Affordability: Seattle’s Ace in Becoming the Next Tech Capital

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Silicon Valley has been well recognized as the nation’s hub of technology, having easily surpassed both Southern California and Massachusetts, but it’s now Seattle that may emerge as its greatest rival. Home to tech giants such as Microsoft and Amazon, Seattle has attracted creative and entrepreneurial talent, which has been the foundation to its low unemployment rate of 5.9% and continuous economic growth. Many former employees from Microsoft and Amazon have founded startups and small businesses in Seattle.

The primary reason for Seattle’s continuous expansion: the metro beats Silicon Valley in affordability on many different avenues. For instance, one of Silicon Valley’s major turnoffs for up and coming entrepreneurs has been its unaffordable housing.

Increasing wages in Silicon Valley have been matched with skyrocketing housing prices in the Bay area, which has become one of the most expensive places to live in the nation. Due to the low number of homes available, bidding wars have become a common problem when buying a home in the area. As a result, San Francisco has witnessed 20+% increases in median home prices over the past year. In May, San Francisco’s median home price was $1 million, a 32% jump from the previous year. Average listing prices in cities such as Los Gatos, San Francisco, Cupertino, Redwood City, San Mateo, and Sunnyvale are anywhere between $1.1 and $1.4 million. To illustrate what this means to a young entrepreneur or skilled technologist looking for a home, the median price to buy a 2-bedroom home in San Francisco would cost $880,000, whereas in Seattle it would cost $385,000.

Seattle’s lower office rent and expanding office space development also have made Seattle become an appealing alternative to Silicon Valley. Jones Lang LaSalle reported this year that Seattle’s average office rental rate is $20.86 with a 0.2% annual rent growth, as opposed to San Francisco’s average office rental rate, which is $25.80, with a 0.9% annual rent growth rate. The Seattle-Bellevue area also has the second highest number of office leases in the country, behind Houston. This is one reason why so many tech companies have moved or expanded its office space in Seattle. For example, Facebook recently doubled its current rental space and Zynga, an online gaming company, rented space in downtown Seattle as well. Google also has created two centers in Seattle and its suburbs, bringing in a total of over 900 employees.  

Washington also bests California in tax incentives, a large factor in attracting tech companies and keeping existing ones at home. California has the second highest individual capital gains tax in the nation, while Washington has none. Recently, a judge ruled California's Qualified Small Business tax bill to be unconstitutional; the policy used to give tech companies a deduction that reduced the state’s capital gains tax rate from 9% to 4.5%. The state’s tax board is estimated to retroactively collect about $128 million from 2,500 entrepreneurs (amounting to about $50,000 per person).

Washington also has no income tax and offers a plethora of tax incentives to high tech companies. The state gives a good number of sales tax deferrals, waivers, and business tax credits to the high tech sector, particularly for research and development spending. The business and occupation tax credit also saved $50 million to almost 1,700 high tech-firms in 2010. Computer software companies accounted for the $12 million property-tax break in the same year. Tech companies, especially Microsoft, have been able to avoid sales tax on construction costs, materials, and new equipment because Washington gives deferrals for the construction of buildings for high-tech projects dedicated to research and development. Evidently, the growth in the tech sector has contributed to Seattle’s expansion in office space development.

This year, there is a developing  36-acre office and apartment development and a grocery distribution center one mile from Bellevue’s downtown area that is slated to be converted into a $2.3 billion district of stores, apartments, and office buildings, two of which will have 490,000 square feet. Expansions of Microsoft and Amazon are expected to fill the office space. Research firm Reis Inc. estimates about 30 million square feet of office buildings, apartments, and stores will be completed in 2013, according to the Wall Street Journal.

But perhaps most of all, Seattle could be highly appealing for tech companies and individual entrepreneurs simply because the cost of living is cheaper. Providing much of the high tech environment of  Silicon Valley   Seattle also gives a greater bang for your buck than San Francisco. The Department of Housing and Urban Development estimates that San Francisco County’s median income is $99,400 and King County’s median income is $85,600. However, $100,000 salary in San Francisco is comparable to living on roughly a $70,000 salary in Seattle, according to CNN’s Cost of Living Calculator. Keeping these comparisons in mind, housing costs about 53% less in Seattle and groceries costs about 13% less. Utilities, transportation, and health care costs are roughly the same.

In addition, Washington also has the fourth lowest electricity prices in the nation, another major incentive for tech companies. This reflects the region’s huge hydroelectric generating capacity. In contrast California’s electricity prices --- driven up by mandates for renewable energy sources like solar and wind --- are now almost double that of Washington.

One final notable difference is that unlike Silicon Valley, Seattle’s economy also rests on a healthy composition of many different established industries. The strong mix of the tech, retail, and manufacturing have been the key factor in Seattle’s staggering job growth, which has grown four times faster than the rest of the country; retail and manufacturing jobs have increased twice as fast. Boat building companies such as Kvichak Marine Industries, retail companies such as Nordstrom, Nike, and Costco, and travel companies like Expedia Inc., Boeing, and Alaska Airlines create Seattle’s diverse portfolio.

Despite its well-recognized reputation and sophisticated style, Silicon Valley ultimately may lose its edge largely on this issue of affordability. When it comes down to it, a sustainable and cost-friendly environment is what makes a desirable destination for tech companies and entrepreneurs. Lower housing prices, lower office rent, numerous tax incentives, and lower costs of living could very well be the pivotal determinants in taking Silicon Valley’s place as the next tech capital.

Tina Kim is an undergraduate at UCLA majoring in Communications and minoring in Urban Planning. 

Photo by Wendell Cox.



















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Good Analysis

There are only a handful of metros that tech talent considers if they want to play in the big leagues. Silicon Valley obviously. Traditionally, Boston was the East Coast counterpart, but NYC has recently grabbed the attention. All of these cities have severe affordability problems.

Seattle and Austin are the only other two that get any respect. Austin is more affordable but isn't quite big enough to get away from the satellite office reputation. It's also lacking the major venture capital firms and higher ed star power (e.g. counterpart to Stanford).

Seattle is perfectly positioned. With Microsoft and Amazon as two pillars, plenty of local cash, relatively affordable housing and office space, less government dysfunction and a similar culture to the Bay Area, it's definitely critical mass.

All that being said, dominant centers are hard to upset once established. And if they are upset, it usually a once in a hundred years event, like NY usurping London in finance, fashion, art and other fields in the 20th century. And even then, the old center can make a huge comeback, much like London is doing today in all those fields. Actually, in a global world, the whole idea of one dominant center may be outdated.

It's not just affordability

"Lower housing prices, lower office rent, numerous tax incentives, and lower costs of living could very well be the pivotal determinants in taking Silicon Valley’s place as the next tech capital."

Or not, because if those were the only valid criteria, you could probably say the same thing about other cities such as Omaha, or Atlanta.

It seems to me there are two critical elements missing from this post that are worth pointing out:

The first is that the descriptors San Francisco and Silicon Valley are used interchangeably when in fact there are some distinct differences. Silicon Valley proper is roughly 40 miles south of San Francisco and centered mostly in Santa Clara County. There are some big differences in the demographics.

Housing affordability can also get more complicated in that you can have communities such as Atherton which skew things toward the upper end of the scale even though they're in relative close proximity to places such as Menlo Park.

An additional error, also by way of omission, is that a key dynamic of Silicon Valley in general is driven by access to a supply of venture capital which tends to cluster along Sand Hill Road in Palo Alto. Yet another part of what makes up, for better or worse, something of an economic ecosystem instead of a random collection of companies.

Back in the day, the legendary Silicon Valley retailer Fry's Electronics, a place where you could buy a computer keyboard and a bag of junk food at 2 A.M., used to publish a poster-sized map with the names and locations of tech firms in its vicinity. And there weren't just a few names, there were dozens and dozens with a lot of them having interlocking dependencies.

This is something that seems to get missed when other cities start talking about being the next Silicon Alley, or Silicon Gulch, or whatever.

Classic open letter if you can find it

I agree with the general thesis that Silicon Valley is driving growth elsewhere with its affordability problems and other factors.

A great read, is the open letter from T. J. Rogers, the CEO of Cypress Semiconductors, to Bay Area Regional Council, on why he was moving his business out of Silicon Valley.

Unfortunately it seems to have disappeared from where it used to be online. If you know Joel Kotkin and Wendell Cox, one of them might have a copy.