is enjoying a virtuous cycle of money financing startups that create jobs and companies that, in turn, will be acquired or go public one day, triggering another wave of wealthy investors and innovation.
“Success breeds success,” said Matthew Le Merle, a Marin County investor in several Bay Area startups.
“If you’re young, ambitious and have an entrepreneurial dream, you come to the Bay Area,” said Le Merle, managing partner at Fifth Era. He sees the Bay Area’s rising tech-fueled fortunes entering 2014 as simply the latest magnet to the region, a theme going back to those pulled here by gold fever.
It’s more than just people finding their way to the Bay Area. The region routinely pulls in about 40 percent of the nation’s venture capital dollars, although that figure moved even higher, 42 percent, in the first three quarters of 2013, according to Pricewaterhouse Coopers and the National Venture Capital Association.
San Francisco is also a destination as people in Asia and around the globe look for good spots to put their money, especially real estate development and investment.
Le Merle’s portfolio is a good example. He’s backing San Francisco startups Spellgun and Concept Art House, where teams from Shanghai and San Francisco are relying on their experience at Lucasfilm and Electronic Arts to take North American digital entertainment to China. Another Fifth Era portfolio company, 1World Online in San Jose, has a Russian and French team leveraging their experience at Google and Motorola to create a real-time polling and market research firm. Fifth Era also has backed entrepreneurs with backgrounds at Pixar and Lucasfilm’s Industrial Light and Magic, both purchased by Disney — more evidence of the growing ties between Hollywood and the Bay Area.
Money from China has been pouring into the Bay Area, with Shenzhen-based China Vanke Co. teaming up with Tishman Speyer Properties on the $620 million Lumina residential tower under construction in San Francisco. Hong Kong-based Great Eagle Holdings recently picked up 123 Mission St. for $179 million. Beyond San Francisco, Signature Development has teamed up with China’s Zarsion Holding Co. for the $1.5 billion mixed-use development of Brooklyn Basin in Oakland.
All that money finding its way to the Bay Area leads to robust job creation. In November, the five-county Bay Area accounted for almost one-fourth of new jobs in the entire state.
Unemployment in the region stretching from Marin County to San Mateo County fell to 5 percent in November compared to 8.3 percent for California and 6.6 percent nationally, based on the latest, seasonally unadjusted data from California’s Employment Development Department. Metro San Jose unemployment in November stood at 6.3 percent and at 6.8 percent in both Alameda and Contra Costa counties, based on data that was not adjusted for seasonality. (On a seasonally adjusted basis, California’s unemployment in November was 8.5 percent and 7 percent nationally. County-level seasonally adjusted data was not available.)
All those new jobs draw people. Population growth in San Francisco’s already tight 49 square miles rose 2.6 percent to 805,000, outpacing California’s growth of 2.1 percent between 2010 and 2012, the latest figures available. Future census data will capture the fact that people are filling up the new apartments and condos springing up around the city.
Observers of Federal Reserve policy see San Francisco’s good times as a natural outgrowth of the central bank’s low-interest-rate policy that’s forced people to take on more risk to generate satisfactory returns.
“Low interest rates and the Fed’s continuous monthly securities purchases have helped fuel the stock market rally, which has disproportionately benefited California’s wealthier areas and funneled billions of dollars into the state’s technology sector,” said Mark Vitner, senior economist at Wells Fargo in Charlotte.
Even with the era of cheap money possibly coming to an end, the primacy of technology is expected to fuel further stock market riches for Bay Area entrepreneurs and investors in 2014. There are up to 590 companies nationwide with valuations above $100 million and enough momentum to be candidates for an initial public offering in 2014, says research firm CB Insights. That group is headlined by 25 tech companies valued at $1 billion or more — 18 of them in the Bay Area.
As they tend to do during Bay Area booms, home prices have followed: San Francisco’s median home price surged past $1 million earlier this year for the first time since 2007, before pulling back to just shy of $897,000 in November.
Opting to rent provided little solace. Northern California posted big rent hikes in 2013 due to the creation of all those tech jobs. San Francisco’s average apartment rent pierced the $3,000 level in the third quarter, while rents in the nine-county Bay Area crossed the $2,000 mark, according to RealFacts in San Rafael.
“The Bay Area has been at the center of California’s recovery from day one,” Wells Fargo’s Vitner said.
The shower of money raining on the Bay Area means residents are more willing to spend, a stark contrast with areas of the country where economic recovery remains more a hope than a reality.
“The velocity of money nationally is at the lowest level since the Great Depression, but that’s not true in the Bay Area,” Brian Pretti, Mechanics Bank’s chief investment strategist, said in discussing how often money turns over in the economy. He points to the Bay Area’s restaurants filled with diners and malls overrun with shoppers as all signs that Bay Area residents aren’t hesitating to pull out their wallets, or smartphones, to spend.
“The more money that is spent in any one geographic area, the more that money has the chance to multiply across that same geographic area,” Pretti said. “It becomes a self-reinforcing positive mini-cycle in and of itself.”
It’s so good that there’s a worry it’s too good. The arrival of big tech companies and thousands of tech workers in San Francisco is blamed by some longer-term residents for the sharp runup in rents and home prices, a spike that’s pricing many of more modest means out of the city. That’s fueling a political backlash that could spell trouble for tech firms’ future growth ambitions in the city.
President Obama’s observation this month that inequality is the “defining challenge of our time,” hits home in the Bay Area. Some residents are protesting the ubiquitous Google buses taking workers to their jobs on the Peninsula. Others were inspired this month to put up posters throughout the city in search of San Francisco’s lost soul.
Fanning the controversy are missives from various tech executives lashing out at the homeless and panhandlers they encounter on their way to work in San Francisco,
And beyond that controversy, the reality is that prosperity never lasts forever. Booms end, generally with a bang rather than a whimper.
But those looking for such clouds have to search the far horizon.
“The Bay Area remains well positioned in this recovery, and we expect this trend to continue into 2014,” Wells Fargo’s Vitner said. “Although home prices are some of the highest in the nation, the robust job market and preponderance of high-paying tech jobs should continue to propel San Francisco.”
Such squabbles are a sideshow to the main event: the wealth being created in the Bay Area that’s likely to continue to prove a siren call for others to come here.
Yapstone CEO Matt Golis says he has no regrets leaving his native Ohio for the Bay Area, where he now runs the profitable Walnut Creek company that handles payments for various websites including HomeAway’s VRBO.com that facilitates vacation rentals by owner. He too has his eyes on the prize, an IPO.
“Not only do all roads lead to the Bay Area,” Golis said, “they run one way. Who wants to go back?”