By Audrey Sun
Currently there is a lot of concern and consternation about the potential looming trade war with China. While there have been numerous scholarly articles addressing the current geo-political environment, this article will focus on the likely impact of trade negotiations with China on the Silicon Valley real estate market.
Overview of Trade Tensions
A fundamental principle of President Trump’s election platform was his focus on trade inequalities around the world, with particular attention paid to China. His commitment to “fix China’s longtime abuse of the broken international system and unfair practices” continually resonated with his base, and, some believe, contributed to his election. Following through on his promise, in 2017, the U.S. officially launched an investigation into the trade polices with China regarding intellectual property, which escalated into the trade tension and retaliatory tariffs that we have today.
Objectively, one can argue that some of the bilateral treaties between the United States and certain foreign governments may be somewhat imbalanced. At a minimum, the U.S.-China Trade Pact, which was originally signed in 1979, may be a bit outdated and inadequate to deal with today’s trade issues. Over the years of U.S. and China relations, much has changed. China was granted full diplomatic recognition in 1979 and in 2000, President Clinton signed the U.S.-China Relations Act, which granted China permanent trade relations with U.S. and paved the road for China to join the World Trade Organization. As our relationship grew, however, it quickly turned sour due to rising trade tensions between the two countries. Although President Trump’s populist rhetoric may not demonstrate a clear appreciation of the nuances of this very complex subject, it does raise strong feelings from both sides of the aisle.
Fortunately for Silicon Valley, the opening salvo of tariffs have been focused on manufactured goods. Thus, we do not expect to see a profound impact on Silicon Valley businesses built around software and services. For example, the most noteworthy tariffs thus far have been on aluminum, steel, wine, fruit, electronics, and televisions, which are all tangible personal property and/or manufactured items. However, Silicon Valley does have its fair share of manufacturing companies; such as Tesla and Apple, which could both be negatively impacted by these restricted trade policies.
The Good News
China has several areas that have emerged as strong technology centers, in particular, Zhongguancun in Beijing (between the 3rd and 4th Ring Road), Shenzhen, Hangzhou and Shanghai. All of these areas share striking similarities to Silicon Valley and San Francisco. They are all very cosmopolitan in nature, have many fine restaurants (with more opening monthly), a very vibrant night life, and strong infrastructure.
As Chinese technology companies like Alibaba (sometimes thought of as China’s Amazon), Tencent (which owns WeChat, the most popular social media platform in China and now counts 1 billion monthly active users worldwide), and Baidu (China’s most popular search engine), as well as large real estate companies, expand their international operations, these companies will continue to be drawn to Silicon Valley. In fact, Tencent has already taken significant space in Palo Alto, Baidu in Sunnyvale, and Alibaba in San Mateo.
The Bad News
If trade tensions between the United States and China escalate, we could certainly see additional tariffs that could have a more significant impact on Silicon Valley. Additionally, the potential for further tightening of the H-1 B visa program could have a profound impact on Silicon Valley’s access to the highly-trained labor that has fueled the Valley’s growth over the past 20 years. Similarly, reductions in the EB-5 visa program could make it more difficult for foreign entrepreneurs and business people to come to the U.S. to start businesses, which would, in turn, reduce the competition for higher-end homes.
The View from Our Vantage Point
Despite tightened restrictions on immigration and increasing trade tensions, we are still experiencing a strong demand for real estate from Chinese buyers. With China’s volatile economy, unpredictable political environment, and poor air quality, residents remain highly drawn to Silicon Valley.
In particular, we have experienced strong Chinese demand for high-end properties in the $5 million to $12 million range as Chinese executives elect to call this area home. After all, our beloved Silicon Valley is still prized world-wide as having the best weather, schools, and a booming tech industry.