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January 4, 2016

Silicon Valley Real Estate Dumping Signals Tech Trouble

Yahoo tries to “quietly” dump its Holy Grail property.

Yahoo has enough problems already. Hardly anything has gone right since its last big successful move, the strategic partnership in 2005 with Chinese e-commerce site Alibaba. Even as it blew billions of dollars on dozens of acquisitions over the last few years, its annual revenues shrank from $7.21 billion in 2008 to $4.62 billion in 2014, down 36% in six years, with not much hope in sight.

Management departures have been termed “Exodus” by re/code. Now that its efforts to spin off Alibaba have collapsed under the tax implications (didn’t they think about this before?), Yahoo said that it would try to spin off instead its core Internet business. Whatever.

“Activist investors” have sunk their teeth into Yahoo with their own proposals, without much success. Its shares, after languishing in the low teens following the 2008 crisis, began soaring in late 2012 in the hopes of an Alibaba IPO that would douse Yahoo in new riches. Its shares were also dragged along by the general stock market and tech euphoria. In late 2014, they broke the sound barrier of $50 a share – but then spent 2015 careening down 36%.

During the stock market bubble that peaked at about the time Yahoo’s stock peaked, all sins were forgiven. Fancy stories mattered. Newfangled metrics mattered. Realities didn’t. But something changed in 2015. The hot air started hissing out of these stories. The tech and startup bubble began wheezing. And IPOs stalled. It seems the party is over in tech land. Now there is talk of “pent-up supply” of IPOs – a gruesome term in a world with little demand for them.   

And so in this new world, Yahoo does something peculiar: it’s trying to dump its Holy-Grail expansion property.

During the boom years, tech companies, including Yahoo, were buying huge properties in Silicon Valley to build each their very own Taj Mahal. During the glory days in 2006, while its revenues were still rising, Yahoo, which owns its 1 million-square-foot headquarters in Sunnyvale, bought 48.6 acres in Santa Clara near the peak of the market for $106 million. A few years later, it obtained approvals to build its own Taj Mahal: up to 3 million square feet of office space, triple the size of its headquarters, spread over 13 buildings, enough for 12,000 people.

Yahoo was dreaming big. It tore down the existing structures on this property but never moved forward with its grandiose building plans. In 2014, the Levi’s Stadium opened nearby, and Yahoo began working a deal to convert its property into a parking lot.
But now Yahoo is getting cold feet or sees the opportunity to unload this property at the peak of the commercial real estate bubble, or both. And Nathan Donato-Weinstein, real estate reporter at the Silicon Valley Business Journal got wind of it: Yahoo is “quietly shopping” this property, “according to three people familiar with the situation. While Yahoo won’t talk about it, brokers for Yahoo have reached out to potential buyers in recent weeks, these people said.”

As of yet, details remain “sketchy,” and “the conversations, which sources described as early and not widely broadcasted,” may not lead anywhere in particular. Donato-Weinstein figures that “a rough ballpark sale price of $200 million” is “probably not out of line.”
Commercial property prices have boomed around the country. The Green Street Commercial Property Price Index is up 100% from May 2009, the low after the Financial Crisis. And it’s up 23% from September 2007, the peak of the prior insane property bubble before it collapsed during the Financial Crisis. So this would definitely be, as Donato-Weinstein put it, “a good time to sell.”

In fact, it would be a great time to sell, before it’s too late. Yahoo isn’t the first to discover this. 

But Yahoo is not in the business of real estate speculation. It didn’t sell the property at the peak of the last bubble; it bought just before it. For Yahoo, selling this property marks the end of an expansion dream. It’s an epochal admission for Yahoo.

And perhaps the beginning of the end of an era in Silicon Valley.

What we’re seeing is that the flow of money from around the world that had washed over the area tsunami-like has now started to recede. Suddenly, investors are looking with a more critical eye at the stories bandied about. They’re beginning to look askance at companies without business models. Ludicrous valuations of startups have gotten chopped down; some are crashing. And big commercial properties suddenly go up for sale.

This doesn’t happen during good times. This doesn’t happen when the “IPO window” is wide open, when everything is possible, when big companies with declining revenues like IBM or Yahoo are gobbling up startups for immense sums. In good times, the tsunami of money in Silicon Valley and San Francisco lifts all boats. And commercial property prices soar into the stratosphere. But busts invariably follow these booms. It’s just a question of when.

Courtesy of Wolf Richter, WOLF STREET



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