Silicon Valley's year: 'amazing' but with 'perils'

2016 Silicon Valley Index finds phenomenal economic growth but questions if it will last

by Sue Dremann / Palo Alto Weekly

Joint Venture Silicon Valley's annual economic study found that 2015 was a year of record-breaking growth and prosperity, but it cautioned that there are perils associated with this kind of break-neck trajectory. It cautioned that a fourth-quarter slowdown, raised the question of whether it marks the beginning of the burst of a bubble.
The 2016 Silicon Valley Index, which has been published since 1995, found that Silicon Valley employment increased 4.3 percent in 2015, a level that has been unprecedented in any other year except 2000, Russell Hancock, president and CEO, said during a Wednesday press conference.
The San Francisco Bay Area created 129,223 new jobs between the second quarter of 2014 and the second quarter of 2015. Job growth has been accelerating since 2010, with the most rapid growth during that time period.
"That's an amazing number," Hancock said. "It's like adding two cities the size of Santa Clara to our region."
What's driving it? Tech, Hancock said. More than 37 percent of job growth was in the tech category of innovation and information, which includes products and services, computer software, apps, devices, the cloud and the like.
The next biggest growth occurred in community infrastructure: health care, construction and education -- areas that support the tech growth, he said. A full 50 percent of the job growth was in this category, with tech jobs accounting for 25 percent, he said.
Another large-growth area: accommodations and food service, including restaurants, hotels and catering. In 2015, the area had the largest amount of planned and completed hotel development.
As a growth industry, although biotech is a small regional employer, it accounted for 20 percent of the growth, garnering the largest share of IPOs over the last three years, according to the Index.
Storage and warehousing, another support for industry used by Apple and for storage of tech furniture and electronic components, increased by 22 percent.
Few categories had job losses -- only eight out of 46 categories showed negative hiring.
"That has never happened," Hancock said. "Last year (2014) we had losses in half of the categories."
The declines occurred in telecommunications manufacturing, semiconductor and equipment manufacturing, IT repair services and nonprofit organizations.
Food and beverage manufacturing -- not a big player in Silicon Valley -- dropped 50 percent since 2007, he said. The prosperity also did not translate to government, which also did not increase jobs in local and state government administrations.
In innovation and entrepreneurship, patents are the highest ever recorded -- 19,414 -- a 14 percent growth over 2014. Six Silicon Valley cities were among the top 10 in the U.S. for patent filings, Hancock said. Most of those were in computers, data processing and information storage.
Venture capitalists also invested $24.5 billion with more money and bigger deals. Silicon Valley garnered $11.1 billion of that money, but San Francisco outstripped the area -- with $13.3 billion -- for the second year in row.
"San Francisco had a couple of blockbuster deals: Airbnb, Uber and Social Finance, peer-to-peer lending," Hancock said.
Office space accounted for 40 percent of the 23 million square feet of approved or built business development, with the rest in commercial and light industrial uses, Hancock said. Of that number, 3.5 million square feet of building were completed in Santa Clara, with San Jose snagging an Apple campus and Fremont also a big winner. San Francisco came in a close second with 3 million square feet built. Vacancy rates of commercial space also declined, with industrial space at just 2.7 percent, the lowest since 2000.
Silicon Valley still outstrips San Francisco and all other areas in income gains. The average annual earnings in 2015 were $122,000, with San Francisco earners making $111,000 and the Bay Area overall average was $99,000. That's compared to the $63,000 average for the U.S. overall and $73,000 in California.
But the phenomenal prosperity has some perils, the Index found.
Poverty levels, as determined by federal standards as people who can't buy food, fell 8.1 percent from 9.7 percent in 2014. That's eight out of 100 people, Hancock said. But those standards are misleading when it comes to Silicon Valley's stratospheric cost of living, Hancock said. Using Self-Sufficiency Standards, which include food, rent and other basic necessities, 30 percent are not meeting those standards, or three out of 10 people.
"Growth income is not evenly distributed," Hancock noted. High-wage earners -- persons making more than $125,000 annually -- account for 25 percent of all jobs.
"Thirty-two percent are low wage, making less than $30,000, which isn't even a living in Silicon Valley," he said.
Forty-three percent of jobs are in the mid-range professions, which are shrinking by 1 percent per year, he said.
"Low-wage earners wages are stagnating," he added.
Who gets a slice of the housing, or for that matter, the rental housing, is also shrinking.
"The people who are moving into Silicon Valley are those who can afford it," Hancock said.
The houses being built and sold are largely luxury homes with little growth of affordable housing.
"It's just astronomic," Hancock said.
The number of homes sold is down. Inventory has declined more than 60 percent since 2011. The median sale price in San Mateo County is $926,000 -- almost a million dollars. In Santa Clara County, it's $830,000. The median in California as a whole is $411,000.
Just 27 percent of first-time home buyers can afford a median-price home in San Mateo County; 41 percent in Santa Clara County.
But the rate of residents who are "burdened," meaning they are spending more than 35 percent of their income on housing, is 39 percent for homeowners and 39 percent of renters. The average Silicon Valley rent is $2,749 per month; the average for condos and homeowners is $3,500 per month. Between 2011 and 2015, the average rent has risen 33 percent.
Silicon Valley is not doing well at building housing, Hancock said. In 2015, only 5,055 residences were approved for permits compared to 11,000 in 2014, he said. There is a 25,000-unit shortage just to keep pace with current growth, he said.
The area's ethnic demographics related to jobs is also shifting. Thirty-seven percent of the population in San Mateo and Santa Clara counties are foreign born, compared to 13 percent in the U.S. overall. Among the working population, 45 percent are foreign born, but in the tech, computer and STEM industries, that number rises to 75 percent, according to the Index.
Whether the rapid growth will continue remains a question that Hancock called the "gorilla in the room." The fourth quarter of 2015 saw a slowdown. In Silicon Valley, venture capital investment saw a 31 percent drop; in San Francisco, the decline was 50 percent. The downturn is not isolated to Silicon Valley, however. Overall in the U.S., VC funding dropped 32 percent, Hancock said. And IPOs have also slowed. In 2015, there were 16 in Silicon Valley and six out of San Francisco. That's a drop from 2014, when there were 23 in Silicon Valley.
"Three quarters of the IPOs were before late August, before the big stock market drop," Hancock said. In January 2016, there were no IPOs. It was the first IPO-free month since 2011."
The full report can be found on the Joint Venture site at