San Francisco’s IPO Panic Is All Hype

Everyone calm down

Clara Hogan
12 min readApr 10, 2019
Illustration by Aaron Alvarez

San Francisco is about to be overrun by thousands upon thousands of newly minted millionaires. They will run up and down the streets with money cascading out of their pockets as they giddily embark on post-IPO buying benders. They will snatch up houses in all cash. Buy luxury boats. Throw lavish parties, adorned with elaborate ice sculptures and full of A-list celebrities. Generally, this will be the moment that finally makes it impossible for you to live here.

At least, that’s what you would you think if you’ve read media coverage of this year’s expected IPO rush in Silicon Valley. The panic generally started with an ever-dramatic headline in the NYT a few weeks ago: “Thousands of New Millionaires Are about to Eat San Francisco Alive” (apparently later changed to be only slightly less intense). The piece blazed its way through our Twitter and Facebook feeds, leaving those of us not poised to strike it rich from an IPO in the coming months distraught over what we were now convinced would be the tipping point that causes the already horrific cost of living here to go over the brink of insanity.

“Here comes the big one!” the NYT shouted at us with an exclamation point.

To summarize for those who managed to avoid the article, and the general consensus in the press, it argues that because a slew of popular tech companies like Uber, Lyft, Airbnb, Slack, and Pinterest will likely go public this year, SF will soon drown in a sea of ultra-wealthy who will cause a ruckus in every part of our lives. “Seemingly the whole city — and not just the financial planners and the real estate agents and the protesters who block tech buses — is scrambling to prepare,” it reads.

To put it lightly, since that piece was published, people have been freaking out.

Odd, I thought, since it wasn’t actually clear people were preparing or panicking for the so-called “wave of new millionaires” before the article. What is clear: they definitely started to do so after it ran.

To put it lightly, since that piece was published, people have been freaking out. The frenzy even caused an emergency SF Board of Supervisors meeting. Realtors I spoke with told me buyers started calling them stressing out about whether they should hurry up and buy before they’re ready just to beat this new rush of rich kids. Sellers, too, rethought their plans — those once ready to put their home on their market are now reconsidering holding off with promises of getting more money later.

“I’ve received calls from clients who are extremely anxious — I’m not kidding, they are really stressed out after reading the article,” said local realtor Eileen Bermingham. “It’s this looming new source of stress and fear. There is an unnecessary hysteria happening.”

I mean, I definitely get it. Living here is rough enough as it is. Imagining even more hoards of new millionaires treating SF’s housing market like a candy (or Apple?) store is not a pretty picture. But I couldn’t help but think there was a lot missing from the story.

So I decided to look into it. I started out by contacting Robert Chislett, founder of Chisel-it (clever), an ice sculpting business in the Bay Area. In one of the more intriguing parts of the NYT article, he was referred to in the story as “the IPO ice sculptor,” and quoted as saying he’s “getting ready to staff up for what he says will be a long year” and “it’s going to be a lot of 14-hour days,” seemingly in preparation for the IPO rush.

Twitter found the ice sculptor tidbit one of the best parts of the piece. As did I. So, I decided to pay Chislett a visit to his Concord warehouse, a small industrial space filled with massive ice blocks stacked throughout.

Sounds like you’re going to be busy with these IPOs, I said to him. He laughed, looking a bit uncomfortable. I quickly learned the piece (and its reaction) left him really confused.

Sure, he told me, he has worked with many tech companies, but that’s just one segment of his business — and he wasn’t referring to the IPO rush when he said he was gearing up for a busy time. He’s been planning on expanding his business and warehouse this year anyway, unrelated to anything in tech. In fact, he’s unsure he’s ever done an ice sculpture for an IPO party.

“I’ve been contacted by a bunch of media outlets, even from the Netherlands, since that story ran,” he said. “It’s been odd and pretty crazy.”

Huh, a lot of drama, without much substance. How much of the rest of this is storyline is the same?

Turns out that a lot of people are throwing a side-eye toward all of this hype. I’ve spent the past few weeks talking to people in tech, real estate and finance who largely agree: it’s possible SF could see some impact from the IPOs, but it’s also very possible that it won’t.

Let’s all take a breath and look at some facts.

Will the “IPO-palooza” Be a Boom or a Bust?

Confetti falls as Lyft CEO, Logan Green, rings the Nasdaq opening-bell celebrating the company’s IPO (photo courtesy of Mario Tama / Getty Images)

The fact that a lot of big-name tech companies are planning to go public soon is, of course, true. Lyft was the first of the highly anticipated IPOs to happen last week — and it went a bit wildly. Shares were priced at $72 and opened at $87.24, but then quickly seemed to crash, falling more than 20 percent below $72 during the first few days before picking up again. Overall, it’s been bumpy, and forecasters think it will continue to be.

While Lyft’s IPO hasn’t been the complete disaster that Snap’s was, it also hasn’t been a raging success or a super-smooth ride. There was a lot of enthusiastic buildup going into the ride-sharing app’s debut in the public market, despite it being an incredibly unprofitable company, having lost $911 million in 2018 (33 percent more than it did two years earlier), and many experts don’t expect it to be profitable for many more years.

“You have to worry when everyone bets on loss-making companies being massively profitable winners.”

Betting high on a deep-in-the-red company like Lyft is in line with what’s been happening on Wall Street during recent years as investors bet on unprofitable companies’ chances of being profitable like Facebook. While Lyft is seeming to fare OK so far, whether other expected IPOs —like Uber, Slack, Pinterest, Airbnb, and Zoom — will hold up to their valuations (many in the tens of billions of dollars) is yet to be seen.

One thing is clear, though: not everyone will come out on top.

“The reality is just because these companies have changed or will change our lives doesn’t mean they will result in strong profits and strong returns,” said Dan Suzuki of Richard Bernstein Advisors. “You have to worry when everyone bets on loss-making companies being massively profitable winners.”

Suzuki said there are some similarities between today’s hype and what existed back in 2000 when the tech bubble burst — a time of overinvestment and overconfidence, when valuations were way too high.

“It’s somewhat similar in this cycle, though not quite as extreme — I foresee more disappointment than a burst, unless you see euphoria take hold,” he said.

How Much Do Employees Actually Stand to Benefit from IPOs?

From an outside perspective, it makes sense to look at the slew of large tech companies set to go public, estimated to employ more than 30,000 people — approximately, Uber (16,000), Airbnb (3,000), Lyft (5,000), Slack (2,000), Palantir (2,000), Pinterest (1,600) and Postmates (1,000) — and figure that there’s going to be a lot more rich people pricing the rest of us out of real estate (like we can afford it anyway). But it’s actually not that clear cut, according to Lise Buyer, the founder of Class V Group, which advises companies ahead of their public offerings.

How an employee fares after an IPO is based on a lot of factors, including how long they’ve worked there. Most tech employees have been in their jobs for an average of two years, but it usually takes about four years to really stand to benefit. “Just because individuals work there and have been granted stock options doesn’t actually mean they own those shares fully, are vested or can sell them yet,” said Buyer.

Even those who have been there long enough to get a big windfall can’t do anything with their stocks during the “lockup period” after an IPO, which usually lasts for six months. Then, when they can sell, there’s the issue of tax. Restricted stock units (RSUs), which is what most employees have, are taxed like cash bonuses, typically around 40 percent, in addition to being slapped with California’s high capital-gains tax rate of up to 13.3 percent.

There’s also the fact that most employees won’t sell all their stock right away.

“People who sold right away after Facebook’s IPO for half the value are regretting it — those who held on until after it rebounded fared much better,” said Buyer. If the recent volatility of Lyft’s stock is any indication, that desire to hold on for some time is likely to be a theme during this round of IPOs overall. “There’s a trend toward slow and steady growth instead of a giant windfall for IPOs these days,” she added.

The current line from a lot of realtors: buy now or be priced out forever. But what if the industry is overestimating the demand and underestimating the increase in housing supply that will take place in SF?

All this means that a small percentage of employees will actually become the characters in the NYT piece, but the media so far has erred on the liberal side, estimating as many as 6,000 new millionaires. But they’ve also admitted that number is pre-tax and could be much, much smaller. Given that California already has about 1 million millionaires, a couple of thousand more (in a good scenario) wouldn’t make much of a dent.

“Generally speaking, every company has a small circle at the top that has been there since the early days and stands the best chance of being the very, very big winners,” said Buyer. “But most people at a company won’t be nipping at Bill Gates’s heels.”

Will SF’s Housing Market Actually Get More Expensive, or Could It Keep Cooling Off?

The actual number of millionaires, post-tax, is one thing to consider — then there’s how many will have enough money left over to be able (and want to) buy a home in SF.

The assumption is, of course, that new tech IPOs will result in an overwhelming demand for real estate and drive prices up — new momentum promised for a city that has seen home prices cooling off over the past year. The current line from a lot of realtors: buy now or be priced out forever. But what if the industry is overestimating the demand and underestimating the increase in housing supply that will take place in SF? That’s exactly what Sam Dogen, founder of Financial Samurai, is afraid of.

While the IPOs could have some amount of impact on raising prices, they also very well couldn’t—in fact, there’s a plausible scenario where real estate keeps cooling off, Dogen warned.

Given that the median home price is about $1.5 million in San Francisco and that most employees have been at their company for less than two years, are under 35 and make less than $200,000 annually, they probably don’t already have a 20 percent downpayment saved up. So in order to purchase a home in or above the median price range and still have a healthy budget for other expenses and be able to pay taxes, he estimates that they would have to sell at least $2 million in options.

Of those who could pull that off, he suspects that only a small percentage will want to. Then, there’s the issue of spending that much money to buy instead of rent or move elsewhere to make their money go further. After all, millennials, as everyone loves to point out, love spending their cash on experiences more than things. And many are wising up to whether SF is really the best place in which to invest in real estate.

Aside from the issue of demand, there’s the issue of supply.

The SF Bay Area real estate market has been dipping since mid-2018. Part of the reason: the inventory of homes for sale has been consistently growing and is now at a seven-year high — a fact that’s often overlooked. Why such a surge? Dogen credits that to many factors, including an aging population, increased congestion and general unaffordability. “There is a demographic shift away from SF to lower-cost places,” he said.

“There’s a good chance the tech-IPO hoopla will awaken a slumbering bear of homeowners in the SF Bay Area who flood the market with new supply.”

Dogen thinks that supply number will only grow as more sellers try to cash in over the next two years. A lot of homeowners, he believes, are sitting pretty but are waiting for the right time to sell, having chosen to hold off in 2017 and even 2018 as the real estate market became weaker. Many are now thinking that 2019 and 2020 are the ideal times to sell, when, they are being told, an IPO surge will lift prices back to an all-time high.

Courtesy of Realtor.com

But what happens when they all try to sell within the same time frame in an underwhelming market? The greater surge of supply could potentially even outweigh demand, resulting in a decrease in prices instead of an increase when the IPO rush is said and done.

“There’s a good chance the tech-IPO hoopla will awaken a slumbering bear of homeowners in the SF Bay Area who flood the market with new supply,” Dogen writes in his piece “How New Tech IPOs Could Cause SF Bay Area Real Estate Prices to Fall Further.” “But things could get even worse given how slowly it usually takes for homeowners to read headlines, contact an agent and prepare their home for sale. The Johnny-come-latelies would create even more supply past the new equilibrium, thoroughly overwhelming demand.”

That is, of course, just one scenario. But it is a plausible scenario.

When the Hype has Real Consequences

Nearly everyone I spoke to worried about the overconfidence in this year’s IPO rush and its consequences, whether that means people betting too much on stocks, deciding to buy a home before they’re financially ready, deciding not to sell when they should or something else.

“It’s been 10 years of boom, so we have a group of 35-and-under people who have never experienced a bust — there’s a feeling that they can’t lose,” said Dogen. “I worry people are getting caught up in the mania, in a sexy headline being shared around, so they are acting in ways that will put them at financial risk.”

Speculators use things like the IPOs and take advantage of industry booms to drive up prices and drive out long-term tenants.

And those aren’t the only effects. One particularly compelling part of the NYT piece mentions a meeting of housing-rights activists in the Mission district, quoting Sarah “Fred” Sherburn-Zimmer, the executive director of the Housing Rights Committee of San Francisco, as saying, “It’s going to mean mass displacement,” about “the coming wealth influx.”

But Sherburn-Zimmer says that quote wasn’t the full picture of what she was saying—it didn’t include the context of real estate speculation. The IPOs may or may not wildly impact housing prices, she said, but the hype around them certainly will. Speculators use things like IPOs and take advantage of industry booms to drive up prices or drive out long-term tenants. Representatives should be doing more to protect tenants from these threats on an ongoing basis, she says.

“It’s a cycle: they create speculation, which gets reported on, which feeds the fire, which causes landlords to start saying they can get twice as much money to pressure tenants out,” she said. “No matter whether this wave ends up being big or small, average folks lose.”

In a sense, that’s what it comes down to. What we’re seeing is a self-fulfilling prophecy not just in the NYT but across media, real estate and the tech sectors: creating hype without giving thought to other, less dramatic scenarios based on facts, or what the very real impact of that in and of itself may be on our city.

San Francisco has a lot of very real issues now. People are struggling now. That’s not to say that unaffordability might not get worse. It very well might. Thinking and planning for the future is one thing; wasting energy by panicking about a doomsday scenario is another. Let’s focus on creating a city that can better withstand tech’s ebbs and flows. One we can and want to live in now.

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Clara Hogan
Clara Hogan

Written by Clara Hogan

Editor in Chief of The Bold Italic

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