With many Californian companies planning to go public soon, there will be an influx of thousands of new millionaires in San Francisco. In 2018, 34 startups from the Bay Area went public, and 23 of them closed the year above their IPO offering prices. Uber, Pinterest, Lyft, and Airbnb are still private companies at the moment, but have huge estimates, which means that once they do go public, large amounts of money will flood the town next year.
Airbnb was recently valued at $31 billion, while Pinterest and Lyft got estimates of $12 billion and $15 billion respectively. Meanwhile, estimates for Uber on the market went as high as $120 billion. While these figures don’t mean anything at the moment, as there is no sure answer to what prices the companies will actually command when they go up on the stock exchange, predictions are that hundreds of billions of dollars will enter San Francisco, with thousands of new millionaires being part of the city. According to Herman Chan, a real estate agent working with Sotheby’s, even if just half the IPO’s end up happening, there will be an overnight influx of ten thousand millionaires.
Given the new-found fortune that the new millionaires will soon enjoy, they will want to spend a lot of it on cars, houses, new businesses, and luxuries. On the other hand, the president of Climb Real Estate, Christine Kim, talked about the fact that millennial tech workers are not looking to own cars, but they simply want to stay close to entertainment, which means that they will remain in the city.
$5 Million House Prices
Denis Kahramaner, who is a real estate agent that specializes in data analytics at Compass, talked about the future status of the real estate market. Talking to a crowd of people, he posed the questions of whether or not in 5 years there will be a one-bedroom condo that will be worth less than a million, and whether or not there will be single family homes that would sell for 1 to 3 million. To the surprise of the crowd, Kahramaner pointed out the fact that single-family home sale prices in San Francisco could actually climb up to an average of $5 million.
With the idea that there will be a large number of IPOs coming up, people looking to sell their houses ended up taking them off the market. As a result, the California housing market ended up softening, with home sales being currently down. People feel like they should wait until next year in order to sell their house, when the city will be filled with billionaires. With a number of IPOs taking place at the same time and potentially thousands of young people with large amounts of money, they will look to buy homes, which will end up impacting the housing market.
Menlo Park’s Facebook and Mountain View’s Google went public at one point as well, however, their workers were spread out across the Bay Area, which means that the impact their IPOs had on the real estate market ended up being diffuse. The situation is different nowadays however. Many start-ups are based in San Francisco, thanks in part to the tax break that the city has, and brokers point out the fact that workers and startups will remain in the city.
Back in 2018, there were a total of 5,644 properties that were sold in the city, only 2,208 of them being single family homes. According to Compass, software employees are over 50% of those buying. Those that are currently in the market for a house are seeking to buy one fast while the number of houses for sales shrinks but before the wave of IPOs hits the city. The founder of Omni, Tom McLeod, who has been renting for close to a decade, pointed out the fact that he felt that if he didn’t buy before the IPOs would hit, they would be priced out forever.
It’s important to note that the housing industry is expensive as it is — given the fact that 60% of tech workers are not able to afford homes in the area with their current situations. While the Bay Area is already swimming in money, the new waves of millionaires will make it even more difficult to get a home at a price that is affordable. According to U.S. Census data from 2018, the median household income is $98,710. Meanwhile the median price of a home in the metro area is approximately $900,000.
Throwing Caution To The Wind
While there is no doubt that a lot of money will flood San Francisco, many experts feel that a lot of young people don’t take into consideration the fact that the tech stocks are volatile. Companies are instilling in their employees the belief that stock goes only one way — up — and some startups have been asking their employees to hold on to that faith for a very long time — about a decade.
Ryan S. Cole, who works for Citrine Capital as a private wealth adviser, pointed out his worry about the influx of new clients who are preparing to be wealthy, due to the fact that this generation seems very bullish when it comes to the success of their companies. Cole pointed out that they have been trying to get them to be more cautious, and he believes that they don’t think there could be a downturn.
It’s important to note that Uber, for example, continues to be dramatically unprofitable, with Mr. Cole reminding his clients that no one can say for sure how well a stock will do once a startup goes public. IPOs can end up being busts, despite the fact that they might have initial success in the beginning. For example, Snaps opened at $27 per share, and is currently trading at $9. Similarly, Groupon opened approximately $26 per share, and is trading nowadays $3.
According to Ryan S. Cole, a lot of people are young, and they don’t understand the fact that tech stocks are volatile, given that they have only seen their valuations going up. Managers also instill that mentality, painting pictures of where the company is going in order to get employees to work harder. One piece of advice to take from Mr. Cole is the fact that they should not be spending too much yet.
Another private wealth adviser who works in the region, Jonathan K. DeYoe, has been around tech clients during the dot-com boom in 1997 as well, and points out that back then things were pretty exciting. Nowadays, however, thinking about the millionaires that will hit the city, he worries about the inequality in the region. While he points out that some people were talking about pitchforks, he notes that things will not go that far, but that wealth will be very visible.
$10 Million IPO Parties
When talking about IPO parties, party planning communities point out that they are going to surpass booms that took place in the past. Jay Siegen, who owned a live music club and now is curating private entertainment and music notes that he has worked on events for plenty of people from the IPO crowd, including Airbnb, Postmates, Lyft, Slack, and Uber.
According to Siegen, there are multiple parties per IPO for the companies that are taking part in that process and the associated firms. The budgets for those parties can go above $10 million easily, with Siegen noting that attractions for the parties are A-list celebrities who are brought in to perform at tables for the executives, as well as ballet performers.
He also noticed a trend among his clients, which is the idea of curating their own theme concerts, with fleets of bands. For example, Siegen talked about a 1980s themed party that featured Devo, B-52s, Flock of Seagulls, and Tears for Fears.
Besides the celebrities and popular bands, another luxury is getting ice sculptures. Robert Chislett is the founder of Chisel-it, and works in a warehouse located in Concord, California around 15 ice sculptors who are currently employed, noting that the he is staffing up for what he believes will be a long year.
The sculptors chiseled a full-sized car for a tech executive party that takes place in Atherton, as well as a 10-foot ice Taj mahal for the swimming pool of a tech executive in San Jose. Mr. Chislett notes that executives in the process of IPOing want predictable things, such as ice cubes with the company logo for drinks, logos carved onto ice rockets (to signify the idea that the company’s stock will spike), and an ice chair with the company’s logo on the back.
Protests Coming Up
While many are preparing for their future wealth, there will be a tech backlash coming up. Housing rights activists have gathered recently in the Mission district at Radio Habana Social Club. There is a sense of repetition by now, as Sarah “Fred” Sherburn Zimmer, who serves as the executive director in the Housing Rights Committee of San Francisco, with the choreography being that cash flooding in the city and the stock-less masses gathering.
There will be protests against evictions, fights against developers, and protest against tax breaks in front of tech buses. While Sherburn-Zimmer noted that it feels like the same game, the associate director, Maria Zamudio pointed out that they have lived through boom periods before, and that they have learned their lessons — which means that they will not make the same concessions they did in the past.
To Charities or Back In the Market?
People who have new-found fortunes generally make their charitable donations when they book a big gain in income, this helping them to avoid having to pay a big tax on that gain. IPOs are generally seen as good opportunities for donors to make contributions. Millionaires are more sophisticated when it comes to finding tax breaks. Many expect that the wealthy will put money into donor-advised funds, which provide tax benefits, but they don’t require for the money to get distributed to charities right away.
On the other hand, there is also money that advisers in the wealth and philanthropy sectors are expecting to see go back into the market. The process is seen as being standard fare when it comes to Silicon Valley, with it including building a personal investment portfolio, and starting a private foundation in the case of billionaires. Given the fact that the money was made in startups, the general sense is that some of the money will end up flowing back into the tech ecosystem, thus funding the entrepreneurs and IPOs of the next generation.