DeLeon Insight – January 1, 2016
While a rising tide may lift all boats, not all boats are suitable for a long-term voyage. Over the past few years Silicon Valley has enjoyed a rapidly appreciating real estate market. However, the ease at which some have made money in real estate may have made them complacent in what they buy or how much they pay.
Over my career in real estate, I have gained immense pleasure in getting homes for my clients at a price less than they were willing to pay. I love it when my negotiation acumen and market knowledge saves my clients tens of thousands of dollars. However, my true genius lies in micro-market forecasting—probably a product of my math/economics undergrad work before attending law school at Berkeley. Pointing my clients to the right cities, neighborhoods, or even the right style of home, has made many of them hundreds of thousands of dollars.
Although many brokerages train their agents not to provide this type of forecasting because of the potential for liability if they are wrong, I founded DeLeon Realty with the believe that clients deserve more. For that reason I provide this analysis of Palo Alto’s most exclusive neighborhoods.
Palo Alto has outpaced all other cities since 2002, the earliest period from which good data is available. Its combination of great schools, a vibrant downtown, proximity to Stanford, and world-class tech companies makes Palo Alto appealing to almost all buyers. Palo Alto’s desirability can be empirically illustrated through its appreciation since 2002 at more than triple the rate of nearby Silicon Valley communities, such as Woodside and Portola Valley, which are now relatively good values.
Within each city that DeLeon Realty serves, our neighborhood guides forecast appreciation across the micro-markets that reside in each city. Yet, within Palo Alto, there are micro-markets with distinct trends, market forces, and city regulations that will result in some neighborhoods appreciating much more than others. Palo Alto’s three most beautiful and prestigious neighborhoods—Old Palo Alto, Crescent Park, and Professorville—all offer stunning aesthetics with beautiful homes and landscaping. However, their appreciation rates vary greatly, just as I had forecast.
Old Palo Alto was not always Palo Alto’s most prestigious neighborhood; that honor previously belonged to Crescent Park. However, over the last 13 years, a wave of gentrification and rebuilding has swept over Old Palo Alto. I jokingly call the neighborhood “New Palo Alto” due to all the new construction occurring on every block. Since it is out of the flood zone, one can build a basement in Old Palo Alto. This greatly increases the size of a home that can be built since basement square footage does not count under the restrictive building formula used by Palo Alto. This is logical because what is constructed below ground level does not negatively impact any neighbors. Builders who are developing for profit and families who are building their dream homes can all take advantage of this rule and maximize their homes by building a basement that spans the entire footprint of the first floor. Consequently, demand has been much stronger in neighborhoods like Old Palo Alto that are outside of the flood zone than neighborhoods within the flood zone, such as Crescent Park, where basements are generally not allowed. Therefore, we are much more bullish on Palo Alto neighborhoods outside of the flood zone.
Professorville has seen less redevelopment and appreciation than Old Palo Alto because it is a registered historic district. Consequently, homes in Professorville generally cannot be torn down and any major modifications are strictly limited. All major projects must be approved by a subjective historic resources board. Having personally lived in and remodeled an iconic 1893 Victorian in Palo Alto, I can tell you that it is more expensive to remodel and restore an older home than it is to build anew. Generally, when an area has such impediments to redevelopment, it will see less appreciation as evidenced by the chart below.
Given these neighborhood trends, I continue to forecast that Old Palo Alto will experience more new construction and resulting appreciation than other high-end neighborhoods in Palo Alto. There are many variables for you to consider when purchasing a home, and there is no universal equation to determine which area will be the best for you and your needs. However, a full awareness of the micro-trends that drive local appreciation is a valuable tool that will help you make a fully informed buying decision.
Old Palo Alto: Price/Sq. Ft. ratio in 2002 – $698; Price/Sq. Ft. ratio in 2015 – $1,778; % appreciation – 155%
Crescent Park: Price/Sq. Ft. ratio in 2002 – $794; Price/Sq. Ft. ratio in 2015 – $1,637; % appreciation – 106%
Professorville: Price/Sq. Ft. ratio in 2002 – $742; Price/Sq. Ft. ratio in 2015 – $1,513; % appreciation – 104%