By Chris Pate
San Francisco’s emergence as the most important city on the West Coast in the 19th century was simply attributable to fortunate geography. The San Francisco Bay Area’s evolution into the most important region in the world for technology innovation and investments in the late 20th century owes to a more complicated confluence of events. Post-World War II, the Bay Area retained many of the service men and women who came through during the war. Moffett Field, located on the southern edge of the San Francisco Bay between San Jose and Palo Alto, became a hub for military technology. Companies such as Lockheed grew to employ thousands in the area. Nearby Stanford University and its vast research capabilities fed the growing appetite for high-tech innovation.
Rail workers pose at the completion of the First Transcontinental Railroad.
The real catalyst for the birth of Silicon Valley, though, was the invention of the silicon-based integrated circuit in 1959 by Robert Noyce of Fairchild Semiconductor. Noyce would go on to found Intel in 1968 and was later known as the “Mayor of Silicon Valley.” As computer hardware advances began to revolutionize what was possible in virtually every facet of the American economy, venture capital firms sprang up in the early 1970s to invest money into myriad new ideas. Kleiner Perkins and Sequoia Capital, both founded in 1972, funded start-up computer businesses such as Applied Materials, Compaq, Apple, Cisco, Sun Microsystems, and others that would become bedrock employers in Silicon Valley and household names around the world over the coming decades. This growing diaspora of technology firms and the companies that funded them eventually spread out from Palo Alto throughout the San Jose/San Francisco region.
Following the dot.com bust in 2001, reduced rents for office space in many parts of San Francisco encouraged more young technology companies to locate in the city, rather than down in Silicon Valley. These software companies like Salesforce, Uber, LinkedIn, Yelp, and others began to mint young millionaires as the firms’ stock values skyrocketed. In short order San Francisco was second only to New York as the most expensive American city in which to live.
The garage in Palo Alto where Hewlett Packard was founded.
Most cities would consider an overabundance of young/wealthy/highly educated residents to be a blessing. San Francisco, living up to its counter-cultural reputation, has taken a different stance. Just as the city’s leadership spurned freeways during the 1950s and 1960s while Los Angeles built them and grew to dominate California’s overall economy, local ordinances in San Francisco make it virtually impossible to develop new housing in the city. High demand and artificially-constrained supply have inevitably resulted in nosebleed prices for housing.
Trash-filled street in downtown San Francisco. (photo by the author)
In 2014 California voters passed (by a 60 percent to 40 percent margin) Proposition 47. Otherwise known as the “Safe Neighborhoods and Schools Act,” the new law reduced from a felony to a misdemeanor many non-violent offenses such as drug possession, shoplifting, forgery and other crimes. The goal of Proposition 47 was to save state dollars on jail time for minor offenders and redirect those funds to educational services as well as mental health, drug abuse treatment, and other social programs. As with most legislation, unintended consequences became clear only in hindsight. San Francisco is now the nation’s leader in property crime. Neighborhood retailers began closing their doors by 2019, citing constant shoplifting costs. Drug abuse skyrocketed among the city’s poor, and a vicious cycle among the city’s poor took hold.1 An Associated Press article in late 2020 stated that almost four times as many San Franciscans died from overdoses in 2020 as were killed by the COVID-19 virus.2
While troubles like high crime and expensive housing can damage a city’s reputation, New York City serves as an obvious example that they can be overcome if the right levers are pulled by city officials before it’s too late. Anyone who visited New York in the 1970s or early 1980s can attest to the fact that its transformation between then and the 2000s – when it came to cleanliness and the drop in crime – was almost miraculous. New York’s then-Mayor Rudy Giuliani is largely credited with this turnaround, but as of January 2021 no major city officials in San Francisco were even acknowledging the growing blight. If there are ultimately twelve steps in San Francisco’s road to recovery, it has yet to begin step one (admission of the problem itself).
San Francisco office buildings including the Transamerica Tower. (photo by the author)
Among the countless technological advances born within the software created by the geniuses working at the young companies in the San Francisco area are programs allowing employees at businesses around the world to communicate with each other effectively without being in the same room or building. In 2002, when I received my first company- issued Blackberry, it seemed that the wall had been broken down: it was now possible to communicate for work (through email) while on the go. In less than two decades the notion of email itself seems antiquated, and virtually any task can be completed on one’s phone or tablet.
Our Q4 2018 letter described Airtable, one of the many applications enhancing remote work capability today. Airtable’s product acts as a shareable database with the capability to bind project management tasks being planned and executed by people regardless of their location like a Microsoft Excel on steroids and available in the App Store, so everyone on a project can do and see the same thing, whether on their phone or desktop. It is not just Airtable. Zoom, Microsoft Teams, DocuSign, Salesforce and scores of other products compete to make workers around the globe more efficient.
In March 2020, as the initial panic due to the COVID-19 virus metastasized around the world, immediate ramifications became clear quickly: a violent economic tidal wave would occur as businesses were forced to close in order to “flatten the curve” of the virus’ spread. The second- and third-order effects are just now becoming clear. Perhaps the single greatest of these, economically, is the notion that remote work is not only possible in white-collar environments, but preferred by both companies and employees in many cases.
Companies that were forced to “go remote” during the onset of the pandemic now have actual data with which to determine the suitability of that format going forward. While the individual employee is typically more concerned with quality-of-life, flexibility and other subjective measurements, the employer usually has one very large line item at the top of the expense list: office rent. Monolithic skyscrapers in the most urban environments in the country have been virtually empty for the past nine months and are only now beginning to see employees trickle back in.
The allure of remote work is easy to understand for the companies that are burdened with high rents in expensive urban locations. If a business with 1,000 employees in New York gives its employees the ability to work remotely half the time, it can restructure the office/desk setup with “hot desks” (where any employee can plug in and work, but which doesn’t serve as a permanent desk for any one person) and theoretically cut up to half its square footage. San Francisco sits behind only New York City in the rankings of most expensive office rents in the United States, so these cities stand to lose the most overall. This trend could wreak havoc on office building real estate prices in many major cities as employee clustering becomes less important to employers and people move away from high-cost cities to less expensive and/or more physically desirable locales.
Google’s headquarters in Mountain View remains empty as teams work remotely in 2020.
It is ironic that the majority of office space in San Francisco is occupied by the very technology companies that gave us the tools to work from anywhere. The end result in late 2020 was that both local companies and their employees executed a wholesale shift from office to remote work. Pinterest, a social media company, made news in August when it wrote a check for $89.5 million to extricate itself from a lease for 490,000 square feet in a San Francisco building that hasn’t even begun construction.3 The company stated that “a more distributed workforce will give us the opportunity to hire people from a wider range of backgrounds and experiences.” It also saves the firm a net of $350 million in future lease payments. Oracle went a step further in December and simply moved its headquarters from Redwood City in Silicon Valley to Austin, accelerating what had already been a steady movement of workers to Texas.4
At the start of 2021 San Francisco is taking a beating by two bullies of its own making: the drug/crime problem that leads many law-abiding residents to consider leaving town, and the remote work capability that gives those residents the ability to do so with almost no negative consequences. If San Francisco’s leaders cannot stem the tide of fleeing taxpayers, the city’s tax revenue will fall and resources could be cut, creating a vicious cycle of more serious economic problems. In the end, San Francisco will remain the city in the western United States most blessed with natural resources and beauty. She will undoubtedly survive, and will eventually thrive again. In the meantime, her technology workers are leaving the roost.
Managing Director, True North Fort Worth