The cost of Seattle’s growing tech sector

It’s the people that make a party. The same can be said for a city. Talented, ambitious individuals are the engines of economic growth; they are also the magic ingredients that can turn a tiny, two-desk start-up into an industry-leading giant. Such is the case for Seattle, the US’ fastest-growing big city in the last decade.

Greg Gottesman, Managing Director and Co-Founder of Pioneer Square Labs, a start-up studio and venture capital fund based in Seattle, spoke to Business Destinations about the strength of Seattle’s recruitment pool: “We have an incredible amount of engineering talent, and if you’re like me and you believe that engineers and engineering talent are at the heart of most great technology start-ups, then Seattle really rivals any place in the world, including Silicon Valley.”

A look at some of the city’s residents shines a light on just how important Seattle is to the global technology industry. Bill Gates, legendary creator of Windows, was born there, and the headquarters for Microsoft is not in Silicon Valley, as some may presume, but in Redmond, 16 miles east of Seattle.

When Jeff Bezos was looking for a location for Amazon’s offices, he chose – you guessed it – Seattle, further transforming the city and kick-starting its economic growth. Numerous others have joined Bezos in or near Seattle, from the world-famous – T-Mobile and Expedia – to the up-and-coming – Outreach and Auth0. Add to the mix a respected university, an array of research institutes and no income tax, and Seattle’s appeal to businesses becomes all the more clear.

Some of the biggest tech companies in the US have begun setting up their satellite engineering offices in Seattle

In comparison with Silicon Valley and its surrounding areas, Seattle is affordable too. According to the calculator offered by personal finance website NerdWallet, the median price for a three-bedroom house in San Francisco is $1m, while renting a two-bedroom condo will cost around $42,000 a year; in Seattle, similar properties will set individuals back roughly $552,000 and $24,000 respectively.

The cost of living is also less expensive – by around 24 percent – according to the site. Even so, tech jobs in Seattle are very well paid: software engineers, for example, earn around $132,000 per annum, according to LinkedIn.

Seattle’s got talent
Seattle’s ongoing success as a tech hub is the result of a virtuous circle that continues to feed the industry. Gottesman explained: “Microsoft deserves a lot of credit for recruiting great engineering talent over many years. And then… Amazon has been perhaps the most appealing and aggressive recruiter of great engineering talent, I would say, over the last 10 years.”

Not only have these tech giants drawn some of the best talent from the US and further afield, but many of these individuals have since left to establish their own companies. As these start-ups have grown, they too have drawn more tech talent to the city.

Naturally, the proximity of Seattle University has also played an instrumental role in nurturing young engineers. “Not many people realise that the University of Washington gets more federal funding and research dollars than any other public university in the country,” Gottesman said.

What’s more, some of the biggest tech companies in the US have begun setting up their satellite engineering offices in Seattle of late. Gottesman explained: “The reason they’ve done that is because people leave Amazon, they leave Microsoft, and then they go to start these companies and then they recruit other people. So we’ve just been the beneficiary of incredible amounts of engineering talents.

“If you’re [creating] a start-up and looking for engineers, which is the hardest thing, Seattle tends to be a great place to find that kind of talent. That’s a really unique aspect of Seattle, I’d say, compared to anywhere else in the world, with the exception of Silicon Valley, which of course also has an overwhelming
supply of great engineers.”

Sunny side up
Seattle has become a people magnet. And it’s not just because of the exciting, well-paid tech jobs available in the city, or its affordability in comparison to other tech rivals; it’s the city itself. Though famed for its abundant rainfall, summers in Seattle are a delight.

The climate is warm, the skies are blue and the panorama is beautiful; its distinct skyline has a backdrop of magnificent mountains, while azure lakes and bays surround the city itself. Seattle boasts a mix of urban living and the great North American outdoors at its best. “A lot of companies here say they like to do their recruiting in the summertime because there is no more beautiful, inspiring, incredible place than Seattle on a summer’s day,” said Gottesman.

With so much of the natural world at their doorstep, Seattleites can leave the commotion of the city behind in no time

With so much of the natural world at their doorstep, Seattleites can leave the commotion of the city behind in no time. Within a few hours, they can find themselves hiking Mount Townsend or through the Olympic National Park, surrounded by breathtaking views and an abundance of flora.

Sailing and water sports are also popular, with Lake Sammamish to the east and Lake Washington adjacent to the city both offering a wealth of activities. In the winter, skiing becomes a favourite for locals, who can choose between numerous highly rated resorts.

“[Seattle’s] also one of these cities where it’s big enough to have great cultural elements to it, like theatre, music and great arts, but it’s still small enough that it doesn’t feel overwhelming,” Gottesman added. “It’s a great place to raise a family; it’s a great place to grow up.”

Housing crisis
It was inevitable that challenges would rise in correlation with such rapid economic growth. One such problem is spiralling homelessness: with a constant demand for highly skilled workers who are inevitably well paid, the cost of housing in Seattle has risen.

This year marks the sixth consecutive upward surge in house prices, while in February the Case-Shiller Home Price Index reported that the cost of single-family homes across the metropolitan area had risen by 12.7 percent from the previous year – the most significant rise across the entire nation in 18 months.

As such, more of Seattle’s citizens are being priced out of their homes – a sorry situation that has been the case for some time now. In fact, in 2015, the city declared a state of crisis.

The situation has only worsened since: a new report by All Home, the lead agency for Seattle/King County, states that on January 26, 2018, homelessness was affecting 12,112 people. Consequently, Seattle now has the third largest concentration of homeless people in the US, only falling behind the metropolises of New York City and Los Angeles County.

The range of people who are now homeless in Seattle speaks volumes about the severity of the crisis and the economic shortfalls associated with it. The Seattle Public School District, for example, reported some 4,280 homeless students in the academic year of 2016/17, while 22 percent of homeless people spoken to in All Home’s Count Us In report have completed some form of college degree.

As well as being wide-ranging, the epidemic is deadly: in 2017, the King County Medical Examiner’s Office registered the deaths of 169 homeless people, an increase of around 19 percent from the previous year. “It’s somewhat ironic that we have the two richest people in the world living here and we have a [homelessness] problem,” noted Gottesman.

Given the intensity of the crisis, city authorities are striving to tackle homelessness with a number of initiatives. Upon her election in November 2017, Mayor Jenny Durkan began working on an initiative to fund up to two years of community college for high school graduates.

In May, the city also approved a new head tax on companies with annual revenues exceeding $20m. The tax, which was reduced from the initial suggestion of $500 per worker to $275, was expected to generate around $48m each year. With more than 40,000 staff members located in the Seattle area, Amazon was due to pay the lion’s share of $10m annually. The money raised by the tax was planned to help fund housing and homelessness services.

Seattle now has the third largest concentration of homeless people in the US, only falling behind the metropolises of New York City and Los Angeles County

The city’s corporate giants responded with outcry. Amazon blasted the legislation as “hostile” and, in protest, halted the construction of a 17-storey office tower in the downtown area that was due to bring as many as 8,000 new jobs to the city. Others also fought back, including Seattle-headquartered Starbucks and Boeing.

Despite a unanimous decision from the City Council, the backlash provoked an overwhelming change of heart, with the tax being overturned in June. At the time, Councilmember Lorena González told KOMO News: “I am deeply troubled and disappointed by the political tactics utilised by a powerful faction of corporations that seem to prioritise corporations over people.”

But while González’s concerns are valid, the tax could have been a case of biting the hand that feeds you. Such a sizeable outlay may well have led the likes of Amazon to reconsider their growth plans in the city, while other big corporations may have thought twice about moving or setting up shop there.

Of course, these companies are not exempt from responsibility – they have played a role in this crisis – but a decision that is agreeable to all stakeholders is crucial.

“It’s something that we need to do better as a community,” said Gottesman. “The way that particular tax was constructed, they placed a specific dollar tax on every employee that you hire, which would hurt companies that were hiring a lot of lower-wage type workers, which didn’t make a whole lot of sense.”

Gottesman believes an approach involving politicians, businesses and community leaders could help to address the problem more effectively. He added: “I do think one of the ways that you solve [homelessness] issues is you build more houses, and I think there are solutions to this issue if we really get together and sort of have a community-wide approach to it versus a ‘tax the Amazons, tax the rich’ approach, which I think is not going to be as conducive to solving the problem.”

Looking after low-wage earners
The city has tried to cope with its exponential growth in other ways too. In April 2015, the local government enforced a new minimum wage of $15 per hour. It was a bold move, attacked by many who feared it would raise unemployment and the cost of living, killing local businesses in the process.

A report published by the National Bureau of Economic Research in 2017 was damning: it stated that, as a result of the higher minimum wage, low-wage workers experienced a nine percent reduction in the hours they worked, costing them an average of $125 a month.

Others, however, aren’t convinced. The report itself verifies that prices at sampled restaurants and grocery stores did not actually increase following the wage hike. Furthermore, economists have long argued that with higher wages, low-income workers have more disposable income to spend on goods and services in the area, which in turn creates greater economic activity and more jobs.

Naturally, the increase in minimum wage has been met both positively and negatively. It has been hard on smaller businesses, particularly at first, but positive feedback loops seem to now be in play, with greater consumer demand paying for the cost of higher wages – as intended.

Though the controversial initiative has found much greater success than Durkan’s head tax, it is not the solution to all of Seattle’s growth problems. Gottesman believes that taking advantage of Seattle’s no-income-tax rule – a massive draw for both start-ups and talent – could be the way forward.

“If you’re making a lot of money, it’s a great place to live from the tax perspective. But in time, I think it’s incumbent on those that are benefitting from it then to contribute back to the community in other ways, and I think that most people feel that way. [What we need to do] is take advantage of the fact that we have this great lure for companies and see if we can then use our monies more efficiently and work more with businesses… to try to solve these problems.”

Capital follows talent
As Seattle grapples with the issues that accompany its soaring growth, it will inevitably continue to nurture the talent and opportunities that have consolidated its status as one of the great tech hubs of America. To do so, greater capital funding is needed. This is an area in which Seattle is currently trailing behind Silicon Valley and New York.

But in this respect, Seattle is on the cusp of change. Leading the charge is Gottesman’s company, Pioneer Square Labs, which runs an $80m venture fund to invest in new companies in the area and a studio that creates tech start-ups.

“You’re starting to see more capital come to Seattle… Because at the end of the day, capital follows talent,” Gottesman said. His old firm, Madrona Venture Group, is one of the largest funds in the area. “But we also need new funds and that’s another area where I think you’ll see growth, as in more capital, coming to the city – a spur on more of these start-ups and more of this growth.”

As more capital flows into Seattle, its prospects become all the more exciting, especially in terms of the actual technology being developed in the area. According to Gottesman: “Even though the last 20 years have been great, I think the next 20 years are looking even [brighter] for Seattle because the kinds of technologies that Seattle is best at are the technologies that… [will be] the most exciting over the next 20 years.”

Gottesman refers to machine learning and artificial intelligence, fields in which Seattle is a hotbed for talent, thanks in part to it being the home of the Allen Institute for Artificial Intelligence, one of the top research institutes of its kind.

Seattle is also a centre point for cloud computing, with Amazon’s subsidiary Amazon Web Services leading in the field, followed by Microsoft. As cloud computing continues to transform the global technological landscape, Seattle is set to further consolidate its position as the home of the technology.

Essentially, Seattle has become the focal point of the most exciting tech in the coming years. As such, the future looks incredibly bright for this unique space: as long as the city can tackle the challenges it faces, it could well become a tech hub for the whole world.