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Soaring housing costs forces talent to flee Silicon Valley

At a recent conference, the founder of one technology titan asked another if it was even possible to build a platform-technology company outside of Silicon Valley. It was a fair question, given the dominance of Google, Facebook and Apple. But from where I sat, it seemed easier to build a company of that size today almost anywhere except Silicon Valley.

Others have had the same thought. A spate of start-ups and now venture funds have recently left Silicon Valley for LA (Snapchat), Chicago (Keepsake), Seattle (Sherbert) and even Ohio (Drive).

The company where I work, Redfin, understands this impulse better than anyone. We are real estate brokers, with technology used by 10 million-plus people each month looking to move. And the simplest trend we see in American life is that Silicon Valley is no longer just the place talented people move to; it's the place those people are moving from. (Tweet this)

The Snapchat headquarters on the strand at Venice Beach in Los Angeles.
Patrick T. Fallon | Bloomberg | Getty Images
The Snapchat headquarters on the strand at Venice Beach in Los Angeles.

The dam has broken

In 2011, 1 in 7 people in the Bay Area searched Redfin.com for homes outside of the Bay Area. Now it's 1 in 4. As Adam Wiener, our chief growth officer, announced to other executives last month: "The dam has broken."

In the past four years, the number of Bay Area people searching for Seattle homes has quadrupled; for Portland homes, that number has quintupled. For every 13 Bay Area people searching for a home, one is now searching in the Pacific Northwest alone.

Where Bay Area People Search Redfin.com for Homes to Buy

Market
2011
2012
2013
2014
2015
Bay Area 85.50% 83.90% 83.60% 81.60% 75.80%
Sacramento 4.30% 5.60% 4.70% 5.60% 7.00%
Southern California 6.00% 5.60% 4.80% 5.50% 5.20%
Seattle 1.20% 1.30% 1.40% 2.10% 5.10%
Portland 0.50% 0.60% 0.90% 0.90% 2.60%
Other 2.50% 2.90% 4.60% 4.30% 4.40%

(Source: Redfin.com)

The new norm: 20% above asking price

And these aren't just idle online searches. One of our Denver employees had a simple answer for where she is now meeting our clients: "at the airport," with many flying in from northern California.

Silicon Valley transplants have become so common that Redfin's Boston agents just this week reported resentment among locals who can't compete. "My God, they are pouring in," Redfin's Boston broker, Alex Coon, wrote me this morning, "particularly in Cambridge and Somerville."

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The result? According to Matt Zborezny, the Redfin agent for that area, 20 percent above asking price is the new norm.

Can't afford to stay

Folks are leaving Silicon Valley, mostly because they can't afford to stay. For the first time ever, the median price for a Silicon Valley home just exceeded $1 million. That's about double what it is in other tech cities, like Boston or Seattle, and triple what it is in aspiring technology hubs, like Portland, Denver or Austin.

Median home sales price

Market
Median Sales Price
Silicon Valley $1,050,000
Seattle $565,000
Boston $480,000
Portland $375,000
Denver $335,750
Austin $319,655
Chicago $292,000

(Source: Redfin.com)

Those in technology who can afford to stay in Silicon Valley all know it as one of the most beautiful places to live in the world, but a wariness has sunk in as folks from other walks of life are forced to leave: coffee shops are wall-to-wall with aspiring entrepreneurs, and restaurants buzz with talk of valuations and venture capital. It can be too much.

Just today a journalist who has covered technology from San Francisco for nearly a decade told me that people here seem more focused on money than in the past. If that's true, it isn't entirely by choice: People hop from job to job and deal to deal because sometimes that's the only way they can afford to stay.

A pay gap, but not big enough

According to compensation data company PayScale.com, Silicon Valley engineers earn nearly 50 percent more than their Boston counterparts; in Seattle that difference is smaller, but still significant, at 12 percent. Nowhere is the pay difference large enough to offset the cost of housing.

For these mostly entry-level jobs, the median level of experience is two to four years, with marketing managers at five to six years. At the most competitive companies, salaries are significantly higher.

In our own experience at Redfin employing engineers in Seattle and San Francisco, we've noticed that as Google, Facebook and Dropbox have opened Seattle offices, the differences in engineering pay, especially among recent graduates of top computer-science programs, have disappeared. But the pay of all the people responsible for the actual day-to-day operations of the business—in accounting, marketing or human resources—is more closely tied to the local cost of living. This is why, as Glassdoor reports today, the best places for jobs in America are now up-and-coming tech hubs like Raleigh and Austin, ranking ahead of San Jose or San Francisco.

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Our board, which once encouraged us to pay whatever it takes to hire engineers in San Francisco, is now also asking if we want to explore opening engineering offices in Portland and Austin. Technologies such as Slack, SourceTree and Stash, and examples of purely virtual companies such as Automattic and GitHub, have made it easier than ever for people to contribute from anywhere. And those folks are more likely to stick around. The CEO of a publicly traded Internet company recently told me the people in his recently opened Midwest office see it "not just as a job but as a career."

Commercial rents are nearly double

Salaries aren't the only costs that are lower in other places. Silicon Valley commercial rents are nearly double what they would be in Denver or Portland, and 50 percent higher than Austin or Seattle. For a 100-person office, the difference is $400,000 a year, lowering operating expenses by about 2 percent; in a typical software company with 15 percent margins, this difference is significant.

Class A office space commercial rents

Market
Gross Rental Rate: $/Square Foot/Year
Annual Rent: 15,000 Square Feet
Silicon Valley $55.20 $828,000
Boston $49.95 $749,250
Chicago $41.00 $615,000
Austin $36.27 $544,050
Seattle $36.26 $543,900
Portland $30.73 $460,950
Denver $28.59 $428,850

(Source: CBRE)

Many high-tech businesses are starting to worry about the rent: When we asked a CBRE broker, Owen Rice, for this data, he wrote back with a funny-that-you-should-ask email, noting that "more and more we are creating multimarket analyses for our clients," including those based in a suddenly more expensive Seattle, as well as the Valley.

Priceless innovation

But what about the original question—whether it's possible to build a technology platform company outside Silicon Valley. A platform company builds technology used by other technology companies, from the iPhone that runs other applications to the Facebook login we use to access other websites, compounding each employee's leverage. This is why Facebook's market value exceeds $20 million per employee.

These companies don't have to worry about expenses much. As my first mentor in Silicon Valley, Kirill Sheynkman, once explained to me at a French restaurant, the point in an innovation economy isn't to spend less, it's to make more. And for a platform company, the value of being close to the technology companies that build on your platform is priceless.

But as our industry matures, the pressure will be on profits, not just revenues. And few high-tech companies get as much leverage as Facebook from each employee. Even a platform company like Twitter is worth about four times less per employee than Facebook. With less equity to burn, Twitter has had to be the pacesetter in raising San Francisco engineering salaries, which is why its stock is now under so much earnings pressure. Only the techiest of tech companies—and only their tech people—don't feel the pinch.

Now of course, Silicon Valley isn't going to empty out. Its population remained constant over the last decade and will remain so again in this one. More people will come here, but more will leave, too. The result will be the Valley-fication of America, a form of gentrification more extreme than most of America has seen before, with high-tech jobs, high incomes and more expensive coffee, yoga studios and—yes—houses, too.

—By Glenn Kelman, CEO of Redfin, a next-generation technology-powered real estate broker. Follow him on Twitter @glennkelman.