Soft Spots: Five Places Where Silicon Valley’s Bubble Could Pop

Xconomy National — 

The main premise of J.J. Abrams’ Fringe—unquestionably one of the three best sci-fi shows made for television in this century, alongside Battlestar Galactica and Doctor Who—is that there’s a second, nearly identical universe coterminous with ours. The wall between the parallel worlds remains impenetrable until a grief-stricken scientist, Walter Bishop, figures out how to cross over in order to save his dead son Peter’s doppelgänger; Walter ends up kidnapping the other Peter and bringing him back. This infraction against physics opens up “soft spots” between the two universes, and wherever the spots become too thin, a vortex or micro-black hole arises, leading to untold destruction in both universes.

The soft spots came back to me when I was searching for a way to sum up my picture of Silicon Valley’s perilous state.

Yes, we’re in a tech bubble. Of course we are. When Facebook can use $19 billion in funny money to buy a startup with revenues of $20 million (WhatsApp) or spend $2 billion to buy another startup that doesn’t even have a product on the market (Oculus), that’s a bubble.

When the median rent for a two-bedroom apartment in San Francisco is $3,350—enough to pay the mortgage on an $800,000 house in any other city—that’s a bubble.

When investors have so much cash floating around, and keep buying into risky startups at ever-higher valuations (like Uber’s ludicrous $18.2 billion) because they can’t get a decent return on their money doing anything else, that’s a bubble.

This bubble may not look the same as the last one. But I’m not going to waste space here documenting its existence, which is only challenged by people who enjoy living in it.

The more interesting question, to me, is how the bubble will eventually pop. What are Silicon Valley’s most important flaws and weaknesses? Where is the membrane being stretched so thin that it’s in danger of tearing open and letting the outer reality rush in?

Of course, there isn’t any single, physical place where the bubble’s collapse will begin. Since a bubble is primarily an economic and psychological phenomenon, it can only be burst by a broad shift in attitudes and expectations. But there are plenty of real places where the tensions, imbalances, or injustices that could escalate into a show-stopping crisis are in evidence.

So I invite you to play along with me below as I tour a few locations around the San Francisco Bay Area that could be considered our soft spots. They’re symbolic of larger problems. You don’t want to be standing in one of these places when the vortex opens up.

By the way, that’s not an event I’m looking forward to, or that I would want to hasten in any way. People riding the bubble have been generating all sorts of important new ideas and capabilities that might not have emerged otherwise. But it’s wise to plan ahead. If we can identify the fractures that threaten to destroy the innovation machine, we might be able to patch them up and keep the system going for a while longer—and maybe even point it in a smarter direction.

1. 555 California Street, San Francisco: The Former Bank of America Tower 

This 52-floor skyscraper has a lumpy black granite sculpture at its base. It’s the creation of Nagasaki-born sculptor Masayuki Nagare and its actual name is “Transcendence,” but locals know it as the “Banker’s Heart.”

Bank of America, still a major tenant in this Financial District landmark, repaid the entire $45 billion it received from the federal government through the Troubled Asset Relief Program in 2009, with interest. But it was still the focus of protesters’ ire during the Occupy San Francisco movement in 2011: they stormed a branch office on Market Street, a few blocks away. And even today, the bank is struggling with the consequences of its $4 billion purchase of Countrywide Financial in 2007, which led to $40 billion in settlements and legal costs.

I choose this location because Bank of America’s troubles show how quickly boom can turn to bust. They remind us that a bubble is first and foremost a financial phenomenon fueled by easy money, whether that’s in the form of excess capital or subprime loans.

The former Bank of America Tower in San Francisco. Source: Mike Linksvayer/Flickr.

The former Bank of America Tower in San Francisco. Source: Mike Linksvayer/Flickr.

Because interest rates have been so low for so long and the global economy isn’t expanding very fast, investors are willing to put lots of money into any business that shows signs that it might actually grow. That’s what tech startups do—a small percentage of them, anyway. So there’s still a lot of money being allocated to high-risk venture and private equity funds. But as soon as another plausible investment opportunity comes along—when the Fed finally raises benchmark interest rates again, for example—the capital could flee.

The tech giants still have a lot of cash on hand, so the big acquisitions could continue for a while even after an economic shock. Apple has $160 billion and Google has $57 billion. Facebook has only $12 billion in cash, but has much greater purchasing power thanks to its sky-high $154 billion valuation. But if things really go south, there’s no net large enough to catch all of the late-stage tech companies that have been cashing huge venture checks lately, not because they need the money, but simply because it’s available ($500 million for Airbnb; $250 million for Lyft; $80 million for Quora; $60 million for Nextdoor).

2. Valencia Street and 24th Street, San Francisco: The Google Bus Stop 

This is one of at least 20 places around the city—many of them Muni bus stops—where Google shuttle buses pick up employees early every morning for the ride to the Googleplex in Mountain View. In December, protesters blockaded a Google bus here in a demonstration against what they saw as misuse of public resources by a commercial entity.

The feelings at work behind the Google bus protests are complex. But a key element is the perception that the big Silicon Valley tech companies are subsidizing their employees’ desire to live in San Francisco, one of the nation’s tightest housing markets. Because these well-paid software engineers are able to fork over $4,750 per month for a junior 2-bedroom in Noe Valley, and be chauffeured to work on a cushy Wi-Fi-equipped bus, rents in the city are becoming unaffordable for everyone else, or so the story goes. It doesn’t help matters that more and more San Francisco landlords are taking advantage of a California law, the Ellis Act, that allows owners of rent-controlled buildings to “go out of business,” evict their tenants, and sell their properties to developers, who replace them with more expensive units or condos.

Protesters blockade a Google bus near the corner of 24th and Valencia in San Francisco. Source: Chris Martin/Flickr

Protesters blockade a Google bus near the corner of 24th and Valencia in San Francisco. Source: Chris Martin/Flickr

To my mind, Google employees are driving up rents, but no more than anyone else. At bottom, it’s a problem of supply and demand. The housing supply in San Francisco is extremely limited and unlikely to grow much in the near future, for reasons explained in an in an epic, masterful piece last month by TechCrunch writer Kim-Mai Cutler. Prominent angel investor Ron Conway is leading an effort to repeal the Ellis Act, but even if it works, it wouldn’t solve the problem. The truth is that as long as more people have their heart set on moving to San Francisco to seek their fortunes in the technology industry, rents will keep going up.

But there could come a time—possibly soon—when the entry-level or service workers every company needs are completely priced out of the region; or employers stop being so happy to subsidize their senior employees’ high rents through high salaries and bonuses; or young workers in San Francisco realize that there are perfectly pleasant cities, like Sacramento, where they could live for a fraction of the rent. Then the housing crunch will become a drag on the labor supply, and companies won’t be able to keep growing.

3. 3000 Hanover Street, Palo Alto: Hewlett-Packard Headquarters

The average age of employees at Hewlett-Packard is 39, according to PayScale, the salary database provider. At IBM and Oracle, it’s 38. The average employee at Google, Facebook, or Zynga, by contrast, is about 10 years younger.

It isn’t possible to explain this difference using factors like geography or training: all of these companies draw on the same population of highly educated Bay Area software engineers. The truth is that Silicon Valley has an ageism problem. The hot young companies are afraid that if they hire people older than 30 or 35, it’ll slow down the pace of innovation—the “move fast and break things” ethic espoused by Facebook’s Mark Zuckerberg, who also famously remarked in 2007 that “young people are just smarter.”

As several excellent journalistic reports have documented lately, interviewers at younger companies systematically weed out mid-career professionals, despite their years of experience, using excuses like “cultural mismatch.” What they’re really saying is that having a few grownups around might dampen the frat-house, brogrammer atmosphere they’ve brought with them from college.

Perhaps there’s an infinite supply of young rock-star engineers finishing their CS degrees at Stanford—or perhaps the big tech firms are shooting themselves in the foot by devaluing a huge group of valuable middle-aged workers. For a culture that claims to prize “pattern recognition” skills, it’s an odd omission. If you’ve been in the business for more than 10 or 15 years, you’ve probably seen everything before, and you know what to do about it—which will be an especially useful skill when the shiitake hits the fan.

I could go on and talk about the other poisonous forms of exclusion in Silicon Valley, namely racism and sexism. But you get my point. The putative hero in today’s Valley is the “full stack engineer”: someone familiar with server, data, networking, logic, UI, and UX tools. Whether someone has mastered those tools has absolutely nothing to do with their age, gender, or ethnic background. To keep innovating and growing, the technology industry will need to tap the full range of talent available to it.

4. 1757 Mountain Blvd., Oakland: Montclair Elementary School

This public school in Oakland, dating from 1925, has the distinction of sitting directly on the most dangerous seismic feature in the San Francisco Bay Area, the Hayward Fault. (The fault actually runs beneath the school’s baseball field, not the school building itself.) In 1868, the western side of this fault jumped six feet to the north, unleashing a magnitude-7 earthquake that, if it were repeated today, would leave 100,000 people homeless and cause $1 trillion in property damage, according to the U.S. Geological Survey. And such a quake is actually overdue: major temblors on the Hayward Fault occur every 140 years or so.

It’s been so long since the 1989 Loma Prieta quake hit the region that few people working in the tech industry today remember how deadly and disruptive an earthquake can be, and that one was just a 6.9. The fact is that if a major natural disaster were to strike, the boom times in Silicon Valley could come to a quick end. It could be an earthquake, but the Bay Area is also prone to drought, fires, storms, flooding, and tsunamis.

The Hayward Fault slices through Oakland and several other densely populated East Bay cities. Source: U.S. Geological Survey.

The Hayward Fault slices through Oakland and several other densely populated East Bay cities. Source: U.S. Geological Survey.

Then there’s the more gradual, but also more predictable, disaster of sea level rise due to global warming, which will likely inundate the land now occupied by several of Silicon Valley’s largest tech companies, including Facebook. This is a particularly insidious threat, because few people are yet willing to talk about it or deal with it.

Because so much commerce and communication now takes place in “the cloud” and on social networks, it’s easy to forget that the big institutions in Silicon Valley—not to mention their data centers—are rooted in the physical world. One good shake could provide a reminder.

5. 7th Street and Market Street, San Francisco: United Nations Plaza

The pedestrian mall and fountain at UN Plaza have been labeled “San Francisco’s most public theater of squalor, misery, and sickness” by one documentarian. Designed by famed architect Lawrence Halprin in 1975, the plaza was supposed to function as a grand formal entrance to Civic Center Plaza and City Hall, and it was originally hoped that its construction would lead to the rejuvenation of a down-at-the-heels section of Market Street. But that never happened, and by the late 1970s the plaza had become the seedy front porch to the Tenderloin, a six-block-by-10-block area that’s been preserved by the city as a haven of low-cost, SRO hotels and rooming houses for the city’s poorest residents. co-founder Gary Kamiya, pulling no punches, calls the Tenderloin San Francisco’s “last human wilderness,” a “radioactive core of junkies, drunks, transvestites, dealers, thugs, madmen, hustlers, derelicts, prostitutes, and lowlifes.” And while UN Plaza has been beautified in recent years—the fence that kept children from going too close to the needle- and feces-ridden fountain has been removed—it’s still a thoroughfare and gathering place for San Francisco’s poor and homeless population. That creates a striking contrast, now that the long stretch of Market Street passing the plaza, known as Mid-Market, is finally being gentrified. In June 2012, Twitter moved into a building two blocks away from the Plaza. Just over a year later, it went public, raising $1.8 billion and minting an estimated 1,600 new millionaires. Some of San Francisco’s richest citizens now work in close proximity to its poorest.

The Lawrence Halprin-designed fountain at UN Plaza. Source: Loren Javier/Flicrk.

The Lawrence Halprin-designed fountain at UN Plaza. Source: Loren Javier/Flicrk.

And that’s by design. The city’s hope is that the generous payroll tax breaks it gave Twitter and other companies as an inducement to settle in Mid-Market will pay off in the form of increased traffic to other local businesses, volunteerism by company employees, and other community benefits, all of which is starting to happen. But the number of San Franciscans living on the street or in emergency shelters hasn’t budged in years, and the gulf of wealth and opportunity that separates neighborhoods like the Tenderloin from the rest of San Francisco is, if anything, growing wider. The question posed by places like UN Plaza is whether technology-driven economic growth can continue indefinitely when such a large portion of the citizenry is being left behind.

Obviously, inequality is the issue of the day. Economist Thomas Piketty’s finding that capitalism, in the absence of progressive taxation, tends toward oligarchy, is now cocktail-party conversation around the world. That’s a good thing—it’s far more useful than debating whether the big banks deserved to be bailed out in 2008-2009. What I’m saying is that technology isn’t necessarily a leveling force, as many of its successful purveyors would like us to believe; in fact, it probably contributes to inequality by undermining wage growth for less-skilled workers.

Without major social programs to provide lower-income, less-educated workers with skills and resources they need to participate in the workforce and act as consumers, our technology-driven economic boom probably isn’t sustainable. And in any case, it isn’t leading us somewhere we want to go. Sharply unequal societies end up either moribund, or riven by revolution and chaos.

*  *  *

The five soft spots visited here aren’t the only ones where circumstances could turn against Silicon Valley’s current success. When the bubble pops, it might be due to some other cause, or several at once. But if we know where the innovation system is weakest, we can work to make it stronger. And we can think ahead about how to handle the next downturn—a message we’ve been hearing lately from no less than California Governor Jerry Brown, who’s proposing a constitutional amendment that would create a rainy-day fund for the state.

“While there are few signs of immediate contraction, we know from history that another recession is inevitable,” Brown’s proposal sensibly observes. So let’s be grownups about it.

By posting a comment, you agree to our terms and conditions.

6 responses to “Soft Spots: Five Places Where Silicon Valley’s Bubble Could Pop”

  1. patrickrafter says:

    Wade: Thanks for this fascinating and thought-provoking article. As a native of San Francisco who’s lived in Boston for the last 20+ years, very interesting to see the state and cost of living in my hometown. I liked your editorial approach of using physical locations as harbingers of likely bubble trouble to come.

    • Wade Roush says:

      Thank you, Patrick. Boston has its own set of challenges. But the contrasts here are so stark…I’ve been gathering thread for this piece for a while, and could have added another five locations to the list. But people don’t have all day to read blog posts, and I had to stop somewhere.

  2. Sridhar Vembu says:

    Great post, Wade. You have highlighted the collateral damage caused by the bubble well.

    The role of the Federal Reserve in blowing these repeated bubbles is also worth highlighting. As an institution, the Fed has failed us.

  3. natalia says:

    Оченъ красивые фотографии) wade

  4. Frank Hofmeister says:

    Wade – Your thoughts and visions are very well timed and placed. Let’s hope some of the ‘grown-ups’ are paying attention? Thanks