Skip to main content
MENU
Subscribe
  • Subscribe
  • Account
  • LOGIN
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE Act 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2022 Innovation Investing Conference
    • 2022 Defined Contribution East Conference
    • 2022 ESG Investing Conference
    • 2022 DC Investment Lineup Conference
    • 2022 Alternatives Investing Conference
Breadcrumb
  1. Home
  2. ALTERNATIVES
August 08, 2016 01:00 AM

Plunging 'unicorn' valuations spell double trouble

Pain for venture capitalists could spillover into real estate

Arleen Jacobius
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Martha S. Peyton said investments are regionally concentrated.

    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.

    Affect values

    Investor concerns over a slowdown in technology company valuation and venture capital investment are expected to affect values of apartments and office buildings in other technology-heavy cities such as Seattle, the Green Street report noted.

    Venture capital firms invested $1.3 billion in technology companies in the first half of this year, down from $1.7 billion in the first half of 2015, according to the MoneyTree Report by National Venture Capital Association and PricewaterhouseCoopers based on Thomson Reuters data.

    Real estate investment executives at TIAA Global Asset Management have been targeting states with the highest amount of venture capital invested.

    “The amount of venture capital dollars invested in each state is highly correlated to job growth in that state, and a small number of states account for the lion's share of venture capital investment,” said Martha S. Peyton, managing director and head of real assets research at Newport Beach, Calif.-based TIAA Global, in an e-mail.

    California leads by far in venture capital investment with $34 billion in 2015, followed by New York and Massachusetts with $6 billion each, she said, citing data from State Science and Technology Institute, a non-profit technology business group. Washington, Texas and Illinois are next with more than $1 billion each in 2015.

    “Our target markets are concentrated in those states, with the exception” of Illinois, Ms. Peyton wrote.

    And TIAA's real estate investments depend on the health of the technology industry, she said: “Tech activity and tech jobs produce income that drives state and local economies in their totalities. All property holdings in San Francisco benefit from the health of its tech sector. Therefore we look at a metro area’s economic prospects rather than just office occupancy by tech tenants since the overall economic outlook is heavily influenced by the vigor of local industries.”

    Increasing pressure

    At the same time, venture capital investors' heavy bet on unicorns is expected to come under increasing pressure as those firms come of age with few available exit routes. Of the 21 acquisitions of private technology companies for more than $1 billion this year, only two of the transactions involved the sale of venture capital-backed unicorns, according to CB Insights.

    What happens to these unicorns will affect investors' real estate portfolios. The management of unicorn companies face a decision of accepting a sale of the business at a lower valuation or building their company into a cash-flowing operation. Either move is expected to require employee layoffs, which would be bad for real estate as both commercial and multifamily space would become vacant.

    So far, real estate managers and other investors are divided on whether property values will fall. Capitalization rates, which measure return, are still rising in the Bay Area. (As the cap rate goes up, the valuation multiple goes down.) The result is that real estate buyers and sellers are beginning to disagree on property values in the Bay Area, home to many unicorns and other venture-capital-backed technology companies.

    Real estate in the Bay Area is expected to dip in value with sagging venture capital-backed company valuations in a way that is similar to what happened in Houston last year when oil prices tumbled, said Andy McCulloch, managing director of real estate analytics at Green Street Advisors.

    It took six to nine months after the price of oil had dropped before real estate buyers and sellers in energy-industry-dependent Houston accepted that real estate prices were down, Mr. McCulloch said. Now those discussions are shifting toward the Bay Area as unicorn valuations fall.

    Some still optimistic

    Not everyone sees it the same way. Some real estate investors are still optimistic that real estate values in technology industry regions will continue to rise.

    Rich Kimble, a senior director of real estate acquisitions in TIAA's San Francisco office, doesn't expect faltering technology company growth to affect real estate valuations. While subleases are up in San Francisco, for example, the new space has been leased, he said.

    It's the newer tech companies that might be in for some trouble, as venture capital investment has declined for earlier stage companies but increased for more established technology companies, Mr. Kimble said.

    What's more, technology companies only account for 20% of the total office space in San Francisco, he noted.

    Many technology companies are growing out of their early “artist loft” space to more traditional office space, said Sam Flood, a senior director of acquisitions in the Boston office of TIAA Global Asset Management. They are targeting buildings with larger floor plates — wider office spaces of 30,000 square feet and larger, Mr. Kimble said. By comparison, the typical size is 20,000 square feet.

    “Even though some major technology companies have gone through a downsizing of valuation in recent times, they still have predominantly the same requirements in terms of staffing and space needs,” Mr. Flood said. “In some instances we're seeing smaller, newer technology companies not making it, but not the more established firms continue to need space.”

    Related Articles
    Unicorn market frothy, but differs from 1999
    Venture cap investments could be victim of own success
    Venture cap innovation transforms real estate market
    Which real estate market is next?
    Recommended for You
    Eimear Palmer
    Pantheon adds global head of ESG
    Franklin Templeton names head of sustainable agri-food
    ONLINE_180819917_AR_0_ZXNMFGHRAFDD.jpg
    Mitsui, Nomura to acquire Aussie real assets manager New Forests
    OCIO, Anchor in Rough Seas
    Sponsored Content: OCIO, Anchor in Rough Seas

    Reader Poll

    May 23, 2022
    SEE MORE POLLS >
    Sponsored
    White Papers
    Crossroads: Politics, Inflation, & Bonds
    Credit Indices: Closing the Fixed Income Evolutionary Gap
    Forever in Style: Benchmarking with the Morningstar® Broad Style Indexes℠
    Q2 2022 Credit Outlook: Carry On
    Leverage does not equal risk
    Is there a mid-cap gap in your DC plan?
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    May 23, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE Act 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2022 Innovation Investing Conference
      • 2022 Defined Contribution East Conference
      • 2022 ESG Investing Conference
      • 2022 DC Investment Lineup Conference
      • 2022 Alternatives Investing Conference