The pandemic has fundamentally reshaped several aspects of societal life, which will have enduring effects. An aspect that often goes unnoticed is the change in the preferred type of residential real estate among buyers, and these changes are poised to influence the historical and present appreciation of distinct asset classes within residential real estate.

There are three major asset classes of residential real estate that consumers may purchase for themselves: single-family homes (“SFH”), townhomes, and condominiums. Before the pandemic, each of these three asset classes had strong demand and would follow roughly the same appreciation trajectory; conversely, each of these asset classes had distinct pros and cons with benefits that were equally attractive to buyers in the past.

While some buyers preferred the yard and space a SFH provides, others preferred condos due to their closer proximity to downtowns and urban attractions. Interestingly, the strength of demand for townhomes and condos is highlighted by the somewhat surprising fact that these property types experienced slightly higher appreciation rates than SFHs in Silicon Valley prior to the pandemic, as evidenced by the following data..

San Mateo County Appreciation in Dollars per Square Foot from 2010-2019:

SFH - 50.9%

Townhomes - 55.7%

Condos - 52.7% 

Just as the pandemic changed our viewpoints of safe activities for our families, it also changed how home buyers viewed their future purchase. The allure of city attractions and urban conveniences associated with condos became less significant, as downtown areas shuttered and communal spaces lost their appeal due to health concerns.

Instead, buyers sought privacy and space over density and convenience. Having a SFH with a private backyard safe from COVID became many buyers’ new focus. This shift in preference propelled formerly tranquil towns like Woodside and Los Altos Hills, known for their spacious properties, into strong housing markets that have maintained their vigor.

The shift away from density and urban amenities triggered by the pandemic translated into reduced demand for urban condos. The most extreme example would be San Francisco, the second-most dense city in America, where prices have dropped precipitously (and likely will take a decade to recover). Within Silicon Valley, this shift in criteria has separated the trends and appreciation levels of each of the three asset classes. Post-pandemic, SFH are more in demand and are appreciating much more rapidly than the other asset classes, as the following statistics show:

San Mateo County Appreciation in Dollars per Square Foot from 2020-2022:

SFH - 17.2%

Townhomes - 12.3%

Condos - 4.5% 

Anticipating the future, I feel SFHs will continue experiencing greater appreciation for several reasons:

1. The trend of buyers preferring space over density seems to have legs and will last for quite some time.
2. The supply of SFHs remains stable or is even diminishing, as certain SFH lots are being repurposed for higher-density endeavors such as multi-family apartments or condos. The supply of condos and townhomes is increasing as the greater density of these developments brings larger profits for the builder. 
3. California is allowing more optionality for SFH, which increases their worth and desirability. Measures granting additional square footage for Accessory Dwelling Units (ADUs) and eliminating SFH zoning, combined with the introduction of SB9 allowing SFH lots to be split, are broadening the potential for redevelopment of SFH lots.

This article underscores the pivotal nature of selecting the right real estate investment, as appreciation outcomes can significantly vary based on the chosen property type. Leveraging my Math-Econ background and insights learned during my time at Stanford’s Graduate School of Business, I am dedicated to accurately predicting future appreciation at both a city and neighborhood level. By scrutinizing present trends and extrapolating their trajectories, I project that the greatest appreciation potential lies in purchasing larger lots with older homes where the majority of the property’s value is in the land. 

For tailored insights into the Silicon Valley neighborhoods and properties poised for the most pronounced appreciation potential, please don't hesitate to reach out to me.

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