Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California at Berkeley, does not mince words about his view of the future of the San Francisco economy.
“There will be blood in the streets,” Rosen said.
Rosen, who holds a Ph.D in economics from MIT, is also chairman of Rosen Consulting Group. He’s also well-known for correctly predicting the last two major economic downturns well before they happened: the dot-com bust of 2000, and the economic downturn which fueled the housing market crash of 2008.
He believes that the preponderance of the economic forces present now point toward the next big collapse, and he said that the coming implosion will be of a greater magnitude than the other two.
He says that two big things are at work: growing unease among experts about the Chinese economy, and the sustainability of the red-hot San Francisco economy.
“San Francisco has been the world’s fastest-growing economy for the past four years, and a correction is coming,” Rosen said.
He said that economy relies heavily on its cluster of startups and the presence of what are known as unicorn companies, private companies valued at $1 billion or more. That list currently has 145 entries on it. For some perspective: Only 14 companies on that list joined it in 2011 or before.
And those companies account for tens of thousands of jobs.
That list of companies is headed by Bay-area transportation sensation Uber, which recently announced a Series G funding round. If successful, the round would increase the company’s value to $65 billion.
And that’s the rub, said Rosen.
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“Uber is overvalued,” he said. “Many venture-stage companies in the area are. There’s going to be a correction sometime in the next three years.”
He added that the companies are money-losers that are being infused with eye-popping sums of venture capital, which is being used to scale up rapidly. That scaling involves hiring and leasing real estate.
“Eighty percent of these companies aren’t going to make it,” he said. “They’re going to start failing within three years. I can’t say exactly when. It hasn’t started yet.”
And when they do, he said, it’s going to be a bigger correction than the dot-com implosion.
That correction will spur job cuts and empty offices in San Francisco. These will be larger than the sporadic layoffs some companies have already endured. The job losses will manifest in a dive in the residential real estate market, as well.
And even though the economy as a whole is good, Rosen said, if the Fed moves to raise interest rates at its December meeting, money becomes more expensive to borrow.
If the Chinese economy continues to slow, Rosen said, not enough cash will be available to pay debt obligations that have fueled the rise in that economy. As China has transitioned from an investment-based economy to a service economy, a slower pace has resulted. Add in increasing commodity prices, and the only remaining question, he said, is if the braking will be modest or dramatic. Defaults across the ocean, he said, will have a trickle-down effect in the U.S.
“People get so mesmerized by easy money,” Rosen said, “and that’s what is driving this. And that makes people make bad decisions.”
