On Thursday, Tesla CEO Elon Musk said arguably the most dreaded words in the automaker’s home state of California: “I’m excited to announce that we are moving our headquarters to Austin, Texas.”
While the dread is real, as communities and companies grapple with the Bay Area’s out-of-control housing costs and red tape, the reality for the economies of Palo Alto, where Tesla has been headquartered since 2009, and Fremont, where the company keeps a vast automotive plant, is likely to be limited.
“We’re taking it as far as possible, but there’s a limit to how big you can scale in the Bay Area,” Musk said during Tesla’s annual shareholder meeting on Thursday. “Just to be clear, though, we will be continuing to expand our activities in California. This is not a matter of leaving California.”
In fact, Tesla has been quietly expanding its presence in Silicon Valley since the third quarter of last year, signing at least 503,500 square feet in new commercial leases during that time. It also broke ground on a new “Megafactory” in the city of Lathrop — located about 52 miles east of Fremont — last month that it will reportedly use to make Megapacks, an energy-storage product it sells to utilities.
Still, Tesla’s announcement during its meeting Thursday makes it the latest large employer to shift its base from the Bay Area to Texas over the last couple of years and is a harbinger of what could happen if fundamental issues aren’t addressed — housing, transportation, red tape. While Musk had expressed frustration with Alameda County, which includes Fremont, and California, in general, in the lead-up to Thursday’s meeting, he cited the high costs of housing and long commute times in the Bay Area as reasons for his company’s relocation, two issues that continue to cap the region’s growth potential.
“Mr. Musk’s announcement highlights yet again the urgency for California to address our housing affordability crisis and the many other challenges that make it so difficult for companies to grow here,” Jim Wunderman, CEO of the Bay Area Council policy group, told CBS News.
Musk is right about housing costs, according to data collected by real estate brokerage Redfin and past reporting by Palo Alto Online. In 2010, a year after Tesla said it would move its headquarters to Palo Alto from San Carlos, the median home price for all sold homes in Palo Alto was $1.25 million. In 2019, the median price was $2.94 million, which translates to an average compound annual growth rate of more than 10%, according to a January 2020 Palo Alto Online report.
Palo Alto’s housing market has gotten even hotter during the Covid-19 pandemic. The median price for single-family homes sold during the first half of this year rose to a record-high of $3.53 million, a 16-percent increase from the first half of 2020. By comparison, the median sale price for a single-family home in Austin was $638,000 in June, according to Redfin data.
A recent joint study by the University of Texas at Austin and Stanford University comparing the economic policies of California and Texas showed that Texas has higher property taxes and lower income taxes while California has much higher income taxes. The bottom line: people come to Texas because it’s inexpensive relative to the rest of the country, according to Axios’ summary of the study.
The lower cost of living in Texas relative to the Bay Area is even more attractive now considering the Covid-19-induced remote work shift across almost every industry. Oracle Corp., for example, said it was implementing a more flexible “employee work location policy” when it confirmed its headquarters move from Redwood City to Austin in December. Both moves “best position Oracle for growth and provide our personnel with more flexibility about where and how they work,” a spokesperson told CNBC at the time.
Hewlett Packard Enterprise (HPE), which also announced its headquarters relocation to Texas in December, cited its business needs, opportunities to cut costs and employee preferences on the future of work as factors in its decision. The company is shifting its base from a campus in San Jose in Silicon Valley to an under-construction, two-building complex in the Houston area.
Neither Oracle, HPE, or any of the other large employers that have moved their headquarters from the Bay Area to Texas in recent years have said how many workers have made the move. Yet the impact on the Bay Area’s commercial real estate market has been relatively minimal.
Charles Schwab, for example, which said it was moving its base to Texas from San Francisco in 2019, recently renewed a 43,000-square-foot lease in downtown San Francisco and still has about five years left on the lease of its now-former headquarters at 211 Main St. Oracle, meanwhile, sold a trophy office building in downtown San Jose after announcing its move and is marketing some of its Bay Area property portfolio for sale, but it still owns large campuses in Santa Clara and Redwood City.
Tesla, which did not respond to an email seeking comment, has not publicly disclosed what it plans to do with its existing headquarters, a 350,000-square-foot office complex at 3500 Deer Creek Road in Palo Alto. The space can hold up to 650 people, Tesla said in 2009. The Registry reported Friday that the company has agreed to sublease 325,000 square feet of office space from Hewlett Packard in a building that’s about two miles north of the Deer Creek Road complex. It’s not clear if all that space will serve as Tesla’s primary offices in Palo Alto once it finishes shifting its headquarters to Texas.
Since the start of the third quarter of 2020, the company has also signed leases for 103,500 square feet in Santa Clara and about 75,000 square feet in San Jose. The pair of deals give Tesla satellite office and warehouse space in the southern half of Silicon Valley.