$1 million over asking: Who is driving Silicon Valley’s housing frenzy?

According to Daryl Fairweather, chief economist at real estate company Redfin, the buyers are benefiting from the artificial intelligence boom and have money to spend and are ready to buy.

The supply of homes for sale fell 40% from the previous year, partly because homeowners are holding on to mortgages with low interest rates and because of changes in office use following the COVID-19 pandemic. The shortage has fueled intense competition for available properties.

At the same time, rents for two-bedroom apartments rose 22%, reaching levels similar to those in New York. Local authorities and developers are even considering converting vacant downtown offices into housing to ease the shortage.

Real estate agents are reporting a wave of cash offers and deals closing hundreds of thousands, and sometimes millions, of dollars above the original asking price. They attribute the trend to stock options held by employees of leading AI companies.

In the past month alone, 44 deals closed for at least $1 million above the asking price. Since the beginning of the year, there have been 144 such transactions.

One notable case involved a luxury three-bedroom apartment in the Duboce Triangle neighborhood. Initially listed for about $3 million, it ultimately sold for $3.2 million after an OpenAI employee who toured the property expressed a willingness to pay by transferring company shares.

The phenomenon is also being fueled by a wave of liquidity among AI company employees. More than 600 OpenAI employees collectively sold $6.6 billion worth of shares in secondary transactions late last year, an average of about $11 million per employee. Anthropic employees sold shares worth about $6 billion.

Analysts estimate that following future public offerings, OpenAI employees could be in a position to buy about 20% of the homes sold in San Francisco, while Anthropic employees could purchase about 9%.

As more new wealth flows into the luxury real estate market, ordinary residents increasingly feel pushed out. A San Francisco couple with a combined annual income of $365,000 said they had struggled to find a one-bedroom apartment for less than $5,000 a month and felt unable to compete with tech workers tied to the AI industry.

Economists warn against assuming the current trend will continue indefinitely, noting that the AI industry is still in the early stages of its development.

Within the AI industry itself, some companies are already developing their own housing policies to address the effects of the boom. The startup Rilla, for example, spends about $1.7 million a year on housing assistance and allows employees to receive up to $18,000 annually to live near its Brooklyn office. The benefit is part of a broader package worth about $37,000 per employee each year.