Is the Seattle area's tech boom really just a bubble?
A maker of virtual reality helmets sells to Facebook for over $2 billion, without a single product on the market. A mobile messaging app fetches $19 billion. Pop singer Justin Bieber graces the cover of Forbes Magazine, cast as a promising venture capitalist. Package delivery via drone is discussed with a straight face, as is connecting Third World villages to the Internet using balloons.
Things have taken a turn for the cartoonish in the tech world, to the point that TV’s best new comedy relies on Silicon Valley for both its name and jokes. Wall Street, after years of getting high on the industry’s fumes, has begun to take notice. The phrase “tech bubble” is appearing with increased frequency in the press, and the climate for tech stocks is getting markedly chillier.
While this has been cause for tension in Northern California, Puget Sound companies aren’t insulated. Investors are questioning Amazon’s stratospheric valuation in the face of low profits, especially as Chinese e-retailer Alibaba eyes an IPO. Newer companies like Zulily and NanoString have taken a pummeling in the market in the past few weeks, with both now trading at about half their 52-week high. Perennial blue chip Microsoft has stayed the course, but ex-CEO Steve Ballmer admits the company is unsure of its next act.
The tech industry has been a steady economic engine for the Puget Sound, especially since the recession hit. Seattle councilman Mike O’Brien calls it the region’s prime creator of high-paying jobs. Mayor Ed Murray and local real estate experts cite it as a driver of the housing construction boom.
To some extent, many of the region’s cranes and construction sites represent a bet on tech industry’s continued growth. But what would happen if that growth slowed down, or even reversed course?
“This Time is Different”
That’s the catchphrase of every bubble. But in this case, there are reasons to believe it.
To be sure, evidence of a modern tech bubble abounds. Business Insider columnist Jim Edwards laid out a comprehensive argument in January, citing 1990s levels of IPO activity, an intensifying boom in tech investment and an ominously robust NASDAQ. Prominent hedge-fund manager David Einhorn made waves last month by stating there’s “a clear consensus that we are witnessing our second tech bubble in 15 years”, observing that many tech valuations are wholly divorced from reality.
But Mark Schill, research director at Praxis Strategy Group, notes that “tech company” doesn’t mean what it used to. Where once it largely applied to dot-coms, high technology now has a role in nearly every business sector. In this respect, he said the Puget Sound has a firmer grip on the market than other regions.
“Is Boeing a tech company?” asked Schill. “They employ a massive number of engineers and computer scientists. How about Amazon? They’re a retail company if you look at them. How about Fred Hutchinson, or all the data and IT-focused firms in the area? … The region is highly concentrated with talent, both in the common definition of tech, but also these other areas.”
This diversity represents an ace card going forward, he said. Schill worked with Forbes to compile a list of the top tech performers in the U.S. Bucking conventional wisdom, the Seattle area was named the country’s “most consistent performer” in tech job growth over the past decade, with a 43 percent increase in tech employment and an 18 percent increase in STEM-related jobs. The local industry’s not minting millionaires like Silicon Valley, but it’s a steady success.
To many investors, all this talk of a tech bubble is just that. Where stocks like Pets.com may’ve seemed like a get-rich-quick ticket last time around, no intelligent person is betting their retirement savings on Twitter stock these days.
As venture capitalist Marc Andreesen told the Wall Street Journal earlier this year, “Bubbles are a very specific phenomenon where you’ve got mass psychology and you've got every mom and pop investor and every cabdriver and every shoe-shine boy buying stock….There's nothing like that. We're talking about a fairly small number of companies. And then, we're talking almost entirely on the private side.”
Put another way, investment in the tech sector is less widespread than it may seem. So far, 64 companies have gone public this year. Yes, that's more than double the amount in 2013’s first quarter, and the most since the bubble-icious year of 2000, but it pales in comparison to the first dot-com craze.
In 2000, there were 261 tech IPOs, down from 369 the year before. In 2013, there were 45.
Unlike the mass market delusion of fifteen years ago, or the more recent housing bubble, the public doesn’t have much tech sector buy-in. Should a bubble actually burst in the industry, the fallout would be more contained.
When the Speed Slows
That said, there are people besides VCs betting on the tech boom’s continuation.
Take Bellevue’s $2.3 billion Spring District, for instance. The proposed 16-block planned community is a marvel of private urban engineering, called “the largest high-density development attempted in the U.S. in decades” by Greg Johnson, the president of developer Wright Runstad.
The 36-acre development aims to create, from scratch, the sort of urban ecosystem that attracts modern tech companies. That includes offices in walking distance of nice apartments, transit, shops, nightlife and more.
“What the market is telling us is these are the sort of neighborhoods that are most attractive to tech companies,” said Johnson, who helped design Microsoft’s Redmond campus. “We’re very excited about tech growth. I get excited every day to read some new twist on the cloud [computing], some new angle on web retailing. It’s all happening here, and it appears to have really strong momentum.”
Johnson said phase one of the project has just been completed, meaning roads and utility infrastructure are in place. Construction will begin on apartment high-rises this coming September, and ideally two commercial buildings as well.
There’s only one hitch. Johnson wants a large tech company to serve as an anchor tenant for one of the two commercial buildings — an Amazon or Microsoft, for example — and one hasn’t materialized yet. As the scheduled construction approaches, he’s debating whether to start without such a commitment.
“We’re being very careful to advance commercial and residential at same time, to create that neighborhood feel of living and working,” said Johnson. “To put things in perspective, if we were having this discussion ten years ago, we’d be talking about South Lake Union the same way we’re talking about Spring District. Ten years ago, South Lake Union was just a glimmer. Everything was very aspirational, and it was a very fast expansion.”
I mention that it took a while for South Lake Union to become a tech hub, with plenty of speed bumps along the way. To hear him tell it, he’s looking for a tech company that wants to make a big expansion right now.
“We’re mindful that you can have big swings up and down,” said Johnson. “This district will be one where we can deliver large amount of space to users who need it, or we can do it block by block if things slow down. Not to say we’re thinking of a downside scenario.”
Overall optimism is warranted. Regardless of the bubble talk, the local tech industry is growing at a rapid clip. Amazon is expanding its headquarters in downtown Seattle, to allow for a doubled workforce of an estimated 30,000 employees. Google is likewise doubling their Kirkland campus to accommodate about 1000 new employees. New tech companies pop up in the area every week.
All that expansion helps to inspire new apartment construction, said Dylan Simon of Colliers International. But he argues those new apartments rest on a stronger foundation than traditional tech growth.
“Tech may be driving demand, but only if you define it in the broad sense,” said Simon. “What’s really driving job growth in the area is innovation.” He names energy, healthcare and general technology as the three primary sectors in this trend.
Should Amazon’s expansion slow from Mach Three to Mach Two, Simon said, housing developers won’t necessarily lose their shirts. Local economic analyst Dick Conway concurs, forecasting an annual growth of 35,300 jobs up until 2018.
In some respect, people have been theorizing about a tech bubble for a while — actor Ashton Kutcher has been a venture capitalist for years, after all. The New York Times was predicting we were in the midst of one back in 2010.
But whatever the trend, investors always eventually return to the age-old question: What’s a company’s plan for profit? The tech world has been able to avoid that question for a few years, asking investors to adopt a more long-term mindset about cornering aspects of the mobile marketplace, or believing in the power of online advertising. But that can only last so long.
The market's recent dip may be a sign it's beginning to call things to account.
That could be bad news for some — flimsy tech companies looking for a big IPO, for example, or apartment developers hoping for an endless supply of young, high-paid tenants. But it’s also the sort of thing that allows a bubble to slowly deflate, rather than suddenly explode.
It’s too early to tell if we’re seeing a new market trend or a temporary lull. But in the economically diverse Puget Sound region, the reaction to bubble rumors so far is to simply keep calm and carry on.
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Correction: This article has been corrected to fix a name of one of the people quoted in the story, Dick Conway.