Why Even Software Companies Can't Afford Seattle Anymore
From the film, "The Hunger Games," courtesy of Lionsgate Entertainment

Why Even Software Companies Can't Afford Seattle Anymore

We never thought it could happen to us. When Boeing announced in 2009 the opening of a new plant in South Carolina instead of Seattle, manufacturing was heading out of Seattle, but technology companies were flooding in: Google opened its first engineering office in 2004, followed by Facebook in 2010, Apple and Dropbox in 2014, Uber in 2015, and Airbnb in 2016.

In the past twelve months alone, Facebook announced plans to double the size of its Seattle presence, Google broke ground on a massive new Seattle campus in Amazon’s South Lake Union neighborhood, and Apple expanded its Seattle office as a hub for artificial intelligence. But now Amazon has decided to open a second headquarters, hiring 50,000 people outside of Seattle.

It’s the Cost of Living, Stupid

Amazon’s departure isn’t, as some have speculated, about Seattle’s taxes. We don't really have any. And other tech giants’ plans to expand to Seattle in lieu of San Francisco is really part of the same trend. All of these companies are exploring new cities for a variety of reasons, but a big one has been to follow the talent to a lower cost of living. This began with folks leaving San Francisco for Seattle years ago, and now some in Seattle are leaving for places like Portland, Denver and Nashville.

It should come as no surprise that the real estate markets that are growing the fastest are the ones where people can afford to buy a home. There are only three Seattle-area listings for $500,000, each a steal by San Francisco standards, each likely to sell within days of their debut.

Here is one example, a condominium with a pool, on the shores of Lake Washington:

Here is a $500,000 listing in Nashville:

Both homes are lovely, but there are, on a per-capita basis, twice as many homes for sale under $500,000 in Nashville as in Seattle. When more people can afford to live in Nashville, more people will over time live in Nashville.

Why Even Amazon Can’t Afford Seattle Anymore

An obscure shift in how technology companies account for profits will accelerate this migration to the center of the country. This shift sounds small, but it will change the face of a dozen American cities. In May 2016, Amazon and Facebook announced that stock-based compensation would be fully accounted for in all their reports on profits, for all of their businesses. Google followed suit this January. A month ago, Redfin was one of the first technology IPO in memory to take this approach from the start.

An Obscure Accounting Rule Changes Everything

For years, investors looked the other way when tech companies paid an engineer a few hundred thousand dollars in salary, and a few million dollars in stock. Businesses would still report their earnings in the time-honored way, including the cost of the stock paid to employees, but would focus investors on a metric of their own invention, “adjusted EBITDA,” which didn’t count the stock. That, everyone agreed, was the real measure of a company’s profits.

Except it wasn’t. If you’re thinking that it makes no sense that a software engineer would immediately recognize the value of getting a million dollars in stock when a Wall Street investor didn’t, you’re right. It never made any sense. But that is exactly what happened.

Every Bubble is Fueled by Funny Money

And of course, this stock was the only way most employees could afford to live in a town like San Francisco or, increasingly, Seattle. Funny money has always been the reason housing prices have risen too fast. First, it was liar loans and negative-amortizing mortgages, where the total amount you owed increased rather than decreased every month.

We all know how that ended, with the global financial crisis of 2008. And now, with the unicorn bubble slowly deflating, investors have begun to insist that even the highest-flying tech companies keep track of all their expenses, including the stock paid to employees.

At Every Tech Company, Two Conversations at the Same Time

The result has been dramatic, even panicky. Every high-growth technology company is now having two conversations at the same time: marathon meetings of a board’s compensation committees about how to rein in stock-based compensation. And a rush to find the next Pittsburgh or Austin for hiring employees at lower wages. The first stop in this journey is often Quicken Loans, which is now hosting four daily group tours for Silicon Valley executives to see a vast empire of Detroit-based software engineers. 

The Wrath of Grapes

Most of the tech CEOs I know used to think that moving to the Midwest or the South was beneath us, a good tactic for the Boeings of the world who don’t need the kind of rare skills we depend on, who have to grub for profits when we reach for growth. But if Amazon can’t afford to keep growing in Seattle, who can? Silicon Valley will finally replicate itself, not haltingly or hesitantly, but headlong, with the same fervor that once brought the Okies out west. As the mayor of Oklahoma City recently said, “It’s like the Wrath of Grapes.”

The Depolarization of America

The result will be, I hope, the depolarization of America. What employing thousands of people in the middle of the country has taught me is how good and hard-working Americans in all cities are, and how much most of the country resents our wealthiest cities’ sense of entitlement and condescension. In an age of freeways and airplanes, of cloud-computing, virtual meetings and Github, it was impossible that such differences in wealth and politics could remain so stark over such small distances for so long.

Amazon will turn a red state a bit blue, and that state will turn Amazon a bit red. The riches of Seattle will come to a new town, bringing with it a few problems, but many more wonders. Nothing could be better for America.

@glennkelman is the CEO of Redfin, a technology-powered real estate broker. The Seattle listing is courtesy of Jessica Livingston of RE/MAX, and the Nashville listing is courtesy of Brittney Testerman Griffith of Avenue Real Estate, and her photography partner, HomePixMedia.

I was born in Chicago, I went to high school in LA, and college in NYC..Yet it never dawned on me until the past 1-2 years how much people raised on the coasts mean it when they say "flyover states." I almost I cannot believe I have to, ahem, state something that should be obvious: that the midwest is filled with wonderful people and beautiful scenery and interesting, nuanced histories from town to town and city to city that are _very_ much a part of the nation's history as anywhere else—so please be able to find the Mississippi River and Lake Michigan, at the very least, on a map.

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Danielle Blue

Account Executive Old Republic Title

6y

So go to Renton, beautiful office spaces there. SouthPort

Gary Clarke

CEO-CFO | Special Operations Veteran | Board Member | SaaS | CleanTech | Gen-AI | Biotech | US, UK, UAE, KSA

6y

I have known many junior and senior executives who over the years have actively shunned the Bay area because of the cost of living and the perceived lower quality of life. So, it is not surprising to see this playing out in Seattle.

Joseph McCorvey

Risk Management Professional

6y

Which is why I see no major east coast city or Chicago making the cut for HQ2.

Ryan Givens, AICP

Revitalization Planner & Urban Designer

6y

Seattle costs are making Tacoma better, I live in a super vibrant, walkable neighborhood for 1/4 of Seattle house price, and I have a lot of the same urban amenities. I think Seattle costs are going to spur a renaissance in other Washington cities.

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