Why Companies Are Moving from Silicon Valley due to Rent Rates - Essay Example

Why Companies Are Moving From Silicon Valley Due To Rent Rates

Introduction

The global land rates have been on the rise with the increasing demand for land where many companies and individuals are moving to develop commercial properties. As a result, properties for rent are rapidly reducing considering that the number of potential tenants continues rising as a result in global population. Consequently, this is pushing property owners to increase rent and lease rates due to the growing demand as well as keeping with the dynamism of the market. As an example of housing developments which comprises of both commercial and household housing units, development of any such development should be well planned to include all human and business requirements such as transport system, food supply chain, social amenities and economic zones among others. The main objective of the development should be to provide affordable and safe housing as well as business units that ensure economic and social growth.

Silicon Valley

Silicon Valley in California started like any other urban area but was propelled by the presence of tech companies which with time saw it grow to a huge metropolis it is today. The presence of tech companies attracted many engineers as well as other professionals who slowly helped push the cost of housing up due to the demand as stated by Stone (2015). However, with many young entrepreneurs and graduates as well as other professionals getting in the Silicon Valley, it became highly competitive to do business and live. Therefore, this paper focuses on the role of rent (land) as a factor of production has played a significant part in the growth as well as the current decreasing rent rates with many of the tech companies taking an exodus from the Silicon Valley.

The Primary Policy Issue

In business, operation costs play a significant role in determining the profitability or otherwise. Therefore, it is imperative that the costs should be well managed and where they get out of control, an alternative should be established if the business is to continue. This is the scenario in many technology-based and other related companies which are finding it difficult to continue their operations. On the other hand, cutting costs as mentioned remains the best solution and many of the Silicon Valley-based companies have decided to move their bases to other relatively cheaper cities.

Though silicon valley is a good place to start a company and hope to see it grow to a multinational, those hopes are fading fast with the high rent rates coupled with the rising populations which affluent corporates do not envy living or working in. Kim (2013) proposes that five or six centuries ago, life was relatively cheap and housing readily available where the nation was in a position to meet its housing demands. However, the rise in population and economic prosperity, the rates has dramatically gone up making the cost of housing to skyrocket. The previously affordable or relatively cheap areas around the country are no longer affordable.

With the rise in tech companies in Silicon Valley, Realtors and other business people with an interest in housing came in to take up even the previously old properties and to renovate them to make profits. As a result, this process also known as gentrification has turned housing to be one of the highest business and living costs in Silicon Valley. As indicated, many businesses have shifted their bases to other cities such as Portland in Oregon which has started rising with the business boost from these companies.

Particular Concern on Housing in an Urban and Regional Setting

In urban centers, rent of property cost is an important factor in the growth of such areas considering that the companies are already established. Portland and other cities which are more favorable in terms of cost of doing business and living considering they are not highly populated and land rates. The main challenge in housing for many years now has been the unmatched development in housing units compared to population growth. The cost of land in areas such as Silicon Valley is the main discouraging factor that has seen developers shy away from investing their money in housing. The other factors associated with rising housing costs include:

Class influence

Many reasons push or attract people to certain areas with class being one of them. For example, some people will remain in Silicon Valley despite its rental rates. With many societies coming up together to create private social groups, many housing areas are becoming rent controlled (Carlyle, 2013). The controls are meant to bar people from lower classes from penetrating these areas. As a result, the rental rates continue rising over time even making it difficult for those who prefer controlled locations.

Speculation

Land or property is one of the best investments to speculate on considering that it does not depreciate but appreciates with the passage of time. As a result, many developers or speculators invest in land with the aim of selling when the prices are right for them (Wen and Goodman, 2013). This results in unnecessarily high property prices which are a significant determinant in the rental rates because the rates are used in scooping back investments as well as making profits. As Silicon Valley continued to develop, speculators played a role in the rapid increase in land rates which primarily contributed to the high housing costs. The speculators, therefore, create a virtual scarcity with the aim of pushing up prices for personal gain.

Government regulations

Land administration is mainly done by governments which give them the duty of regulating it through the creation of policies. Governments also consider different factors when formulating land policies which are mainly aimed at controlling development. With the regulation, the rates payable for such properties may go up thereby forcing developers to increase their rental rates in a bid to recoup their investments.

While planning for urban developments, it is important to ensure that the development entity’s policies blend with governed policies regarding housing to avoid planning constraints. For example, the utilizes in the development should be well planned to go along with government utility planning which will end up in well-planned developments as well as reduction of costs.

Market lenders

The banking sector as a major contributor to development in lending has a significant role in determining the cost of borrowing which is directly reflected in the cost of land or rental rates. The rationale behind is that when an investor takes up a loan to develop rental units, the interest rates may vary with time and the cost of the loan must be factored in the rental rates to cash in their investments.

The market lenders also have mortgage rules that have affected many housing developers as well as new owners especially with the spilling effects of the recession. With the recession biting hard, mortgage-backed loans were greatly affected while at the same time many potential house owners changed their priorities (Ca.gov 2015). Considering the shift in the priorities, the intended funding is also diversified to other investments.

Land use

It is important to have a pattern to follow in the housing development which stipulates where various developments should be situated. The stipulation is significant in the elimination of potential conflicts that can occur between incompatible land developments. With the well developed infrastructural development in the US, it is possible to have urban centers situated anywhere. However, it is important to understand that urban centers cannot be everywhere man desires. Also, it is important to project on the public health needs, safety as well as the general welfare of the residents.

Goals or Objectives That an Economic Area Should Establish

When developing goals and objectives, it is important to have a vision which will provide an overarching statement which stated the desired results. The vision should also lead to definable goals as well as objectives which as guided by a vision statement. The factors that need to be addressed include:

Desired Achievement: there must be a desired outcome that the economic area institutes in its plan for it to be a plan. The main focus on the development of housing areas should be safety and proper provision of utilities required for human habitation. Gabriel et al. (2015) affirms that the desired result should also include economic factors both current and future to make it feasible.

Timelines: when setting any project, there should well elaborate milestones that illustrate the achievements and the completion points. For example, the economic area can set up a vision 2020 long range housing plan aimed at addressing housing shortages.

Objectives: when setting up the objectives in an economic area, the plan should have specific objectives which it aims to fulfill which in this case is related to housing. The housing should be safe, promote environmental sustainability and economic vitality as well as reduction of congestion among others.

Economic and Political Factors

Any project that involves human is affected by economic and political factors which if ignored would end up jeopardizing the entire project.

Demand and supply

Market growth is determined by the forces of demand and supply, and the housing sector is no different. As indicated, the case in Silicon Valley has primarily been as a result of high demand levels while on the hand housing supply has been in shortage. This is the case in many parts of America where as stated the land cannot be expanded thus causing the deficits. The inadequate supply of housing units has continually increased demand in both business and living housing units. The demand and supply levels in many ways affects other factors such as the need for controlled areas among others. There are other factors such as the increase in life expectancy, changes I building codes and increase in migration rates among others.

Labor market

The American economy has changed from the labor intensive form of market to one that is driven by technology. The foundation of Silicon Valley has always been technology which means that the sector and region have been reliant on skilled labor. However, with the rise of many entities as well as multinationals, the population of skilled labor has also been huge to cope with the skills demand according to Jackson and Kawano (2015). On the other hand, with the rising costs in rental rates and the shift in more ‘accommodating' regions and cities, the labor demand is also shifting to those areas. Housing developers are pushed to invest in housing to satisfy the housing demand.

Utilities and communal facilities

Despite being a well-planned metropolis, the rising population in Silicon Valley had escalated to a point of pressuring the utility system. Though the communal facilities are not mainly affected because many employers have had the capacity to provide the same to their workforce, it is still a factor to consider when setting goals and objectives.

Transport

Housing is not only development of housing or commercial units and getting tenants because there are many other factors such as social costs which include transportation. When thinking of massive developments, infrastructure is a major factor to consider. When thinking of a region that is supposed to serve a technological economy, there will be both importation and export of goods which demand good transportation system. For example, Microsoft or Dell cannot operate their industrial headquarters to a region that does not have a reliable road network and air transport. Therefore, housing development meant for an economic area cannot exist without an adequate transport system.

Natural resources

Protection of natural resources, as well as the availability of the same, is a critical element in considering human habitation. While human existence requires more natural resources, it is important to advocate for sustainable resources such as energy because depletion of such resources can lead to an endangered existence. Therefore, when considering energy sources, it is only necessary that the economic area depends on renewable energy as well as avoids depletion or abuse of what is available. Apart from energy, there should be well-planned waste disposal plans to boost sustainability.

Cycle of Rising Costs

As mentioned, the Silicon Valley took some years to grow to what it is today, but the main driver of such growth is the increase in tech companies establishing their bases there. With the increase in population, Silicon Valley continued to experience exponential growth both demographically and economically. However, it is not possible to grow or increase land which is the reason behind the congestion and extreme competition for housing.

With the companies shifting to other cities or localities, these new areas will also experience the same growth that Silicon Valley experienced over the years. Hoxha and Salaj (2014) emphasize that such a scenario may create a vicious cycle where companies get in; populations grow with the increase in demand for labor, and the competition increases forcing others to move out of those areas.

Conclusion

Rent rates through a secondary determinant in any human occupied development; it can determine the existence of such establishments. There are many factors that any developer should consider with many of them touching on making the development habitable and functional considering the changing global trends in housing and business. Silicon Valley is an example of a metropolis that experienced massive growth due to the rise of technology base business establishments. However, as the demand for labor and more housing units grew, the expansion of the metropolis became endangered by factors such as speculation, pushing land rates extremely high. Consequently, with the costs passed down to the tenant, it has of late become unbearable for businesses due to extremely high rent rates. This development has seen major corporates shift their bases o other regions or cities. On the other hand, it is important that these economic zones carefully plan their development to avoid the same cycle in a few years ahead.