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Blame Apple For The San Francisco Apartment Bubble

This article is more than 10 years old.

After a three-year exile to the East Coast, I came back to San Francisco. What struck me more than the cold August fog was the vertiginous rise in rents. Small studios in crack addict-ridden parts of SOMA (South Of Market) typically go for $3,000 a month. If you are lucky enough to get it, that is. Tales of bidding wars for short-term rentals abound.

With a sense of ill-conceived pride, my San Franciscan friends confirmed that downtown San Francisco was now a more expansive place to live than Manhattan. For years, New York City was the only city that San Franciscans could not dismiss as a backward place for Fox TV-watching rednecks. Manhattanites could boast higher rents, more organic markets and trendier cafes.

How did San Francisco beat New York at its own game? A renting bubble is hard to understand. Housing bubbles arise when dumb bankers are willing to issue six-figure mortgages without asking questions and make home equity loans at inflated rates. In a renting bubble, however, renters still need to come up with the cash every month.

To explain the rise in rents, my friends pointed to the influx of start-ups in the Bay Area, from Zynga (ZNGA) to Facebook (FB) and LinkedIn (LNKD). I remained skeptical. Sure, start-up engineers make very good money these days, but there are not enough of them to justify a city-wide bubble of these proportions. Sure, a few made it big during the Facebook IPO, but the stock now looks more like the Titanic than like Google (GOOG) and most of its float is locked in the hands of its founders and early investors.

My understanding is that these brand new condos are mostly-populated by 20-something college grads occupying entry-level positions in the traditional economy like marketing, sales or education. How can they come up with $36,000 in annual rent, not mentioning student loan payments and $10 a day for lattes and Jamba Juice?

I had an epiphany when a tenth friend asked me if I thought Apple (AAPL) would hit $1,000 before year-end. All conversations that were not about rents centered around Apple: what a visionary Steve Jobs is, how awesome Apple’s product pipeline is and fantasist rumors about the new features of the soon-to-be-unveiled iPhone 5.

What if Apple's stellar rise to a $632 billion market capitalization was the fuel behind the San Francisco renting bubble? Every $1 dollar rise in the share price creates $1 billion in new wealth and the stock is up $272 this year alone. For comparison, Apple’s increase this year is equivalent to the market capitalization of seven Facebooks!

There is no way to know the geographical ownership of a stock. Yet, it would make sense for Apple’s ownership to be overrepresented in the Bay Area. It is where most of its U.S. employees hail from, and the company has a relatively generous employee stock ownership plan. Just walk in one of the myriad of trendy cafes that have mushroomed in the city, and you will see hundreds of yuppies feverishly “working” on brand new Macs with their iPhone 4S prominently displayed on the table. It does not take a far stretch of imagination to assume that they also own the stock in their e-trade (ETFC) accounts. My conversations do not suggest that San Franciscans are selling their beloved Apple stock. Rather, they eagerly wait for the stock to enter into four-digit territory to congratulate themselves of their investment savviness. But the thought of their well-stashed brokerage accounts allows them to spend like there is no tomorrow – and that includes overpriced rents in not-so-desirable parts of the city.

I do not pretend to know when Apple will peak. I have sold my own holdings at $300 and I am very happy with my 150% gain. There is a graveyard full of Apple bears and I do not intend to join it. But what I will say is that the party will not last forever. And when it ends, watch for a much-needed correction in rents in the Bay Area.