Over the last two years, the San Francisco Bay Area has experienced a loss of 60,000 technology jobs, approximately 10% of its peak workforce in late 2022. This alarming trend, accompanied by rising homelessness and empty office spaces, raises questions about the region's status as the heart of the tech industry.
Understanding the Decline
The current downturn appears to be cyclical, heavily influenced by the pandemic and the subsequent actions of the Federal Reserve. Initially, the pandemic spurred a surge in demand for social media, backed by a massive $5 trillion stimulus that flooded the economy and fueled venture capital funding. This influx saw funding levels more than double from $43 billion in 2020 to $92 billion in 2021, leading to an unprecedented rise in tech jobs.
The Bubble Bursts
However, as inflation took hold, the Federal Reserve shifted from stimulus to tightening measures. Consequently, venture capital funding plummeted by two-thirds between 2021 and 2023, even as the pandemic subsided. Despite this, the worst seems to be over, with VC funding stabilizing and tech jobs showing signs of recovery. The Bay Area continues to command a significant share of VC funding and maintains nearly double the tech jobs compared to cities like Dallas and Austin.
Historical Context
Interestingly, this isn't the first time the Bay Area has faced such a challenge. Following the dot-com bubble burst from 2000 to 2004, the region lost nearly one-third of its tech jobs but never relinquished its status as America's tech epicenter.
Labor Force Challenges
Despite a 10% decline from its peak, tech jobs in the Bay Area have still increased by 84% over the past 15 years, outpacing national growth. However, the region's labor force has contracted to levels seen in 2016, with tech employment now utilizing 16% of the local labor supply, the highest since before the pandemic. The crux of the problem lies in the housing shortage, which is exacerbated by a declining population.
Housing Crisis
The Bay Area's housing supply has failed to keep pace with the increasing number of households, leading to a critical shortage. With housing permits dropping significantly, the region risks losing its competitive edge to states like Texas and Washington, which are ready to welcome companies seeking a more favorable environment.
Time is running out for Bay Area leaders to address this acute housing issue, as it is crucial for the sustainability of the tech industry in the region.
Christopher Thornberg is the founding partner of Beacon Economics.
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