CITY: THE RESHUFFLED MAP OF INNOVATION

A 2020 report at a major news outlet, titled “The Death of the City,” describes how remote working is “making urban living obsolete.” In its opening paragraph it cites the history of Siena, Italy. In 1348, the city was a medieval powerhouse for banking and proto-industrial activity until it was dramatically affected by the Black Death, losing 60 percent of its population. The city only recovered to its pre-pandemic size in the twentieth century.

The article is one example of many claiming a general narrative that goes something like this: the COVID-19 pandemic and the growth of remote work could lead to the end of cities. It is especially bad in places like New York and San Francisco, and it can lead to the end of Silicon Valley.

To make their cases, these articles bring up a mix of points on the advantages of remote working, stories of people leaving “superstar” cities like San Francisco or New York for cheaper places (nevermind the stories featured are often of families with kids—a point in life when historically people have left cities for suburbs and cheaper areas anyways), and falling rent prices.

The general narrative presented makes some solid points. It is true some people are leaving cities. It is true remote working is getting more accepted. It is all but certain remote working technology will get better over the years.

But when we dig deeper underneath the surface of the stories, we quickly see the trends cannot be as simple as “the end of cities,” “New York is dead,” or “Silicon Valley is over” as these narratives suggest. For example:

• While real estate prices in Manhattan are down year-over-year, prices in broader New York City are actually up as of November 2020.
• Inventory of housing for sale in the city of San Francisco proper grew during the pandemic (suggesting more people putting homes up for sale), but it has remained essentially unchanged for the broader metropolitan area as research from real estate company Zillow shows. For other major metropolitan areas like Boston, Los Angeles, Miami, Seattle, and Washington DC, housing inventory for sales is actually down.
• People are back in the workplace at pre-pandemic levels in New Zealand and Taiwan, the only two rich economies to control the pandemic so far, as GPS data aggregated by Google shows.
• Migration data from LinkedIn shows the number one place New Yorkers have moved to the twelve months ending in November 2020 is Los Angeles—hardly a small city. The number one destination away from the San Francisco Bay Area in the same period is Seattle, another tech hub.

In the middle of a crisis, it is easy to overestimate the long-term impact of the pandemic. The rise of remote work and the migration away from cities are probably the two most over-estimated changes coming from the pandemic. While there is a real reshuffle of tech and innovation activity, there are several key patterns that will dominate the life of cities post-pandemic.

1) People live in cities for many reasons which have nothing to do with work.
There are many reasons why people live in cities outside of work. Cities are major centers for entertainment and social life. Some—like San Francisco, Melbourne, and Rio de Janeiro—are endowed with gorgeous natural landscapes. Others have rich architecture and history, such as Beijing, London, and Paris. These cities being millennia old and having lived through their own share of pandemics is also a clue to the overblown nature of the “end cities” narrative.

I was talking about the topic with Marianna Presotto, an artist friend who lives in Alameda, California, an island that is a short drive or ferry ride away from San Francisco. I asked if she was thinking about moving further from the city. Her answer was, “No, I am thinking about moving into it,” to take advantage of the temporary reductions in rent prices.

For career-minded people who are choosing where to live to optimize professional gains or for the relatively introverted one in four people who prefer remote work to in-person, these non-work considerations are not as prominent. We all have different priorities, after all. But I suspect the overlap of “career-minded” or “relatively introverted” with “technologists” and “writers” is pretty high, and that leads to an over-representation of the “end of cities” perspective on public discourse.

2) Many of the moves happening will turn out to be temporary.
While “I am leaving San Francisco (or New York)” can make for a good story, many of the moves will turn out to be temporary. In fact, that is what data from the US Postal Service suggests, with short-term moves up during the pandemic but no meaningful increase in long-term moves.

During the timeframe from February to July 2020, the number of temporary change-of-address (CoA) requests in the US increased by 27 percent compared to the previous year, whereas permanent CoA requests increased by only 2 percent. The majority of these temporary CoA requests were in March and April when the pandemic was at its peak in the US and has since then become closer to 2019 request numbers.

As constraints on where one lives become detached from how one makes a living, at least temporarily for some of the population, it is natural people experiment with different living arrangements. A friend has moved from Washington DC to Florida to be close to in-laws and homeschool kids. A different friend moved from San Francisco to Sao Paulo, and then to a rural, waterfall-rich area in Brazil. Another one is experimenting with living a hundred miles outside of London and dividing time between there and his London home.

I myself write this from Hawaii, where I am spending time with family. I am also planning on a season in my birth state of Minas Gerais in Brazil for the next year—although my home is still in the Bay Area. Whether or not these kinds of experiments will become permanent is very much still up in the air—and much more a function of family and personal choices than pandemic-influenced decisions.

The major drop in rent prices we see is not accompanied by a similar drop in sales prices of homes, which is consistent with this notion of an increase in experimental and temporary moves, but not as much long-term ones.

If you can make big-city wages with small town cost of living, that is an unbelievably good deal. Over time labor markets will settle and the arbitrage opportunity of getting paid Silicon Valley money while paying Montana cost of living will get competed away.

No doubt some of these moves will be permanent, but these hardly add up to an “end of cities” story.

3) Permanent relocations will be dominated by “near-city” moves.
As we covered in the previous chapter, the future of work is more hybrid than remote. Over time, working away from your team 100 percent of the time gets tiring, and most of the people who do not get back to the office full-time will adopt a hybrid model of work.

Much of the movement in migration and prices we see today are consistent with this expectation, including the data we mentioned at the beginning of the chapter. Real estate prices in New York City are up even though Manhattan-only prices are down.

The major metropolitan areas studied by Zillow—San Francisco, Boston, Los Angeles, Miami, Seattle, and Washington DC—all have fewer homes for sale, even if in the case of the city of San Francisco proper inventory is up. While commenting on a softening of demand for homes in the densest areas of San Francisco, chief market analyst for the Bay Area at the real estate brokerage company Compass Patrick Carlisle states, “More rural and suburban counties (around the area) and markets have gone absolutely nuts—Sonoma, Monterey, Marin.”

Reshuffled Map of Innovation

While the above makes a clear case why we are not living “the death of the city,” some meaningful changes are happening. But rather than being caused by COVID-19, they are previously ongoing trends which were accelerated by it—and are a lot more nuanced than you could fit in a headline. It is the case some people are leaving Silicon Valley and a few other superstar cities like London and New York. But as my friend Torsten Kolind, founder and CEO of YouNoodle says, “People leaving San Francisco was not a new story in February 2020.”

The places experiencing meaningful out-migration are primarily those which had overheated housing markets and abnormal dynamics to begin with. This move out of the city is not the story, for example, in tech hubs like Berlin or Austin, where the cost of living is still relatively affordable (and some of these are gaining ground).

But even with the recent out-migration, the changes are much more a story of relieving pressure on the overheated systems of New York and San Francisco than a story of the death of these places. This is bringing these “superstar” markets closer in line with other places on certain metrics, and it creates new opportunities for smaller tech hubs.

Austin is frequently cited as a destination for those leaving San Francisco, so it is informative to look at figures for these places to see how things are changing. A look at the numbers strongly suggests a reshuffled map of tech but not a tidal wave shift away from superstar cities.

In late 2020—as both Pfizer and Moderna announced vaccines with higher than 90 percent effectiveness, and at least ten vaccines in phase three testing—Austin, Texas is the city in the US which has gained the most people in the past twelve months. (As I and others have written with the Kauffman Foundation in the past few years, Austin has been gaining ground on startup activity for a while.) The top five, according to LinkedIn data, are:

• Austin, TX
• Charlotte, NC
• Tampa-St. Petersburg, FL
• Denver, CO
• Seattle, WA
  

But even with all these gains, the net population growth resulting from people moving to Austin is 1.4 percent over twelve months. Of those, about 12 percent are, on net, coming from the San Francisco Bay Area. When we extrapolate those numbers to the total population of Austin, we get about 31,000 newcomers over one year, with between three and four thousand of those coming from the Bay Area.

Relatedly, the housing market in San Francisco city proper has slowed down. The median number of days homes spend on the market is up, price drops are more common, and homes sold above list price are less common. The broader US market is going in the opposite direction as is the housing market in Austin, often cited as an alternative to Silicon Valley (and one of my favorite US cities). This has brought the San Francisco housing market a little more in line with other ones.

But despite the opposing trends and reports of historic “red hot” demand in Austin and a cooled-down demand in San Francisco, San Francisco is still a much more competitive real estate market. San Francisco homes still sell faster than homes in Austin (twenty-eight versus thirty-six days, respectively), and are more likely to be sold above list price (54.4 percent versus 39.1 percent). San Francisco homes are more likely to see price drops, however (16.1 percent versus 12.8 percent).

Silicon Valley is Dead. Long Live Silicon Valley 

If you are following the stories of technologists, investors, and founders leaving Silicon Valley for greener pastures, the quote below will ring familiar:

“Entrepreneurial zeal has been overtaken by worries about fierce global competition, increasing government regulation and the cumbersome size of some companies, as well as the high cost of living, poor transportation, and pollution.”

The complaints about the high cost of living, government regulation, and attractive global alternatives are both common. But they are not new. In fact the quote, which comes from the New York Times article “Silicon Valley May Have Lost Its Way,” was published in 1992—nearly three decades ago. Since then, here is a brief list of companies founded in the area:

• Airbnb
• eBay
• Facebook
• Google
• Netflix
• Uber

That these complaints are old does not make them untrue. There are certain governance aspects of life in Silicon Valley which present serious headwinds (even if not caused by the pandemic) to the area’s development. For example:

• The property-crime rate in San Francisco is now the highest in the US.
• Zoning restrictions make building housing in the Bay Area expensive (sometimes impossible), pricing out most anybody with lower- or middle-incomes from being able to buy (or even live) in the major centers. Surprisingly to many people outside, it also prices out techies. We hear about “two exit” (and even three exit) towns which are the places where one needs to have not one, but two or more successful tech startup exits to be able to live in them.
• Homelessness is rampant, and it is relatively common to see needles and human waste on the streets. The city created an official taskforce to do “poop patrol,” and the city has been called “the doo-doo capital of the US.” There was an app made by a resident called Snapcrap to report human poop.

Altogether, these are major headwinds, but they are not death sentences.

At the height of lockdowns, San Francisco might have been one of the worst places in the world for establishing a startup. Lockdowns combined with wildfire season made for a bleak picture. The sky outside had an apocalyptic, red hue: somewhere between a scene from Blade Runner and Star Wars. The smell in the air brought to mind breathing in diesel truck exhaust. Not long before, the typically balmy weather of Northern California had gotten desert hot, with heatwaves. (As I heard said, “I miss it when it was just the pandemic.”)

The double-whammy of lockdowns and smoke negated the usual advantages of being in the area—especially the agglomeration benefits of easily connecting and working together with lots of amazing people in-person. But the usual disadvantages of being in the area were still felt keenly. The cost of living and doing business in the area is incredibly high. Unbeknownst to many people not living in the Bay Area, internet and cell phone connectivity is shockingly spotty and expensive (which, when travel was more open, made for embarrassing conversations with visitors coming from places like South Korea).

But the region still has an enduring appeal which will continue to exist in the long run.

To start, the city is far ahead of the rest of the world in tech startup activity. As shown in research from Startup Genome, where I served as CIO, the top five startup ecosystems in the world and their respective ecosystem values are:

• Silicon Valley: $677B
• Beijing: $345B
• New York City: $147B
• Boston: $96B
• London: $92B

Silicon Valley produces as much value as the next four top-performing startup ecosystems combined, and even if it lost half of the value it would still be the largest startup ecosystem in the world, all else equal.

Additionally, even the stories of people leaving California can be more nuanced than they seem at a first glance.

Antonio Garcia Martinez, the fascinating author of the book Chaos Monkeys and a tech executive and former Facebooker, mentioned some of the downsides of California when he moved away a few years ago to the remote Orcas Island on the Pacific Northwest to live in a yurt (as a camping, hippie-ish person, I could see myself making a similar move). Martinez later moved back to the Bay Area for a job, first to a suburb-y area of Silicon Valley and then to the city of San Francisco proper in the middle of the pandemic (I could also see myself making a similar move).

In a similar vein, the founder and CEO of YouNoodle Torsten Kolind, who I mentioned previously in this chapter, is originally from Denmark. He moved to San Francisco in 2009 at the peak of the financial crisis, when optimism for Silicon Valley was low and venture capital activity was the lowest it had been in years. He started his company in Silicon Valley with the whole team co-located, but over time began to hire in other places (e.g., Mexico City). During the pandemic, he and his spouse (who until recently worked at a major publicly traded tech company) moved to Copenhagen primarily for family reasons.

But Kolind has considered a move back to San Francisco and is even more optimistic for SF post-pandemic than before, as crises create “slack in the system” which have often turned into opportunity in the city’s past. In fact, the city has thrived through crises, for instance after the Great Recession and the Dot-Com Bust.

Silicon Valley has had major crises and transformations in its history. And although it is rarely mentioned today, considering the city of San Francisco proper as part of Silicon Valley is a relatively new development. It used to be that “Silicon Valley” meant the suburban sprawl around Palo Alto, Mountain View, and the like. That began to change around the 2000s when newer startups began to set up offices in the city of San Francisco directly. Exemplifying the perception, a 2006 essay from legendary investor Paul Graham talks about how “Silicon Valley proper is soul-crushing suburban sprawl.”

Fabrice Cavarretta, a professor at ESSEC Business School in Paris, used to work as a software engineer at Oracle and studied at Stanford in the ’80s and ’90s. He told me over drinks going to San Francisco for fun was unusual among the suburban-dwelling Silicon Valley techie crowd of the time; the city was a little too dangerous and rowdy for most.

Looking beyond the recent crises, cities have a history of adapting. London became a much healthier city after the British cholera epidemic of the 1830s spurred science and engineering developments like sewage disposal and clean water supply. Chicago pioneered the skyscraper—buildings taller than you could see anywhere else in the world—in the very business district the 1871 fire had turned into a wasteland. New York City was considered “done for” in the ’70s and ’80s, but it had major growth and revival in the 1990s once high crime rates were under control.

These examples are all better parallels for what is happening in cities today than Siena after the Black Death.

The challenges to superstar cities are real, and no city is destined for certain success nor certain failure. But crisis brings opportunities, and we can together build better places out of seeming disaster.

This post is an excerpt of the book Rebooted: An Uncommon Guide to Radical Success and Fairness in the New World of Life, Death, and Tech. Learn more at www.morelix.com/rebooted-book