What’s striking about Seattle’s tech scene is that it looks a lot like San Francisco’s did nearly a decade ago. Even with remote work on the rise, the number of tech jobs in Seattle is growing and tech companies—including some (formerly) headquartered in the Bay Area—are expanding their footprint in the Pacific Northwest. What’s also striking is that Seattle is following a similar tech policy trajectory to that of San Francisco. Rather than watching and learning from the San Francisco tech exodus, Seattle could be setting itself up for a tech bust. And it may be closer than we think.
Learn more about the tech policy landscapes of San Francisco and Seattle by watching sf.citi’s Mapping the Tech Exodus conversation with Nicholas Merriam, CEO of sea.citi.
HOW TECH WAS LEVERAGED TO REVITALIZE SAN FRANCISCO AND SEATTLE DOWNTOWNS
Seattle’s tech scene is largely concentrated in South Lake Union—a neighborhood historically known for manufacturing, explained Nicholas Merriam, CEO of Seattle tech nonprofit sea.citi. The area saw a transformation in the 1990s when Microsoft Co-Founder Paul Allen bought a significant amount of land in South Lake Union. His vision was to build an enormous park, known as the Seattle Commons, that would rival Central Park in New York City. After his proposal was rejected twice by Seattle voters, however, Allen changed course. He used the land he purchased to develop an epicenter for tech and life sciences. Today, South Lake Union is home to Amazon headquarters, as well as outposts of Bay Area tech companies like Facebook and Google.
San Francisco’s Mid-Market neighborhood underwent a similar transformation. In 2011, San Francisco was feeling the brunt of the Great Recession with an unemployment rate of 9 percent. From 2009 to 2011, the City eliminated more than 1,600 government jobs and trimmed services to close two consecutive budget deficits of over $400 million. To help address some of San Francisco’s financial woes, the San Francisco Board of Supervisors adopted the Mid-Market Tax Break, which incentivized businesses to plant their offices along a several block stretch of San Francisco’s Market Street corridor by offering them a six-year reprieve from San Francisco’s 1.5 percent payroll tax on new hires. The neighborhood covered by the tax break had struggled with crime, drugs, and vacant storefronts for many years.
California State Senator Scott Wiener was District 8 Supervisor at the time. In a recent Clubhouse conversation with sf.citi, he explained, “At that point, we were in a recession. Jobs and economic development and bringing in companies were what people wanted. The purpose of that tax zone was to try to bring some change to the Mid-Market area, which had been a real challenge in San Francisco for fifty or sixty years.”
Depending on who you ask, the Mid-Market Tax Break achieved its intended goals, albeit imperfectly. 59 companies moved into or were created in the area, including tech companies like Twitter and Zendesk. By the time the tax incentive expired in May 2019, unemployment in San Francisco hovered around 2.6 percent and the City’s budget had nearly doubled. Between 2010 and 2017, Mid-Market produced an additional $6 million in payroll and gross receipts taxes and added $750,000 in sales taxes to San Francisco’s general fund. Citywide, San Francisco saw its business tax and sales tax revenue balloon by over 90 percent. The number of retailers in the Mid-Market area grew by 3 percent even as retail declined by 1 percent in San Francisco as a whole.
A few blocks from its headquarters, meanwhile, Twitter launched the NeighborNest, a community center focused on digital skills training for the local community, while Zendesk donated millions to San Francisco nonprofits. Despite this, San Francisco now has double the number of residents experiencing homelessness than it did ten years ago. Open-air drug use and crime persist in both the Mid-Market and adjacent Tenderloin neighborhoods.
More than anything, tech’s origin stories in San Francisco and Seattle remind us of what the tech industry can and can’t do for cities. Tech can be a powerful lever of economic recovery and revitalization for struggling downtowns. What tech can’t be is a catch-all solution for deep, underlying issues that have plagued cities for decades.
TENSIONS BETWEEN TECH AND LOCAL GOVERNMENT IN SAN FRANCISCO AND SEATTLE
It’s no secret that the tech industry and San Francisco City Hall have had a complicated relationship. One obvious source of tension is the fact that innovation often outpaces regulation, as showcased in the 2018 standoff between San Francisco’s Municipal Transportation Agency (SFMTA) and electric scooter companies. More than that, though, local policymakers have not made it clear that they value what tech has to offer.
One takeaway from the aforementioned Clubhouse conversation between sf.citi, Senator Scott Wiener, former Mayor of Stockton Michael Tubbs, Partner at Initialized Capital Kim-Mai Cutler, and other industry leaders, was that tone matters when it comes to attracting and retaining business. Between proposed cafeteria bans, private shuttle protests, and new business taxes every election cycle, San Francisco’s political tone has not always come off as the most welcoming toward local tech companies.
Merriam explained that a similar dynamic exists between the tech industry and Seattle’s City Council. “Tech represents outsiders . . . There’s this palpable tension between what’s perceived as old Seattle versus new Seattle,” he said. Merriam noted that this negative perception of tech results in policies and taxes that directly target the industry. Ironically, a sea.citi survey of over 1,600 Seattle tech workers found an overwhelming overlap between the attitudes of the local tech community and longtime Seattle residents on major issues such as climate change and homelessness. Nevertheless, Seattle City Council recently imposed a surcharge on rides taken via Uber and Lyft. And in June 2020, the city passed the Jumpstart Seattle Tax, which taxes annual salaries greater than $150,000 for companies with gross revenues of $7 million or more.
Tech represents outsiders . . . There’s this palpable tension between what’s perceived as old Seattle versus new Seattle.
—Nicholas Merriam, CEO, sea.citi
Neighboring cities and counties embrace tech with open arms. In both San Francisco and Seattle, tech companies are increasingly moving their business just outside the city proper. In 2019, Stripe announced it would relocate its headquarters to South San Francisco. And in 2020, Credit Karma opted to move all of its employees from San Francisco to Oakland.
In the Seattle area, meanwhile, the City of Bellevue has become a tech hub in and of itself. Unlike Seattle, Bellevue’s political leadership appears glad to house the offices of Microsoft, T-Mobile, Concur, and Facebook. Bellevue Mayor Lynne Robinson cheered Amazon’s recent announcement to move its entire operations division to Bellevue and add 10,000 more jobs in the city by 2025. “I think any commitment of that many jobs is a real positive for our region, and Amazon is showing itself to be a really good community partner,” she said in 425 Business.
WHY SEATTLE MAY HAVE AN EDGE OVER SAN FRANCISCO ON THE FUTURE OF TECH
As similar as San Francisco and Seattle are in terms of geography, policy landscape, and tech ecosystems, the fact remains that San Francisco’s tech scene is shrinking while Seattle’s tech scene is growing. In some cases, tech companies are leaving the Bay Area for Seattle and its surrounding counties. The Seattle area is now home to 10 unicorns, including cybersecurity company and Bay Area transplant Tanium, which announced it was moving its headquarters from Emeryville, California to Kirkland, Washington in December 2020. Perhaps the ultimate appeal of Seattle is that it offers much of what San Francisco does—temperate weather, access to the outdoors, a bustling metropolis—at half the cost. For now, Seattle boasts a few competitive advantages over San Francisco that could help attract an increasingly transient tech workforce.
Fewer Office Vacancies
San Francisco has an office vacancy rate of 17.8 percent and over 15 million square feet of available office space, surpassing levels seen after both the dot-com bust and the Great Recession. In our tech exodus dashboard, sf.citi has been tracking the near-weekly announcements of tech companies listing office space for lease or giving up their San Francisco offices altogether. And in a recent sf.citi survey conducted among 83 tech CEOs and founders, 63 percent reported that they have already downsized or plan to downsize their office space in the San Francisco Bay Area.
According to Nicholas Merriam of sea.citi, tech companies are not shedding their Seattle offices to the same extent that they are in San Francisco. Even though some major Seattle-based companies like Zillow have adopted remote-first work policies, Merriam noted, “We aren’t seeing companies actually give up their leases yet.”
Many of the tax benefits of doing business in Seattle begin at the state level. Unlike California, Washington does not collect a personal or corporate income tax, nor does it collect a capital gains tax—for now. Governor Jay Inslee has proposed a capital gains tax to help fund COVID-19 relief. In recent months, the State of Washington has also been weighing a selective wealth tax on its resident billionaires.
The tax regime at the municipal level is similar to San Francisco. Like San Francisco, Seattle charges a gross receipts tax on local businesses. Staying in line with many of the points made throughout this piece, however, the rate imposed on tech companies in Seattle is about half that of San Francisco.
More Affordable Cost of Living
Even as San Francisco rent prices have fallen by 27 percent, the median price of a one-bedroom apartment—just under $2,000/month—towers above other cities, including Seattle. The median price of a one-bedroom apartment in Seattle now stands at just over $1,300/month, which represents a 20 percent drop from pre-pandemic levels. To give you some perspective, San Francisco reigns supreme as the most expensive rental market in the country whereas Seattle doesn’t even make it on the list of the top ten most expensive cities to rent an apartment.
We have a lot of the amenities that San Francisco does and your dollars go much further here.
—Nicholas Merriam, CEO, sea.citi
Home prices are another story. Seattle, like San Francisco, is a notoriously expensive place to buy a home. Of course, all things are relative, Seattle’s median home value of $813,000 pales in comparison to the $1.4 million median home value in San Francisco.
WILL SEATTLE GO THE WAY OF SAN FRANCISCO?
What’s important for both San Francisco and Seattle to realize is that remote work has broadened the competition for tech and business well beyond the West Coast. You no longer need to be based in San Francisco or Seattle to attract top tech talent or capital. Meanwhile, new tech hubs are rising in places like Miami and Atlanta, where you can, in fact, buy a home for less than $800,000 and elected officials are eager to see tech thrive.
Up until now, it’s really been a battle over talent. Now talent is increasingly looking to other forms of quality of life rather than being on the coast.
—Jennifer Stojkovic, Executive Director, sf.citi
While similarities between San Francisco and Seattle have given rise to powerful tech ecosystems along the West Coast, those same similarities could accelerate tech’s decline in both cities. Some could argue that San Francisco has taken the tech industry over the last decade and is now getting a taste for the consequences of tech’s departure. Business tax revenues in 2020 were lower than anticipated, and San Francisco will have to close hundreds of millions of dollars in budget deficits over the next five years—all while tech companies rapidly embrace remote work and downsize their San Francisco offices.
The question for Seattle is will it go the way of San Francisco? Is Seattle due for a tech exodus in the coming years? And given the rise of remote work, is Seattle’s tech bust closer than we think?