Behind Silicon Valley's New Boom

An apartment is listed and within hours the owner is flooded with 60 calls, some offering as much as $500 a month more than the asking price.

A three-bedroom French provincial-style house goes on sale for $1.6 million - when the bidding war is over, the price has escalated to $2.5 million.

These are just a few scenes from the hottest spot in Silicon Valley's overheated economy. Whether it is office space, a place to lay your head, or a software engineer to write code, everything is in short supply in this northern California technopolis. And while Palo Alto's boom is explosive, the rest of this region is following closely behind.

"The valley is just supercooked right now," says Carol Jansen, Palo Alto's development planner.

This concentration of computer and other high-tech industry at the south end of San Francisco Bay has emerged from California's long, deep recession with a bang that has surprised both economists and businessmen. The phenomenal growth of the Internet is driving the rebound, and in the process, is ushering in a profound transformation of the area's economy - one that could foreshadow changes to come in other technology centers across the country.

"Silicon Valley isn't having a nice little blip of a positive period - it's a fundamental shift in industrial base," says Jim Baer, a prominent Palo Alto developer.

The traditional blue-collar work of manufacturing hardware has given way to a newly dominant software sector, followed closely by the creators of Internet and corporate "Intranet" networks. The semiconductor industry here has also gone from making chips to designing them, as well as the machines that make chips.

"We don't assemble computers, PCs, and chips - we design all that stuff," says Doug Henton, president of Collaborative Economics, which prepares an annual economic index of Silicon Valley.

The region's phenomenal growth began around 1992 and has been accelerating in the past two years. The software industry is growing by 21 percent a year currently, for example. The Internet is spawning startups whose initial public offerings (IPOs) on the stock market have turned twentysomething software wizards into overnight multi-millionaires.

One of the most visible signs of this is the job market. After losing about 40,000 jobs between 1989, the start of the recession, and 1992, Silicon Valley has added 100,000 jobs. Official unemployment in Santa Clara county, which covers much of the Silicon Valley region, is now less than 4 percent. That does not reflect huge unfilled demand for highly skilled workers. According to economist Tapan Munroe, some 18,000 technical positions are vacant in the valley.

After vacancy rates of 20 percent, commercial space is now at a premium. In Palo Alto, there is less than 1 percent vacancy. Rents have risen by as much as 20 percent since the beginning of this year, giving this small city of 56,000 residents office rents that trail only Manhattan and Washington as the highest in the country.

The prospects of finding a place to live aren't much better. Thanks largely to the influx of new workers, rental space is almost impossible to find in much of the valley. With an average monthly rent of $1,441 for an apartment, San Jose, the valley's major metropolitan center, is the most expensive metropolitan area in the country.

House sales, after a long decline, are rising all over California but only in Silicon Valley are home values showing a marked increase as well.

In Palo Alto, historically one of the most expensive home markets in a generally overpriced region, house prices are now above the pre-recession peak levels, reports realtor Sarah Elder.

"I have 15 buyers who would buy something tomorrow but there's nothing to sell them," says Ms. Elder. While the initial market surge was propelled by "IPO millionaires," most of the demand comes from middle managers who now feel more confidence in the future. "These were the people who felt most threatened over the last few years," she explains.

NOWHERE is the evidence of good times more visible than in Palo Alto. It began in the late 19th century as a college town, home to Stanford University, whose professors built wood-shingled homes on quiet tree-lined streets that still give the town a unique New England feel. Spurred by World War II, Stanford's powerful engineering department gave birth to an electronics industry, dominated by Hewlett-Packard, founded in a Palo Alto garage. In the '70s, Palo Alto began to emerge as center for the venture capitalists, investors, and lawyers who did the deals.

But until even a decade ago, Palo Alto was a sleepy place. "When I was at Stanford as a student, you didn't even consider going to downtown Palo Alto - you went to San Francisco," says Gary Fazzino, a city councilman and HP executive who grew up here.

Nowadays, Palo Alto boasts the most vibrant downtown in the region. University Avenue, the city's main drag, is lined with fashionable stores, restaurants, and cafes, and filled with people until late at night.

Five years ago the city, despite its affluence, was facing budget deficits and layoffs. Economic planner Jansen was tasked with finding new businesses to come to Palo Alto. Now the city's coffers are full - they ran a $13 million surplus over their $84 million budget last year. And Jansen finds herself fending off inquiries from people thinking about coming here.

"It's the talent base," says economist Henton, "that's why they want to be here. And the quality of life attracts the talent."

But with the boom come new threats to that lifestyle. "Success buys problems," says councilman Fazzino, "parking, traffic, the homeless, the late-night problems of people coming out of bars and nightclubs." And the city is embroiled in battles over plans for new roads, and over how to protect old homes from developers.

Still the transformation of Palo Alto has now become a model being followed in cities and towns across Silicon Valley, where downtowns are being revived and communities are fighting to preserve a sense of community. And as for the boom, there is no end in sight.