Swelling Tech Economy Fuels Demand for Real Estate

Would Demand Damage Appeal for Small City with Big Reputation?

A booming technology economy in recent years has fuelled vast wealth creation in Palo Alto, California and across Silicon Valley but has also spawned punishing increases in apartment rents and clogged small streets with traffic.

Now Palo Alto, a city that helped give rise to Hewlett-Packard, Google and Facebook, is saying enough is enough.

The city council last year put a moratorium on new office construction in its downtown—and in recent weeks the city’s mayor has pushed to block big software companies from dominating Palo Alto’s quaint centre, saying they threaten the diversity and charm of the small-feeling city.

“At a certain point in time, it would lose a lot of its attractiveness,” the mayor, Patrick Burt, said of the downtown area. “If Palo Altans wanted to live in San Francisco, they’d go live in San Francisco.”

Palo Alto’s tough stance is only the latest dust-up in Silicon Valley, where overwhelming demand from expanding tech companies is sparking a growing anti-development backlash—one that could undermine the region’s ability to keep growing.

If development becomes more difficult, costs will rise and companies will find it too hard to move to or grow in the region, said Timothy Tosta, a land-use lawyer at Arent Fox LLP who represents multiple large tech companies.

The pushback stems from the mismatch of furious employment growth coupled with a housing market that is expanding much more slowly, and the resulting strain that places on infrastructure and services. In San Mateo, Santa Clara and San Francisco counties, permits were issued for just 58,000 housing units from 2010 to 2015—about one-sixth of the 380,000 jobs added.

Tensions are flaring among different cities as well. San Jose, a city of one million, in July sued Santa Clara over a planned megaproject that calls for nearly three Empire State Buildings’ worth of office and retail but only 1,360 housing units. Santa Clara has said it is trying to add housing elsewhere.

Facebook Inc.’s planned expansion of its Menlo Park headquarters has caused a similar rupture, even as the social media giant recently took the unusual step of pledging to develop at least 1,500 units of housing on its own land to mitigate impacts of its growth.

The city of East Palo Alto is opposing the Facebook development because the added jobs would put too much burden on its housing stock, and last week it told Menlo Park it hired a lawyer on the issue.

“The housing crisis is a preventable tragedy that is created by other cities developing more jobs than housing units,” said Sean Charpentier, East Palo Alto’s assistant city manager.

Office buildings tend to create more tax revenue, and require far fewer services such as schools, making it easier for cities to build offices than housing. While cities generally recognise this is a regional problem, there is no strong entity with the power to enforce growth patterns across the Bay Area and little will for cities to work together.

The city of 66,000 has long been a difficult place to develop. But in the past couple of years, the city council has become increasingly wary of new development that would add office space in the downtown. It passed a cap on office space last year and is pushing to add housing, though not enough to give hope of a relief valve for a market where the median home value is $2.4 million, according to Zillow.