Updated with correction
Faltering valuations of so-called unicorn companies hold a potential double hit for institutional investors' portfolios.
Some 30% of U.S. venture capital investment in the first half was invested in unicorns — venture-backed startups valued at $1 billion or more, according to PitchBook Data. Venture capital unicorn investment is up 116% from $4.1 billion in the second quarter of last year, figures from the Seattle-based researcher show.
The location of technology startups — especially unicorns — in any single area was considered a sign of growth in recent years, attracting the attention of real estate investors.
But the median valuation of unicorn companies hit $1.5 billion as of Aug. 2, down from $2.5 billion in 2011.
As unicorn valuations drop, some real estate investors are wondering whether their returns will follow that path.
The effect could be considerable.
Real estate managers and some direct investors have been investing heavily in technology-driven markets because that is where they have seen the most growth, industry executives say. Indeed, technology companies in the year ended Sept. 30, 2015, were responsible for the most leases of spaces 20,000 square feet and larger across the U.S., amounting to 20.5% of all leasing, according to real estate manager Jones Lang LaSalle Inc.'s 2015 technology report.
However, expected real estate returns in office and multifamily buildings in tech-heavy areas are expected to drop due, in part, to slowing venture capital investment and weakening valuations of venture capital portfolio companies. At the same time, technology business hubs of Austin, Denver, Silicon Valley and San Francisco are all near peak pricing and poised to slow, according to a JLL second-quarter report.
For similar reasons, there have been fewer bidders for both office and apartment properties in California's Bay Area, which could cause prices to drop, according to a July report by Newport Beach, Calif.-based real estate research firm Green Street Advisors LLC. Prospective investors are now expecting lower growth of net operating income for apartment buildings than they did a year ago, which has resulted in several deals falling apart, the report noted.
What's more, many technology companies are using less space than traditional businesses. Some technology companies are having employees work virtually from whatever city they happen to be living in, managers said.