Inside Tech Companies’ Move Beyond SF and NYC

The COVID-19 pandemic proved to the rest of the world what the tech Industry already knew: if you leverage technology, most office work can be done anywhere, from anywhere, at any time. Which is why it was a bit of a conundrum that some of the largest technology companies – who have always been at the forefront of remote and hybrid work models – continued to stay focused on establishing large concentrations of workforce and real estate in high-cost U.S. cities like New York and San Francisco. After all, it logically follows that those who produced software and technology that enabled us to work from home during the COVID-19 pandemic should also be using that same technology to work from anywhere themselves. For some, it was about staying where they had rooted themselves from the early days of a tech startup. For many others, it was the “network effect” of being immersed in adjacent companies and infrastructure that was accustomed to supporting the rapid, demanding pace of the tech industry. 

Post-pandemic, the rest of the world leveraged their learnings during what was essentially a forced, global pilot program in remote working and found themselves embracing remote and hybrid work in big ways, permanently dispersing portions of their workforce into lower cost cities. Because of this, tech companies are now realizing their “network effect” – and the support that comes along with it – can be found outside of New York and San Francisco. Even more surprising, they are finding that some of the more experienced computer engineering, programming and other advanced technology skillsets can also be found in tier-2 U.S. cities and potentially, even internationally. 

For example, a financial tech company was recently looking to position a large portion of its workforce in Wisconsin. These roles were responsible for building the technology and developing the algorithms for its wealth management products – roles that typically have been found in global financial centers like New York City, San Francisco, Los Angeles or Chicago. They also required a large, secured data center tied to a trading room that monitors global financial markets 24/7, something that is definitely out of the ordinary for a Wisconsin suburb. More recent conversations with a core, global tech company yielded serious interest in developing models and business cases to build significant scale in international cities like Mexico City, Sao Paolo, Buenos Aires, Amsterdam, and even Ho Chi Minh City. 

A number of factors are driving this flight to lower cost, including the increasing cost of debt, rising inflation and the subsequent rising profit expectations from shareholders. From the tech workforce point of view, they have been indicating for the past several years that the high cost of living combined with the poor work-life balance culture of the tech industry has become unbearable and unsustainable for them.

On paper, the business case exists to execute on these migrations and transformations. Office vacancies and rents have not returned to their pre-pandemic levels,4 presenting some great opportunities for companies to lock into low-rent, long-term lease contracts. Labor costs in tier-2 U.S. and international cities are most certainly lower than either San Francisco and New York, which continue to be among the most expensive cities in the world to live in, despite the impacts from the pandemic. In addition to this making sense from a business perspective, post-COVID trends have shown that the workforce may actually desire to migrate out of large metropolitan areas and into these tier-2 cities,6 seeking better schools, more living space, less pollution, less traffic, and a local economy supported by a major university or state government that could potentially mitigate the effects of an anticipated recession in 2023.

That said, what looks good on paper today loses its luster when you factor in some of the geopolitical and macroeconomic forecasts. Rising costs of debt are making it more challenging for companies to obtain the required capital to build out, furnish and implement new technology to establish and enable these new office locations. Furthermore, the emphasis on returning jobs to the U.S. is being driven by both political parties – as was evidenced by former President Trump’s tariffs and is apparent in President Biden’s “Build Back Better” plan with the 15% global minimum tax aimed at discouraging transfer of jobs and profits overseas. This trend toward nationalism is increasing in other countries, as well. Just prior to the pandemic, Italy contemplated following in the footsteps of the UK and exiting the EU. China’s tech giants like Tencent, Alibaba, and JD.com have struggled along with the rest of the global tech industry; however, there is no sign China will change its posture toward globalization of technology.9 Even the powerhouse of tech outsourcing – India – has become increasingly nationalistic as their boom years associated with the rise in technology exports have been impacted by sagging global trade, further worsened by the U.S.-China trade spat. As a result, Prime Minister Modi’s government has been producing policies that prioritize nationalism over economic recovery. This decrease in globalization will not only make it more challenging to redistribute these tech roles internationally from a policy perspective, but also support the hypothesis that the recent rise in global inflation is structural – as opposed to transitory.

While much of this continues to be uncertain and many of us will be reactive spectators to these events happening on the world stage, one thing is for certain: these “Tech”-tonic plates are already shifting domestically as places like Austin, Charlotte, Denver, Nashville and Raleigh have been seeing large migrations of tech labor coming from NYC and San Francisco for the last decade, and it has accelerated post-pandemic. Whether these movements are just tremors or indicators that San Francisco and New York City are losing their positions as core and finance tech capitals of the world has yet to be seen. Rob Raymond is a Managing Director in the Real Estate Solutions Practice at FTI Consulting where he focuses on corporate real estate strategy. Contact him at Rob.Raymond@FTIConsulting.com.