There’s no denying that COVID-19 gave a boost to Austin’s already fast-growing tech ecosystem. In fact, tech-forward cities San Francisco and Austin had nearly opposite experiences when it came to their population and office space market during the pandemic—both of which were influenced by new trends within the tech industry. When you look a bit closer, however, San Francisco’s tech growth shows few signs of slowing. And while Austin has reaped the benefits of tech’s expanding presence, it may be catching up to San Francisco on challenges related to housing and transportation.
Learn more about the tech policy landscapes of San Francisco and Austin by watching sf.citi’s Mapping the Tech Exodus conversation with Austin Tech Alliance Executive Director, Sarah Ortiz Shields, below.
A TALE OF TWO TECH CITIES DURING THE PANDEMIC: SAN FRANCISCO VS. AUSTIN
The experience of San Francisco and Austin during the COVID-19 pandemic could not be more different. In 2020, San Francisco saw its population drop for the first time in years, while the number of Austin transplants kept on increasing. Both cities saw their office vacancies jump during the pandemic, though San Francisco faces a much steeper recovery.
Population Losses…and Gains
After more than a year into the pandemic, it’s clear that people did not leave California en masse. They did, however, leave San Francisco. As recorded on our tech exodus dashboard, there were over 80,000 USPS address changes out of San Francisco between March and November 2020—a 77 percent increase from the same time period in 2019. A report by the California Policy Lab tracking Californians’ credit history also found a significant spike in net exits from San Francisco during the last nine months of 2020. As LinkedIn Principal Economist Guy Burger pointed out, it’s not just that more people left the City; far fewer people moved into San Francisco in 2020. In fact, the Los Angeles Times reported that “San Francisco saw the largest percentage increase in residential exits of any county in [California].”
The widespread embrace of remote work during the pandemic—especially among the tech industry—offers some explanation for San Francisco’s unique and exacerbated outmigration. According to a study by Apartment List, the San Francisco Bay Area is home to the largest percentage of “untethered” workers, or those who are able to work remotely and have no children or a spouse working an in-person job. Furthermore, many major tech companies, including Coinbase, Twitter, and Salesforce, announced permanent hybrid or remote work policies several months into the pandemic. Some San Francisco tech employees seized the opportunity to move away from San Francisco to more affordable Bay Area counties, while others quit California altogether.
The pandemic dislodged people from places they felt stuck in.
—Sarah Ortiz Shields, Executive Director, Austin Tech Alliance
Austin took the crown as the top out-of-state destination for people leaving the San Francisco Bay Area during the pandemic. Unlike San Francisco, Austin’s population increased by over 3 percent in 2020, adding 47,000 new residents and more or less keeping pace with its population growth of previous years. Along with the rise of remote work, many attribute Austin’s expanding population with its fast-growing tech scene—and jobs. During the pandemic, said Mayor Steve Adler, the number of high-tech employers in Austin grew by 6.8 percent from 2019. Overall, Austin added 22,114 new jobs in 2020.
According to Sarah Ortiz Shields, Executive Director of Austin Tech Alliance, one reason for Austin’s rapid tech growth, is the city’s network of universities feeding its tech talent pool. As we’ve written before, an established talent pipeline is one of the most important ingredients for building a thriving tech city. Just as the San Francisco Bay Area boasts two of the best engineering schools in the country—Stanford University and the University of California, Berkeley—Austin has given rise to three universities with strong engineering programs. One of these is the University of Texas, which is home to the Austin Technology Incubator, or the oldest incubator in the country.
Divergent Office Space Trends
The demographic changes in San Francisco and Austin highlight another point of contrast between the two tech-focused cities during the pandemic: their office space markets.
Soon after COVID-19 was declared a pandemic in March 2020 and entire workforces shifted online, San Francisco businesses began to flood the office market with sublease inventory. As of this writing, San Francisco’s office vacancy rate sits at 19.7 percent, nearing the record 2002 office vacancy high of 21 percent that followed the dot-com bust. With 16.3 million square feet of vacant office space on the market, commercial rent prices have dropped by almost 15 percent. And for the first time in years, Manhattan surpassed San Francisco as the most expensive office rental market in the United States. The impact of San Francisco’s empty offices has been particularly hard on downtown small businesses, many of whom saw their sales drop by more than 70 percent in 2020.
There are glimmers of hope as vaccinations rise—well over half of adults in San Francisco have received at least one dose of the vaccine—and San Francisco tech employers like Salesforce and Uber welcome workers back to the office. Colin Yasukochi, executive director of the Tech Insights Center at CBRE, told the San Francisco Business Times that tenants are beginning to re-engage with the market. Public Comment, meanwhile, reported that San Francisco office tours returned to 95 percent of their pre-COVID activity by March 2021. Even more optimistic is Justin Bedecarre, CEO of commercial real estate startup Raise, who predicts that San Francisco’s office market will be at 80 to 90 percent of pre-pandemic capacity within two years.
This next decade is going to be a renaissance in San Francisco.
—Justin Bedecarre, CEO, Raise
Austin has also felt the impact of COVID-19 on its office market with an office vacancy rate of 15 percent. At the same time, Austin was ranked the number 1 metro area in the United States for 2021 investment prospects in a CBRE survey of commercial real estate investors. The city currently has 8 million square feet of office space under construction, and a CBRE study of the top 100 tech leases in 2020 found that Austin was one of several cities to score more tech leases than the Bay Area over the last year. Indeed, Apple, Oracle, and Tesla all made headlines for their commitments to lay down roots in the Austin metro area. According to the Austin Chamber of Commerce, 154 companies announced plans to either relocate to or expand in Austin in 2020.
AUSTIN’S CHALLENGES ARE NOT FAR BEHIND THOSE OF SAN FRANCISCO
Jim Breyer, CEO of venture capital and private equity firm Breyer Capital, is one of several people who views Austin’s burgeoning tech scene as an opportunity to improve upon what Silicon Valley “got wrong.” Actually achieving that, however, may prove easier said than done.
Lag in Housing Production
Austin is already bumping up against challenges that sound eerily familiar to anyone who has lived or worked in San Francisco. First and foremost among them is housing production and affordability.
Although Austin’s median home value of approximately $480,000 pales in comparison to San Francisco’s $1.4 million median home value, Austin and San Francisco both struggle to produce enough homes to keep up with their demand. Shields described Austin as the “market of well-qualified buyers who can’t buy a house.” She explained that construction being built right now is already sold through 2021. New subdivisions, meanwhile, have 300-person waitlists. Austin’s fierce competition for housing means that buyers must be prepared to shell over 20 to 30 percent of the home value in their downpayment. The discrepancy between housing production and demand has also eliminated whole categories of homebuyers in both Austin and San Francisco.
TWe have rising costs. We have displacement, gentrification, persons experiencing homelessness—all of the things San Francisco has gone through and is still going through. That’s something we’re going to work on tackling.
—Sarah Ortiz Shields, Executive Director, Austin Tech Alliance
Interestingly, Austin has seen rental prices dip during the pandemic despite its population growth. According to Apartment List, Austin rents have dropped 2.4 percent since the start of 2020. San Francisco has also seen rents fall but to a much larger degree. The median rent of a one-bedroom apartment in San Francisco plummeted to just over $2,000 in March 2021, marking a 23 percent drop from this time last year. Even so, San Francisco continues to top the list of most expensive metro areas, while Austin ranks somewhere in the middle.
Transit Infrastructure Outpaced by Growth
Another issue Shields highlighted was traffic. At over 1,000 square miles, Travis County (which includes Austin) far outpaces San Francisco County’s 49 square miles in size. And while this means people have a lot more room to live and build housing, it also contributes to sprawl. Shields explained that it can take people an hour to travel ten miles from the suburbs into Austin’s downtown. She did note that Austin recently passed Project Connect, a massive transportation bond that will expand Austin’s transit infrastructure, including a new rail system, a downtown transit tunnel, and more. Unfortunately, it won’t be completed until 2040, at the earliest.
The San Francisco Bay Area has also struggled to expand its transit infrastructure. The region is home to a growing number of super-commuters traveling more than 90 minutes to and from work. Between 2009 and 2017, in fact, the number of super-commuters in San Francisco County increased by 110 percent with many of the surrounding counties seeing even greater increases. Long commutes and traffic are one thing many Bay Area residents don’t miss. In a recent poll conducted by the Bay Area Council, 34 percent of respondents said they plan to commute to the office less after the COVID-19 pandemic.
SAN FRANCISCO MAINTAINS A TECH EDGE OVER AUSTIN AND OTHER U.S. CITIES
The fact that the pandemic catapulted Austin’s tech reputation beyond the borders of Texas more or less confirms the trend we at sf.citi have observed throughout the past year. As an industry, tech recognizes the need to have offices in more cities across the country (and the world). Armed with the technology to do so, the industry is readying itself to accommodate an increasingly decentralized, diverse workforce.
Even with new hubs of innovation emerging in places like Austin, Miami, and Nashville, the San Francisco Bay Area’s tech prowess is far from crumbling. On capital alone, the Bay Area is stronger than ever. More than 8,000 rounds of capital were deployed to tech companies in the United States in 2020. Of those, approximately 2,500 rounds of capital went to companies in the Bay Area, which equals ten times the number of rounds of capital deployed in Austin.
The San Francisco Bay Area also continues to churn out widely successful tech companies. In the first three months of 2021, the region gained 25 new unicorns, or companies valued at $1 billion or more. As reported by the San Francisco Business Times, nearly half of all 2021 unicorns in the United States are from the Bay Area. Even more impressive, the region accounts for 29 percent of all of the new unicorns created worldwide.
TECH, SAN FRANCISCO, AND AUSTIN CAN ALL THRIVE—AS LONG AS THEY ADAPT
All of this suggests that tech’s future is bright—regardless of the region. The implications of post-pandemic remote and flexible work within the tech industry nonetheless carry very real implications for both San Francisco and Austin On the one hand, hybrid work models requiring employees to come into the office just two to three days a week could alleviate congestion. On the other hand, a 40 to 60 percent drop in traffic will challenge the durability of our downtown small businesses, many of which have already been among those hardest hit by the pandemic. Furthermore, tech offices in San Francisco and Austin are likely to look very different than they did before the pandemic. As we look toward recovery, the real challenge for local leaders is to take a page out of tech’s book and nimbly adapt our tech-forward cities to thrive in our new reality.