It Starts: Tech Trouble Mucks up Silicon Valley Real Estate Party

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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 [read… IPOs Collapse, “Worst Year Since 2009,” Worst December since 2008].

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. Potential property buyers are already discovering this as well.

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.

So now, piece by piece, incident after incident, we’re seeing the whole construct beginning to come unglued. Read… Former Hot Startup Whacked Down 60%(!?) Whither the Tech Boom?



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  23 comments for “It Starts: Tech Trouble Mucks up Silicon Valley Real Estate Party

  1. VegasBob
    Jan 3, 2016 at 10:24 pm

    The problem with printing up a tsunami of counterfeit electronic money is that eventually the tide recedes when the printing press speed slows down or stops.

    This is one of the fundamental flaws in the Fed’s efforts to reflate the US economy.

    If the Fed prints money to infinity, it eventually destroys the economy through asset price inflation and perhaps even hyperinflation.

    But when the Fed stops printing money, the air starts to hiss out of the various bubbles, or the bubbles simply explode.

    • ucde
      Jan 4, 2016 at 1:45 am

      I’m just stating my understanding of Steve Keen’s financial analysis here, as I listen to more of his lectures, because you mention deficit spending.

      In summary:

      – Capitalism has a natural crisis dynamic, absent all government intervention
      – According to that crisis dynamic, private debts accumulate (Bank’s share of the economic pie) until they cause a crisis
      – The major fundamental crisis dynamic of capitalism is the expansion of private debt
      – All private debt, regardless of who owes it or who issued it, is eventually paid for by decreasing wages
      – In summary, the Workers always pay for all increases in private debt, even if there is a time lag in this happening
      – Major class conflict in capitalism is not between Workers and Capitalists, but between Banks and Workers
      – Bankers issue private debt, and Workers wages are reduced to pay the debts (even if this occurs indirectly, for example through the investments of Capitalists using private debt)
      – Hence historically cyclical debt jubilees and wars driven by economic imperatives (local economic collapse often prompting wars of aggression)

      None of that touches public policy (aside from banking regulation). But here is where the government steps in:
      – The only actor which can create debt-free money is the government, which it does by issuing currency e.g. via public debt e.g. deficit spending
      – Government is thus a natural antidote to the crisis dynamic
      – There is no growth without debt, either public or private, because the money supply will contract naturally without an increase in debt levels
      – In the event of a late-stage debt crisis, such as we are in, the government owns the only source of debt-free money in existence
      – If we refuse to use debt-free money created by the state to pay down our now crisis-level private debt burdens…
      – Then we force the economy into a debt-deleveraging downward spiral, where the banks still remain the only source of new money entering the economy, but they cease doing so because their investments are crashing
      – And we rely on capitalism’s default method of debt extinction: that is, workers have to reset the debt on their own, using the ever-shrinking portion of wages which they are able to earn from the Capitalists.
      – Paying back our current debts from private sector wages alone could take, in Keen’s view, 20 years
      – This 20 year period would be one of economic stagnation, increasing unemployment and general economic malaise
      – And it is *still* likely to increase public spending/public debt, even if we avoid all forms of fiscal stimulus, because the ongoing economic contractions are going to throw ever more millions of people into the arms of whatever social safety nets we still have in place
      – In other words, deficit spending is *still* coming, if not as generosity, then as survival measure, as this never-ending debt-deflationary quagmire Japan-scenario just keeps on spreading and intensifying
      – Just look at a graph of southern EU nations public debt in the years since austerity: their public debts per GDP are skyrocketing, even as they lower fiscal spending — because as their expenditures decrease, so does their GDP! (http://www.economicvoice.com/wp-content/uploads/2013/10/European-Debt-to-GDP-Ratios-Oct-2013.jpg)

      So, yeah, debt-free money is how you end a private debt crisis.

      • economicminor
        Jan 4, 2016 at 11:18 am

        ucde, what you are saying is that outside of the FED, the government needs to create money that is not borrowed into existence. As it had a right to do under the Constitution before the creation of the 16th amendment.

        And by spending this debt free money it would solve the problem..

        Except the existing government would probably spend it on war rather than peace and would probably put it in the hands of the elite rather than the people.. thus perpetuating the transfer of wealth from the citizens to those at the top.

      • James McFadden
        Jan 4, 2016 at 11:57 am

        You might also want to read Keen’s book “Debunking Economics” – a good read.
        Two others who provide insight into debt-deflation are Prof. Jack Rasmus (book – “Epic Recession”) and Prof. Michael Hudson.
        Rasmus also teaches an online course in financialization at the Zschool.
        https://zcomm.org/zschool/moodle/
        Lots of other interesting classes on this site.

  2. guido
    Jan 3, 2016 at 10:40 pm

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

    Not quite yet. Sure Uber and Snapchat have had their values written down by Fidelity that has to submit itself to real accounting and has to be overseen by companies that don’t want to become an Anderson Accounting.

    That said, the values written down were very paltry. Reminds me of shops that hike up the fares by 300% and then offer you a deal at 1/3 the price — original price! Only difference, the value touted on these tech stocks is like a 10% discount after a 3000% hike. Notice how the independent valuation firms that help in marking to market cannot quite bring themselves to say the emperor has no clothes.

    In one sense, Yahoo is a very bad example, IMO. Yahoo is a terminal patient whose time should have been up long time ago. Sure it had good days. But it was obvious that its days were numbered.

    Yet, in another sense, Yahoo is a terrific example. Its demise has been predicted for ages now. So was the demise of the current tech bubble. Neither seems to be happening today. They are always happening “soon”.

    Now that 2016 is here, I doubt if the Fed will let the tech party end. After all, a lot of pension funds are invested in this up to their necks (think Calpers that has only doubled down after its Facebook bet that worked). I suspect the bubble will either hiss out slowly with the principals at various VC firms somehow making fire sales to public companies (soft landing) or nothing will happen until 2017 when there will be a vacuum until the new POTUS takes over and settles down.

    Good informative piece, though.

    • NotSoSure
      Jan 4, 2016 at 1:38 am

      I agree with your comment, the powers that be and the current state of the country are too infested on the status quo. People would rather die through a thousand cuts rather than shooting for a real change.

      • night-train
        Jan 4, 2016 at 4:21 am

        Your confidence inspires me. And that said, would you be interested in buying some real estate investments I hold?

      • CrazyCooter
        Jan 4, 2016 at 11:40 am

        The problem is the MECHANICS of how that propping up takes place – this is the ball of the game and one has to always keep ones eye on it. Once one starts doing this, one quickly realizes the game is to maintain confidence and there is no “magic power” that keeps prices where one wants to keep prices. All the Fed can do is buy assets and shove money into the system – liquidity – for its closest friends, but it doesn’t fix a company that is insolvent. And this comes at a cost to those who use the currency for their business or households.

        The Fed can push rates around, just like the Bank of Japan, but if you look at the bank of Japan it is a mess. The Fed can buy assets, just like the bank of Japan. But it hasn’t worked for the Bank of Japan. It is beyond a joke at this point. Yet it hasn’t collapsed. Mission accomplished?

        I can say with certainty that, in real terms, the stock market is going to absolutely crash (investors panic and head for the exits en masse), more importantly the bond market will crash (fed loses control of rates), but I can’t tell you when or how. It might be fast or slow, but it will come one way or the other.

        I also know that we live in a debt based money system and when it finally hits the fan no credit will be had by anyone for any price – and that will collapse the money supply – so get out of debt and keep some physical cash handy. :-)

        Regards,

        Cooter

  3. MC
    Jan 4, 2016 at 4:14 am

    Silicon Valley is becoming a whole lot like stock markets and the film industry: the winners are getting bigger but fewer and the losers are getting a whole lot more numerous. Call it “narrowing”, if you will.
    In short for every Google there are dozens of Yahoo.

    Even at the top there are signs the number of winners is getting thinner: Apple has been cutting orders for iPhone components for the past three months, and cut prices on Asian markets despite a stronger dollar. Granted: Apple will remain incredibly profitable but the fact AAPL is not the A component of the FANG which has been saving NASDAQ for the whole 2015 is very telling.
    And while not technically part of Silicon Valley, how can we forget Microsoft? Its stocks rebounded spectacularly in the later part of 2015, but not based on better than expected profits or some groundbreaking discovery. It’s the same pure financial speculation mixed with a growing sense of unease that drove the FANG. MS is still saddled with the tragicomic acquisition of Nokia’s mobile phone division, and its gaming division (perhaps not important overall, but the source of good profits) is getting whacked over the head by Sony. As a chap I know of who worked for MS said “When my former employer enters the hardware business, run in the opposite direction and keep running”.

    Now: most if not all these companies invested heavily in real estate. Not so much because they speculate in it, but because they bought a lot of the primest real estate in the world at premium prices. Just think about the Apple Campus at Cupertino or the Googleplex at Mountain View, which is about to be joined by the Google Campus. Leaving the buildings aside, how much is the land there worth? The median house in Cupertino is valued at over $1.8 million. In Mountain View $1.4 million. Both are forecast to grow 5% over 2016.
    Even those cash-only Chinese buyers will soon need Tony Montana levels of cash to afford a house there.

    Personally I’ve always believed high prices are their own best cure. Google and Apple have plenty of cash to bid prices up, but what about all other companies? Perhaps somebody will start renting out shipping containers to startup as offices…

  4. matt
    Jan 4, 2016 at 5:32 am

    Where I live In Baltimore Co Maryland Commercial Real estate vacancies have sky rocketed like I have never seen before. Strip malls now going vacant as retail collapses. New Light industry and strip mall built on Route 43 just off I95 sat vacant for 2 years, developer bankrupt. a few eateries have settled in 1 being my favorite in the area now. Towson area. Good Lord went out there yesterday 1st time in a year and almost every commercial/office building is for sale

    • Mike R.
      Jan 4, 2016 at 9:01 am

      I would hazard a guess that the economic dynamics of Balitmore are quite different than many other cities across the US. Still, thanks for the observations reported. It helps greatly when people weigh in/describe what is happening in their neck of the woods.

  5. Jeremy
    Jan 4, 2016 at 7:58 am

    “Almost every commercial/office building is for sale.” This is an exact description of Bear Hill Road, a small light industry strip that runs for a few miles along the side of Rte 128 in Waltham, Mass. All of a sudden at least 1/3 of the properties – maybe more – are either for rent or for sale and nothing seems to be moving. This has been a reliable indicator of trouble in the past.

    An even better indicator is the clearly visible national outbreak of that most virulent economic disease – edifice complex – with a classic example of one of yesterday’s stock market heroes leading the way –
    You guessed it: Apple.

  6. prepalaw
    Jan 4, 2016 at 9:42 am

    Here in Northern NJ, 22 miles from Manhattan, real estate insanity has never been greater. This is a Wall Street commuter town, the home of Celgene and situated in the middle of Big Pharma. I have lived here for 40 years and seen real estate mania in full swing several times. There are no more building lots.

    What happened in 2014 some 500 feet from my house is typical: A nice 100 year old 3,500 sq ft home on an 1/2 and acre of land with huge trees is bought for $1.2 million. The lot is stripped bare of buildings and vegetation. A 7,000 sq ft well-constructed box is installed with generic landscaping. A wall street couple with 2 small children and a nanny move in. They paid $3.2 million and added about $200,000 of “improvements”. Where did they move from: a $2.0 million house located about 1 mile away.

    It seems that every 1/2 a mile, you see an excavator at work, tearing down all or part of a small home, with the developer cramming as much new house as he is allow to on the property. And, to my amazement, these new homes are bought during the work-in-progress phase.

    All of this has elevated the market value of existing single family homes beyond their 2007 highs. There are very few foreclosures here, with many new home acquired with cash down payments of 20% or more. The buyers are not foreigners but American couples, relocating within the area or from greater Manhattan.

    When the stock market crashed in 2008, homes lost 20% to 25% of their pre-crash value within one year. Wall street shed jobs and ex-wall streeters saw the house they bought 2 or 3 years earlier go “no bid”.

    One house was vacant for 4 years after the family followed dad to a new, lesser paying job elsewhere. Dad refused to accept a 25% loss and carried the property until he could sell it for a 10% loss.

    • Petunia
      Jan 4, 2016 at 12:20 pm

      All the high frequency trading computers are located across the river from Wall St. in NJ. These operations support good high paying jobs, which is why the real estate market in northern NJ has rebounded nicely.

  7. CrazyCooter
    Jan 4, 2016 at 11:25 am

    I made a comment on this very subject recently in another thread. To summarize “info tech is a K-Wave that is very long in the tooth and is commoditizing. Big profit margins are going to be replaced with small ones and companies will go out of business, consolidate, or tighten belts. In a few decades San Fran and all the other info-tech hubs will have lived with this decline and piss poor muni management for decades … and will have quite a bit in common with Detroit.”

    Save that and rub my nose in it in 20 years.

    I would also submit in the 60s/70s, Detroit was the wealthiest city in the entire US. Thirty years after that peak, not so much.

    For starters, our economy needs a real depression to cleanse itself of waste, but the new neo-fedual system we seem to have more and more of (crony capitalism, corruption, whatever you call health care, etc) might prevent this cleansing regardless. It is really quite a mess.

    Regardless, I spent a good bit of time digging for what the next K-Wave might be. I considered but eventually dismissed bio-informatics. Nano-tech (i.e. manufacturing on a small scale) still might significantly re-write manufacturing, but more and more I dismiss this as well. Maybe I missed something.

    It is becoming painfully obvious that an energy problem has to be solved because oil supply will not be able to sustain even a major portion of today’s activities when I am a typical retirement age. And that bodes very, very painful change for many, many people.

    I think LFTR meets that criteria (i.e. it is proven it can scale to production size designs and still works) and even posted a link to commercialization of it in another thread. Sadly, this is all happening in other countries which will ultimately mean we are not the leaders should I be proven right.

    Regards,

    Cooter

    • Chicken
      Jan 4, 2016 at 4:43 pm

      “this is all happening in other countries”

      I expect there’s a good reason for that although considering US firms are no less capable of burning cash I can’t imagine why.

      • Chicken
        Jan 4, 2016 at 5:17 pm

        Ah yes fluoride salts… I have some experience working with Chlorine Trifluoride (ClF3), some pretty wicked stuff.

    • Jan 4, 2016 at 11:03 pm

      The fluorine reactors have never scaled. The first reactor was a proof of concept model. The second never was charged with thorium but ran for a short time on other radionuclides.

      The superalloys the cores are made from are subject to fatigue stresses and corrosion. The materials are expensive and the vessels – with a lot of compound bends – are difficult to fabricate. Besides the poisonous fluorine there are highly radioactive daughter products inside the reactor core that prevents repairs if something goes wrong.

      Any reactor can be used to produce excess plutonium; LFTRs require plutonium to start. This is a proliferation hazard.

      All reactors share a similar design problem: energy density within reactor cores is too high, at or near the limits of 1960s metallurgical tech. Natural reactors are deep in the ground and the ‘fuel’ is largely dissipated. In human reactors, the safety margin is too thin. A minor tech failure turns into a catastrophe: the reactor blows up, leaks, melts or otherwise becomes a menace.

      Reactors are tricky. In Southern California near Los Angeles there is the old Santa Susana facility. Different companies built at least ten modest sized ‘test’ reactors at the site. Four of these reactors had core melts or runaway criticality. One was a liquid metal (sodium) reactor, the first reactor to produce electricity in the US.

      “Wrong decade!” some would say. Metallurgy doesn’t change because the fundamental ingredients are the same as they were since the creation. Many of the newer compounds coming from the lab — intended for power generating magnets, semiconductors, etc. — are too expensive for boiling water or heating a working fluid.

      Something always goes wrong.

      We keep looking for easy ways out of our problems but the solution to the energy problem is to simply use less. People should live near their jobs and have enough going on their lives to interest and entertain themselves … so that they don’t have the need to squander what’s left of our non-renewable resources … for entertainment purposes only.

  8. polecat
    Jan 4, 2016 at 11:34 am

    ………’pop’…….

  9. ERG
    Jan 4, 2016 at 12:08 pm

    No one should be surprised when an ‘industry’ based on nothing, developed from nothing, and sustained by unjustifiable credit (i.e., worse than nothing!) goes right back to being nothing.

  10. tomkoppel@sbcglobal.net
    Jan 4, 2016 at 12:43 pm

    Anyone recall Cisco big plan for its HQ back when the first bubble burst ?

  11. Petunia
    Jan 4, 2016 at 12:46 pm

    Yahoo missed its chance to be the Microsoft portal, and missed out on Verzion too, being beaten out by AOL. Eventually it will land up being the front end of some other big company. Microsoft, Comcast, and ATT could use a functional portal and would be my picks to be potential buyers.

    As far as FANG goes, I expect two of those to disappear in the next five to ten years. Do you all remember Wang, or Digital Equipment, or Cobol. Things change quickly in tech and nothing is immuned. Indispensable today and gone tomorrow.

  12. Captain KurtZ
    Jan 4, 2016 at 5:30 pm

    Tech is the ‘chosen one’ industry because of its ability to fit into the MIC / NSA’s domestic spy network. We willingly pay for and carry around a smart phone, a two-way device where we divulge our deepest secrets, for even the laziest black mailer to work his deeds.

    Blackmail info is priceless, worth the hundreds of billions of malinvestment in ‘unicorns’.

    How the elites work with one another is through mutual blackmail, not just from secrets divulged at their Skull and Bones-and-like rituals.

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