Coming downturn for tech hubs?

Question

Pretty interesting article on how accounting tricks have created funny money in tech hubs like San Francisco and Seattle that have inflated the real estate markets:

https://www.redfin.com/blog/2017/09/when-even-tech...

Both as a real estate investor and as a career software engineer who has worked at a tech startup in Oklahoma City for the last ten years, I have been deeply involved in this trend.  I have always wanted to move out to a tech hub on the west coast, but the salary vs cost of living differential has never made sense to me.  Living in a low cost of living area like OKC has also made it significantly easier to buy and hold cashflow rentals to build my real estate portfolio.

There has been net positive migration from California to Oklahoma for a while now, but it seems like the trend is accelerating.  Desirable areas will always be desirable areas, and historically betting on the west coast has always paid off in the long run, but when I am looking at 700k to get started on a 3/2/2 anywhere near a place I can work in the big tech hubs, it sure smells like a bubble to me.  What do you folks think the long term trend will be?  Right this second, I'm feeling pretty good about my appreciation position in SFH rentals in the midwest :)

Dan H. · Answer

@Nick Stageberg

>There has been net positive migration from California to Oklahoma for a while now, but it seems like the trend is accelerating.

I do not know about a net positive migration from CA to OK but I do know that the census bureau lists CA as the state with the 3rd highest population increase from July 1, 2015, to July 1, 2016 which I believe are the latest numbers available.  There was not a Midwest state listed in the top 10.

More as it relates to my investment area, San Diego continues to have strong population growth with insufficient number of homes (multiple studies).  Most of my rentals have tenants that want to move in before we can have the place ready for move-in and this is at market rent (there is no need to charge below market rent to entice renters).

In San Diego I do not fear a tech downturn or exodus.  The tech company I work for has been hiring as fast as we can for over 2 years.  We have lowered our previously high standards as it was necessary to fill the positions.  The competition for engineers in San Diego is significant.

Matt R. · Answer

I am not sure this is an exodus from the older tech hubs and rather an expansion to new hubs. Facebook, Goog, Microsoft all have serious Bay area expansion going. There is competition for talent worldwide and the attracting top talent is what some of these techs focus on.

Amazon is doing the HQ2 thing. It will be interesting where this hq lands. They just added 500 jobs in San Diego and a very expensive area relative to the national market (cheap compared to SF). I will not be surprised if Amzn new hq ends up in SD almost solely for attracting new talent reasons.

Good luck!

Justin R. · Answer

Agreed that "working in software" will eventually become more like a factory production job (and in some cases already is).  From everything I see, though, there's a gigantic difference between our "engineers" and our "coders" ... and the education level is a pretty accurate proxy.  Not sure that changes.

Anthony Gayden · Answer

@Nick Stageberg

I know there are others here who remember the dot-com bust of 1999-2000.

The companies that have found a way to make money are great, but the ones who have been bleeding money since they were born are destined to fail unless something changes. Twitter and Uber are big names, but how much money do they actually make?

Margie Kohlhaas · Answer

As a former California resident who has now moved to the midwest, I wouldn't invest 700K to get into the market if it won't pay itself off in 5 years. In the Midwest, you can easily buy a property and have it completely paid off by rental income within 5 years. A lot of people are migrating out of California due to high property taxes, low wages, and high cost of living. Also, it can take a long time to evict a tenant in California as it's considered their habitat. You're already in a great spot since you've got the Mayo Clinic attracting people. You could easily do a short term rental for patients. I was recently up there for a week and couldn't find a hotel under $200 a night.

Levi T. · Answer

Not really a bubble, just an end to era. My son told me the other day he wanted to be a programmer, I told him it was a dead end job, and I was not joking.

There was a time that tech was the wild west of making money by coding, now it's the factory job of today. It's no longer about how much money you have to toss at something, it's about process, timelines, and delivery cost. It's about repos, packages, and dumbing down the process of software development so the masses can write software easily, thus we deliver product for less.

Companies are now racing to zero in cost, moving headquarters, lowering pay as the bar gets lower. We've been doing it for years to offset the salary cost, longer and longer hours, more perks at work to keep people around the officer longer working... When the unions come, you know we are hitting bottom as a industry, but by then we will be old and retired.

It will be the next generation that will sit at a desk and assemble the next app with point and click using the remanence of code structors and ideas we developed decades before.There will not be a sudden drop in the industry, just a slow move from upwards growth to  declining. Real estate owners will take small write-offs over time as they move away in search of better pay or life balance. I think we are still on the front side of that hill, but it is clearly reaching a point that we are topping it, but I would not lose any sleep over it, it's a multi generational thing.

Peter Mckernan · Answer

@Nick Stageberg great article! This covers a lot of things that have been happening for awhile now, but with a lot more movement comes the ability to see the movement easier.

I have seen a lot of companies move from California to Phenix Metro area to get a fresh new start and even a really great friend moved out there for his company. It will be interesting to see what else comes from the movement.

Coming downturn for tech hubs?

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