Pandemic threatens dominance of ‘superstar’ tech cities, creating uncertain future for innovation hubs

Downtown Seattle and Mount Rainier as viewed from the top observation deck of the Space Needle on Tuesday. (GeekWire Photo / Kurt Schlosser)

The seemingly unstoppable trend of tech companies and talent concentrating in a few cities hit a brick wall in March. As the first-known U.S. cases of the coronavirus emerged in Seattle and the San Francisco Bay Area, tech companies pioneered a nationwide shift to remote work.

Six months into the pandemic, some of those companies will never go back to the office in full force.

Meanwhile, the cities where tech has driven population spikes and surging home prices are confronting sudden budget shortfalls and scrambling to adjust. Seattle and San Francisco — home to the largest and most valuable tech companies in the country — are considering new business and wealth taxes to make up for the lost revenue.

City officials are charging the tech industry with funding recovery efforts, while business advocates sound familiar alarm bells about jobs leaving town.

It’s an old story with a new twist: a global experiment in the benefits and shortfalls of remote work. Could the pandemic really lead to a decentralization of tech opportunity from just a few cities? If so, what does it mean for the future of the tech industry in America? City officials and urban experts are watching the trend closely, but they’re divided over the implications.

Death and taxes

In addition to infecting nearly 4 million people and killing at least 145,000 people in the US alone, the coronavirus has blown a major hole in the budgets of cities across the country. In Seattle, the shortfall is estimated to be around $400 million this year. San Francisco is scrambling to plug a $1.7 billion budget deficit over the next two years.

Both cities are considering taxes that target big business and wealthy executives to fill their gaps.

The Seattle City Council passed legislation earlier this month that taxes the top salaries at the highest paying companies in the city to fund coronavirus relief programs right away and affordable housing down the line.

Amazon has been a recurring focus of Seattle’s tax debate. (GeekWire Photo / Monica Nickelsburg)

In San Francisco, voters will be asked to decide on a number of new taxes this November that affect the tech industry, including a CEO tax on executives earning at least 100 times the median income of their average worker. Another proposal would tax stock-based compensation. Changes to the city’s payroll and gross receipts taxes are also under consideration.

The business communities in both tech hubs warn the taxes will push out jobs and hurt companies already struggling to weather the economic storm brought on by the pandemic.

Seattle Metro Chamber of Commerce vice president Mark McIntyre said the payroll tax will “stunt economic recovery, push high-paying jobs out of the city, further toxify the relationship between city government” in a statement.

Leila Kirske, CFO of the medical tech company 98point6 warned that “so many of the jobs lost will not come back.”

“Taxing those that remain will not make this community healthy again,” she said in a statement accompanying McIntyre’s, part of a round-up circulated by Seattle’s “No Tax on Jobs” campaign.

Jennifer Stojkovic, executive director of the tech advocacy group sf.citi, was more blunt in her prediction.

Sf.citi executive director Jennifer Stojkovic. (Sf.citi Photo)

“Tech’s going to leave,” she said in an interview with GeekWire. “There’s no way around it. We’re in this unprecedented time where companies are having huge downturns, and they are being hit with new taxes, and they don’t know if they are going to be able to afford this tax burden. In addition to the downturn that they are facing, and these layoffs, and thousands of jobs that have been lost, they have all their employees who have been working remotely since March, and they’re doing it.”

Though the pandemic adds a level of uncertainty that feels unprecedented, this isn’t the first time the business community has threatened lost jobs amid a tax battle — and the research paints a more complicated picture than the rhetoric

Tech follows talent

Tech industry concentration in just a few cities ultimately comes down to talent. The U.S. has a shortage of engineers, data analysts, and other knowledge workers needed to power the technology industry. Those workers tend to gravitate toward places like Seattle or San Francisco, West Coast cities with plenty of amenities and like-minded people. Companies tend to cluster around those talent bases and value the knowledge exchange that occurs when workers bounce between startups and large tech firms.

The pandemic does not appear to be significantly changing that underlying trend — at least not yet.

Zillow compared web traffic to for-sale listings in urban, suburban, and rural areas in April 2019 and April 2020 and saw no significant change.

“The data do not provide any early evidence for an overall shift in search behavior away from urban cores,” Zillow said in its report.

Of course, that was early on in the pandemic, before some companies announced long-term plans to keep workers remote.

A survey by Blind of 4,400 Bay Area tech workers found about two-thirds would consider moving if they had the option to work remotely, Business Insider reports. But only 18% said they would consider moving out of California.

Some experts predict a slight deconcentration of tech within the municipal boundaries of cities like San Francisco and Seattle but don’t expect those jobs to travel far from the tech hubs where they were formed.  Companies might shift to towns surrounding those metros, like Bellevue, Wash., where they can still tap the talent pool that gravitates to premier cities. In San Francisco’s case, Stojkovic expects some tech companies and workers to move to the Seattle area, which offers many similar amenities but a relatively lower cost of living.

Richard Florida speaking at the 2018 Cascadia Innovation Cooridor Conference in Vancouver, B.C. (Cascadia Innovation Corridor Photo / Matt Borck)

Richard Florida, a distinguished urbanist and professor at the University of Toronto, said he does not expect U.S. tech hubs to decentralize in any significant way.

“San Francisco and Seattle will be just fine,” he said. “I do not see a massive relocation of large corporations or startups anywhere outside of the handful of superstar metros that have dominated this for the better part of two decades. I think that remote work is a different story. I think more workers in the tech community and elsewhere will work remotely, not all, but I think more will. My bigger point is, if San Francisco, New York, and Seattle went away you might as well just write off America’s high tech innovation capacity.”

Working from home: The ‘X-factor’

The pandemic is the latest in a long list of catastrophes that have supposedly foretold the death of cities. For centuries, crises have led to grim forecasts about the end of cities and so far, no calamity has been more powerful than the trend of urbanization. Cities have weathered pandemics, hurricanes, bombings, recessions, and depressions before and rebounded each time.

But there is one factor that makes our current moment different: remote work. Tech leaders are realizing that many jobs can be done just as efficiently from home, which could allow them to pay lower salaries in less expensive cities. A University of Chicago report published in June estimates 37% of U.S. jobs can be done entirely remotely.

Microsoft and Amazon were among the first to shift their tech workers remote when coronavirus cases began emerging in the Seattle area. Other tech companies up and down the West Coast quickly followed suit. In the months that followed, several announced new, permanent work from home policies.

Twitter and Square will allow employees to work from home indefinitely, even after the pandemic subsides. Facebook expects about 50% of its workforce to be remote in the next 5-10 years. Other companies are giving up their physical offices altogether.

“We’re not in a boom or bust binary anymore,” said Stojkovic of Silicon Valley’s tendency to pendulum swing. “There’s a third option and that’s pivoting to remote work. That’s the X-factor that we have at play and it will change everything. It will change what the path to recovery looks like because some companies will never go back.”

Stojkovic mentioned rumors that Uber, a member company of sf.citi, could relocate its headquarters to Dallas amid the tax battle in San Francisco. But the difficulty that states like Texas, have had containing the coronavirus could make tech workers less likely to relocate, according to Florida.

“Who in their right mind would move a company to Texas?” he said. “Texas has shown that it is incapable of governing itself. Great, maybe if Elon Musk wants to put a battery factory there, but the red states have shown that they’re incapable of providing a stable and healthy environment for people. Good luck attracting people to Texas.”

Instead, he predicts companies will set up smaller, premium headquarters in major tech hubs with remote workers distributed in nearby regions. These “high-end boutique” headquarters will continue to be in superstars cities, Florida said. “The headquarters is going to be like a brand enhancement.”

But even if America’s tech hubs remain relatively concentrated, they are not immune to global political and economic forces that are evolving rapidly. An increasingly burdensome U.S. immigration system and the nation’s difficulty containing the coronavirus could push entrepreneurs and engineers who would have moved to American tech hubs to consider cities in other countries, according to Florida.

“The real fear,” he said, “is that this climate makes people not come to U.S. cities at all.”

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