Dotcoms drag down land values
news.ft.com
By Paul Abrahams in San Francisco
Published: May 17 2001 17:23GMT | Last Updated: May 18 2001 11:22GMT
In March last year, James saw 932 Sanchez Street, a family home in the heart of San Francisco's Noe Valley, and knew he must have it. The 31-year old computer engineer and his wife, Fredrica, thought the property perfect. The three-storey eight-room Victorian house offered quick access to the highways leading to Silicon Valley. Better still it was just two blocks from 24th Street, a trendy area lined with coffee shops and second-hand bookstalls.
James had already been outbid for two Noe Valley houses in a real-estate market inflated by dotcom share options, and he was determined not be beaten again. Since he, too, owned shares and options in a high-flying dotcom, he felt comfortable paying $1,755,000 for the home, more than $700,000 over the asking price.
The purchase proved a financial catastrophe. Last month, just a year after they bought their home, the couple sold it for $1,150,000 a loss of $605,000.
James' story is emblematic of the distress in Silicon Valley caused by the collapse of Nasdaq, which in spite of its recent rally is still down 58 per cent from its peak last March.
His confidence last year was understandable. James had been one of the six top executives at Connectify, an internet start-up founded in 1998 offering e-mail technology that promised to revolutionise the way companies interacted with individuals. The business had the backing of leading venture capitalists such as Crosspoint Venture Partners and New Enterprise Associates, and was led by industry veterans from Apple, Claris and Arthur Andersen.
Just a year later, in October 1999, Connectify, which had only 40 employees, was bought in an all-share deal by another internet company, Kana.com, for $273m. James will not say how many shares and options he received, but admits they were a normal amount for an executive at a company that was acquired. Kana.com's shares at the end of that month were $84.
During the next six months, Kana.com's shares soared. The Redwood City-based company, which makes portal software to help companies communicate with their customers and partners via e-mail, was on a roll. The shares peaked on March 10 - just two weeks before James bought his home - at $169.62, or $339 at the pre-split value.
Kana.com's fall from grace was equally swift. Last month, the group - which now calls itself Kana Communications - had joined the 97 club, that unfortunate gaggle of hi-tech companies whose shares have plunged 97 per cent from their peak. In fact, Kana's had done worse. The stock, fell from its $169-high to a low in April of 84 cents. Thursday at midday it was trading at $1.80.
James decided to sell his home because he could no longer afford his $950,000 mortgage. He declines to say what his monthly payments were, but at 7 per cent interest, they would have been around $5,500.
The rise of San Francisco's property market was most acute in the Noe Valley, says Naomi Lempert, an agent at BJ Droubie, a local real estate broker. Since 1994 house prices there have climbed faster than anywhere else in the city, up about 20 per cent a year, a rate that accelerated during the past two years, she says. The increase in price of the Sanchez Street home was more extraordinary than that. A developer bought the home from a local pastor for about $750,000, spent 10 weeks doing up the place, and then he sold it to James for a $1m more than he paid.
"The buyer knew the market was crazy, but he was not stupid," says Richard Meyerson, a partner at Zephyr, an agent involved in the transaction. "He paid top dollar, but wasn't that far ahead of the competition."
But when James had to put his home on the market he discovered that if the rise in the price of Noe Valley homes had been precipitous, so too was the fall.
"The downturn only became apparent in January this year. Prices for homes over $850,000 have already fallen about 15 per cent," says Mr Meyerson. But he admits he was shocked by the fall in the price of James' house. "We expected it to go for $1.4m, but in the end we had to reduce the asking price to $995,000 to generate bids," he adds.
In some ways, James is fortunate. He at least has a job at Kana, which cut staff from 1,200 to 470 in two rounds this year. Now he just needs to find somewhere to live. His plan is to rent. For regional reports, www.ft.com/americas |
