South Bay & Peninsula housing is actually more expensive than SF, though you do get a bit more for your money. Compensation is often marginally higher as well, though most companies with offices in both have them in the same salary band.
For senior engineers, I'd say opportunities weigh more than the difference in salary or even in overall package, unless the package correlates with the opportunities. I may complain about commute, but I'd still be happy to join an exciting startup in the city.
The Santana Row neighborhood ("Winchester Orchards") is pretty comparable, at $910/sf though. I was actually thinking of Mountain View & Sunnyvale, which are considered decent places to live in the South Bay but aren't quite as elite as Palo Alto. They are both about $1.2K/sf:
