SPRING 2021 QUARTERLY BLOG
Ready to leave the Bay Area? Faced with soaring real estate and labor costs, a growing number of local tech firms are moving all or part of their companies elsewhere…companies say they are moving to save on rent, find more room to grow and attract employees who will work for less and will not job hop. For their part, the affected employees find that their Silicon Valley salaries will support a more affluent lifestyle outside the Bay Area.
Sound familiar? Those words were written in a September 18, 2000 article on SFGate. A similar story today, just with a different title and new characters – so I’m not concerned the valley won’t rebound and am confident it will continue to be the innovation hub of the world and continue to be the home to the next generation of technology. I am hearing a lot of this conversation through social media, zoom calls or around the socially-distanced gatherings -- last one to leave California should turn out the lights! I plan to highlight what is currently happening in the valley and how this as a natural cycle that has happened before and will happen again.
Tech giants such as Oracle, HPE, Palantir, Tesla and others have moved, or are threatening to move, their headquarters out of California. I literally hear something about the Great Silicon Valley Exodus or questions about if people should pack up and leave at least once every few days. I recognize that things are different this time, specifically with better technology to work remotely, but I am not sold that fundamentals have changed.
The pendulum has clearly swung. Not too long ago it was all about how the valley is expensive, but we stay for the talent, weather, and culture. There was heavy rationalization to the valley benefits, but I’m not hearing that today. Now the conversation goes something like this: the valley is too expensive, the traffic is terrible, I’m tired of the homelessness, politics and taxes, and I can get a better quality of life elsewhere while still maintaining my job status because companies will be embracing work-from-home in perpetuity. That is a mouth full, but I frequently hear something of the sort. Let’s break it down:
Top Reasons to Leave Silicon Valley: Today
High State Income Taxes – California taxes are insanely high, I rarely find anyone who disagrees, but I also think we are at a saturation point; legislators see the wealth exodus due to high state taxes and I think they will have to respond
Politics & Regulations – rent control, wealth tax proposal, etc – politicians have been given carte blanche, but I think that time has ended. There is a reckoning upon us, and I think politicians will have to listen. I’m expecting pull back from the evil corporation rhetoric, though I think it is possible we see more tech regulation over the next few years
Expensive Real Estate –buy a mansion in many parts of the country for the price of a valley condo (but how do prices in the valley compare to other top global metro areas?)
Better Quality of Life – work from home benefits and lifestyle opportunities
It’s Crowded – tired of traffic and crowded restaurants (pre-pandemic)
Economic Inequality – growing disparity between rich and poor
In addition to the population migration, companies are also looking for greener pastures. I think there are a few key reasons driving the corporate strategy shift out of California: cost savings, job retention, and employee quality of life. Many of the companies making the move are mature businesses that are arguably past their initial high growth stage. These companies are showing profit in part through cost savings and cost cutting, outsourcing labor or by acquiring other companies rather than innovating in-house.
Ironically, the arguments for fleeing California at the tail-end of the dot.com era had many similarities:
Top Reasons to Leave Silicon Valley: during the dot.com crash
More Bang for the Buck – instead of living in a tiny home in the valley, the opportunity to live in a sprawling home in another part of the country. Many people fled for places like Sacramento and other up and coming areas in Washington, Colorado, Texas, Tennessee, etc.
Quality of Life – too much congestion both traffic and people. Instead, have more flexibility in personal time and not be married to the commute
Technology Mobility – can work from anywhere! Hmm. I love the similarity with this one today. The tech leaders in dot.com era had a similar argument – why stay here when technology is mobile and employees can work remotely? I concede technology mobility is hugely different today and much easier to accomplish, but I do not think remote work replaces in-person collaboration
High Taxes – tired of the high state taxes, move to low or zero state income tax locations
I think it is clear we are in a transition. Many people have moved away, whether temporarily during the pandemic or long term, it is too early to tell. It is clearly visible in the rental market vacancy rate and that trend does not seem to be changing yet. We will have a much clearer picture later in the year once we return to some form of normalcy. Until then, I think we will see more of the same that we saw during the dot.com crash. Enjoy the light commute traffic!
Surprisingly, while the rental market has been soft, the sales market for primary homes has been strong. The infusion of COVID-19 stimulus money from the government has swelled the values of the equities market and has trickled into the real estate market. Interest rates have followed suit and continue to be at record lows, so people (and companies) are taking on larger debts at low rates. In hindsight, we will have a better picture of the direct impact on stimulus money infusion into the economy, but for now it is speculation, though it is clear the stimulus and strong tech sector are driving the sales market.
Collaboration over Zoom calls will never be the same as rubbing shoulders with other entrepreneurs and passionate individuals that want to change the world. What I love about the valley is our culture – to me, it is the culture of passion. What I love are those that make the conscience decision to be in the valley usually do it because they have the desire to make the world better, in whatever way possible. The passion people have is infectious, and that is what I love!
I have experienced the valley changing over the past several decades and I can tell you there are some noticeably clear cyclical trends.
Early Stage – This is the most passionate stage when entrepreneurs come to the valley, bright eyed and bushy tailed with big dreams and a vision. It’s not about making it big, but rather being impactful and making a difference. The two most recent examples were mid 1990’s and after the financial crash around 2008.
Euphoric – the realization that you can do what you love and make money doing it
Transition – when changing the world becomes secondary to stock prices values
Crowds – traffic becomes horrible, again. People get exhausted by the crowds, everything is expensive and you start looking for alternative growth locations
The valley has been a hub on innovation for decades. The culture and spirit of innovation doesn’t just happen organically, it’s a result of proximity, for instance. Just going for coffee in the morning you can stumble and have conversations with several other entrepreneurs and easily find avenues to pitch your start-up ideas. If you get bored with your job, no worries, there are tons of other companies within a small radius to consider. I think it’s the big companies that don’t like this – if they can get their employees out of such a hot area, they are less likely to job hop and I’m willing to bet that job retention outside the valley is much higher.
By no means do I have a crystal ball as to what Silicon Valley will look like in the coming years and if this migration out of the area will be game-changing, or just part of the ebbs and flows we see with each cycle. I know I have heard this story before, so I am not particularly concerned with the valley not rebounding, but I appreciate that technology is much different today and through this pandemic people have learned to be more comfortable with remote work and living. I think other areas, such as Austin Texas, Nashville Tennessee and other regions will see a boost from this migration, but how well they will fare against the valley ten years from now is yet to be seen. Anyone who claims they know for sure is just guessing, though my bet will be on Silicon Valley. I think we will continue to be a destination for talent and a leader of innovation. We are fortunate to have such an amazing place to call home and I hope we can really enjoy it this summer!