technology
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Is SF Finished As the Capital of Tech?
Chief Economist, San Francisco
Susa Ventures
0
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Genesis
Response
Penultimate
Finale
January 14th, 2021
The sudden reversal in San Francisco’s economic fortunes during the pandemic, and the news about high-profile tech relocations out of the Bay Area, are leading people to wonder if San Francisco or Silicon Valley is finished as the capital of tech. Even big tech companies that are planning to stay are talking about reducing time in the office, suggesting that the value of working together in the city is less than it used to be.
Some say the pandemic has been a watershed, while others point to longer-term issues like housing costs, taxes, or transportation. Tech drives the entire regional economy, so it’s an important question, but I think the data suggests that San Francisco will bounce back.
Let’s start with some background. As recently as 2009, only 5% of the city’s private sector jobs were in tech. By 2019, tech accounted for more than 16%.
San Francisco had been, along with Austin, the fastest growing large city in the country throughout the 2010s. This was a major reversal; San Francisco hadn’t sustained a decade of even 1% average annual job growth since the 1980s.
So these facts alone should make people question a story of a “tech exodus” that’s based on San Francisco being too expensive. It had serious transportation congestion, and the highest housing and labor costs of any big city, ten years ago. Are the doomsayers wrong now? Or were all of those companies, workers, and investors wrong ten years ago?
More than any other city, San Francisco’s tech growth has been generated by start-ups, funded by venture capital. While the Bay Area has 12% of the nation’s information technology jobs, it received 44% of U.S. venture capital investment over the past decade. Even during the pandemic, 30% of early stage funding has gone to Bay Area startups, dwarfing the levels of every other metro.
The productivity of the local tech workforce has been the primary reason why such an expensive city can continually defy economic gravity, and grow faster than other places. Generally workers in tech clusters become more productive as the critical mass of talent, know-how, and funding expands, and this is true here too. In 2019, the average San Francisco tech worker generated $21,000 more in value-added than the U.S. average, after accounting for employee compensation. That’s a reason to come to San Francisco, not to leave.
Taxes are another matter. Since 2018, San Francisco has adopted several new taxes on large businesses. For most tech companies, local taxes are smaller than the wage and office premiums they already pay for being here. Some may see a changing political dynamic, and of course there is some magic number above which taxes simply get too high. The critical question is what costs more — putting up with the new dynamic, trying to change it, or walking away? I don’t have the answer to that question, but it’s clear to me that walking away would be very expensive.
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