THE SEQUEL: CHECKING VITAL SIGNS: DO YOU WANT TO BUY TECH, OR SHORT IT? WHAT IMPACT ON OFFICE MARKETS?
Dan Mihalovich
January 27, 2016
Tenants – Here’s Round 2 in this discussion. Tech, clearly the driving demand factor in office markets around the country, gets its lifeblood from venture capital. So, where are we in the VC cycle NOW? If the flow of VC slows, crawls or evaporates, will the office markets collapse --- and if such a scenario is even likely in the foreseeable future, WHEN might this occur? Do you want to be “long” tech, or “short” it? We asked for an update (from last quarter) from a local brainbox – a venture capitalist whose tenured company has more than $1B invested in public and private tech. We agreed not to disclose the VC’s name, but here’s a direct quote:
“It has been a tumultuous few months since we last checked in, given developments in China and commodity markets and a resulting bear market. For now, jobs, housing, consumer health, and bank lending all look ok-to-strong. Obvious risks to watch include global deflationary pressure, China balance sheet contraction, and energy contagion. I will let a macro guy fill you in on these issues and instead focus on what we are seeing in the tech world. As I noted in my last write-up, if we go into a recession we will all have larger issues…
Clearly, the IPO pipeline has halted. We saw one tech IPO in December (Disclaimer: IPO data is for my firm’s investable universe- generally mid to large cap US based tech companies), and currently only have two companies in the imminent pipeline (NTNX, and SCWX). 54% of the 26 IPOs we evaluated are now trading below their issue price. 85% of these IPOs are trading below where they closed on their first day of trading.
Notably, several IPOs priced below the post on their latest VC rounds or have traded down there after coming public (VCs are often at least partially protected from IPO down rounds with ratchets). For example SQ, PSTG, BOX, and ETSY are all trading below their late stage venture valuations.
Perhaps consequentially, we have seen numerous examples of VC investors being less willing to chase high late stage valuations. We have also seen non-traditional venture investors (i.e. Fidelity) pull back. I believe this will continue and we will see some more rational thinking injected into the private markets, especially if tumult continues in the public markets (which seems likely). Later stage start-ups may need to dial back burn rates a bit and focus on proving out the unit economics of their businesses.
Somewhat counter intuitively, we will also likely see the pace of IPOs pick up. I would not be surprised by more IPO down rounds. VC backed companies need cash and their investors need liquidity. Founders and early investors typically do fine through an IPO down round; it is the late stage investors and later employees who will get hurt.
It is important not to overly generalize when discussing the tech outlook. Of these IPOs there will be both good long and short opportunities, depending on price and fundamentals. Within tech in general we are beginning to see numerous opportunities to buy quality franchises at reasonable valuations (for long term minded investors), and other areas where overly optimistic estimates and potential for multiple contraction paint a less rosy picture.
While I remain cautious on the 2016 macro picture, I think good companies will have the opportunity to do ok and bad companies will get killed in an unforgiving tape. We will see bifurcation in performance as volatility returns to the markets.”
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About the Author
Mihalovich Partners, a San Francisco based commercial tenant-representation firm, was formed in 1998 by Dan Mihalovich, then a 16-year Industry veteran and Director of Office Leasing at Cushman & Wakefield. Mihalovich brings to the firm 35 years of business experience, focusing on Market Analysis, Negotiation Skills and Project Management expertise. He has managed over 200 office-leasing and project management assignments for many of San Francisco's most prestigious tenants. His career, and the focus of Mihalovich Partners, is solely driven to advocate the interests of San Francisco tenants in leasing negotiations of all types—renewals, relocations, renegotiations, and terminations. Mihalovich Partners never represents landlords, avoiding conflicts of interest, unlike most firms in the leasing brokerage business.
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