Silicon Valley builders tend to be composed of one of two groups. One group of builders are construction foreman who rose through the ranks and build homes as they have done in the past. The other set of builders is more reflective of Silicon Valley, and these builders will be very analytical, discerning, and often have graduate degrees from an elite university like Stanford. With my analytical background, I tend to attract the more calculating developers, and they seek my advice on which town is the most profitable for them to build in. While this article focuses on the advice I give my clients who build homes for profit or speculation (“spec” builders), the analysis also applies to advice I provide custom builders who are building their dream home. 

While some agents may intuitively try to evaluate what city is the most lucrative to build in, I wanted to empirically evaluate the data to draw this conclusion. I compared the builders’ final sales price, and then subtracted out the price of the land and imputed construction costs; as a result, I was then able to determine which cities provided the most profit to speculation builders.

Having worked with clients to build dozens of homes, and personally building a home now in Palo Alto with a client, I have gotten to know accurate estimates for the cost of construction and how that will vary by each city as determined by their topography and building codes. As a study in contrasts, in Mountain View, which is a town very open to property redevelopment and has a flat topography that is easy to build upon, a “spec” builder can still build a home for $350 per sq. foot or less. In Woodside, which has very restrictive building regulations, hilly topography, and the San Andreas Fault running through its center, necessitating very stringent seismic requirements, it is hard to build anything of quality for less than $800 per sq. foot. In my analysis, I normalized the construction costs to be reflective of the cities that I was examining. In higher end cities such as Atherton, Los Altos, Los Altos Hills (“LAH”), Menlo Park, Palo Alto, Portola Valley and Woodside, I also imputed a higher level of finishes to the homes to determine my estimated cost of construction in each town.

While I share the detailed findings with my clients to best help them, I have some general conclusions that will be insightful for anyone interested in building in Silicon Valley:

1. Palo Alto has been a good city to build in: Intuitively, I always told my clients that Palo Alto is amongst the best cities in which to build. There is always high demand due to the exceptional schools and a vibrant downtown. This was empirically proven with Palo Alto having the highest return on investment amongst all local cities with an average profit of 39% for speculation homes built by developers. This is why I chose Palo Alto to partner with a client to build my first home, so that way I can gain greater construction expertise that I can pass along to my clients. While a 39% return per project sounds amazing, planning, permitting, and completing a home now takes over two years in most cases, so this return is fair given the risk involved of market fluctuations coupled with the large amount of time and money required. Palo Alto’s growing timeframe for reviewing and approving permits may deter future redevelopment if this trend continues. To illustrate, it is likely that the home I am building from the ground up will have a longer time for plans and permits (13 months) than the time to complete it (approximately 11 months).
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2. Los Altos, Mountain View, and Menlo Park all had roughly the same return on projects: As both Los Altos and Menlo Park are viewed as sister cities to Palo Alto, and are both prestigious and in high demand, I anticipated strong and roughly equal returns for developers in these two cities. I was correct, as projects in these towns had just a slightly lower return of 33% and 35%, respectively. I anticipated Mountain View would have a lower rate of return due to lower sales prices of new homes, but with an average return of 38%, this city fared well. Lower land acquisition costs and lower costs of construction (due to lower buyer expectations plus ease of building there) netted out to have a higher profit margin than other cities.
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3. Towns with large lots do best with expensive homes: I anticipated lower rates of returns for building in the hillside towns because of the high cost of construction (due to sloping topography and earthquake risks engendering more stringent seismic requirements) and overall lower demand. While I was correct overall, with the rate of return a bit over half as high as other towns, I spotted an interesting trend: large homes that sell for over $10M had exceptional returns that, overall, were in the top range of all the cities. As I reflected upon this, I noticed that my upper-end clients are the most willing to spend money to save time. Whenever I have clients that want to buy a $20M speculation home, I try to be the hero and save them $6M by telling them that we can buy a nice tear down for $8M (either an acre in prime Atherton or 3 acres in Woodside) and spend $6M building the home that when complete will be worth $20M. Most of my affluent clients appreciate my trying to save them money, but say they will happily pay the $20M to enjoy the home immediately. The builders who regularly build these beautiful spec homes, such as Pacific Peninsula Group, have been very successful in catering to busy tech clients who value time over money. Interestingly, homes and lots that were smaller than average for these elite towns tended to provide very little return.
   
   For those who are considering building their own home in Silicon Valley, whether for their family or for profit, DeLeon Realty can provide more analysis and assistance (such as our interior designers assisting with selecting finishes during construction) than any other agency would ever offer. We look forward to sharing our continually growing expertise and experience with building to our clients. 
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