The five-year rally in San Francisco’s tech sector and office market is showing signs of approaching its limits. Several high-riding companies have seen their valuation cut in the second half of the year. The valuation readjustments have come as investors reassess the value of unicorns and the tech sector in general. The office market has also lost a step. More sublet space has hit the market, and availability has leveled off for the first time since the recession.
With IPO offerings in the area down 25% year-over-year, investors were tough on many of those who did make the leap – 13 closed the quarter with values below their initial price. Companies circumventing public markets are not immune to the negative sentiment. Private investors such as Fidelity have also been recalibrating their assessment of some companies.
It remains to be seen if these two troubling signs in the tech sector – a reduction in IPOs and the lower valuation of several unicorns – are just hiccups or harbingers of the inevitable end to what has been an incredibly impressive rally. If investor appetite cools and capital dries up for an extended period it will spur a negative feedback loop as devaluations become harsher, expansion plans among tech firms come to a halt, and widespread layoffs ensue.
For now, San Francisco seems a long way away from reaching this point, but this market has a track record of turning quickly. The potential of a moderation in growth, or possibly a correction in The Bay Area warrants close attention – in prior cycles this market has been one of the first to signals that the national economy is encountering difficulties.