Vexed in the city: Tech's fraught transformation of San Francisco 2014

The city once known for the summer of love is now dealing with a different kind of emotion. An influx of thousands of techies is feeding an unprecedented economic boom -- and generating a whole lot of angst.

Charles Cooper Former Executive Editor / News
Charles Cooper was an executive editor at CNET News. He has covered technology and business for more than 25 years, working at CBSNews.com, the Associated Press, Computer & Software News, Computer Shopper, PC Week, and ZDNet.
Charles Cooper
14 min read

Amid a time of tech-fueled prosperity, San Francisco faces myriad questions about how the venerable city is evolving. George Rose, Getty Images

This story is part of a CNET special report that examines the controversy gripping San Francisco as a massive influx of techies feeds an unprecedented economic boom -- and backlash.

SAN FRANCISCO -- On a sunny day in April, San Francisco's skyline offered a handy prop for Mayor Ed Lee, who seized on the can-you-believe-this view moment to ham it up for the news cameras.

"I know we're in the cloud, but there's nothing cloudy about what's being unveiled today," Lee told a room packed with civic and business representatives.

From their vantage point 25 stories above downtown, the crowd gathered at Salesforce.com's corporate offices watched as construction workers used cranes to lay girders for what will be the city's tallest building -- a 61-floor high skyscraper bearing Salesforce's name. The company, already San Francisco's biggest tech employer with 14,200 workers, will lease more than half of the 1.4 million square foot tower, creating even more private sector employment once the project is completed in 2017.

Vexed in the city: CNET looks at how San Francisco is dealing with its tech boom. James Martin/CNET

As the municipal booster-in-chief, Lee was predictably pleased about yet another high-profile tech company expanding in San Francisco rather than in one of Silicon Valley's suburbs 30 minutes to the south. The moment also furnished another reminder of the tech-powered economic resurgence in this perennial boom-and-bust town, with tech jobs helping to drive the unemployment rate to 4.1 percent in the Bay Area, well below the statewide average of 7.4 percent in June.

But while tech may be re-energizing the local economy, a dark mood has set in among social activists who don't share the mayor's upbeat vibe about the benefits of cozying up to the tech industry. In fact, they link its increasingly outsized presence here to a widening social gap. The presence of well-heeled newcomers sporting six-figure tech salaries is raising the cost of living to the breaking point for thousands of poor and working-class people, they argue. Stories about elderly, long-time residents evicted to make way for Airbnb inventory have become a fixture on the front page of the local paper.

Tech companies counter that San Francisco is a magnet for the tech disruptors changing the way we all live and work, and say they are bringing prosperity to the more than 68,000 people who work in San Francisco's tech sector.

The clash between those two views of the world has led to a spring and summer of angry words and angst.

A few days before Salesforce's announcement, protesters set up a line outside the home of Google Ventures partner Kevin Rose, passing around fliers describing him as a "parasite."

"The start-up he funds bring the swarms of entrepreneurs that have ravaged the landscapes of San Francisco and Oakland," the protestors wrote in a leaflet handed out at the demonstration. We are the ones who serve them coffee, deliver them food, suck their c---s, watch their kids, and mop their floors."

Rose declined to comment. But last week he announced plans to scale back his time at Google Ventures to focus on a new consumer Internet startup called North Technologies. Presumably, he's hiring.

Summer of love, anyone?

San Francisco is a small city geographically, just 46.9 square miles, with a population of over 825,000 people. (In comparison, New York City is 10 times the size -- at 469 square miles -- with more than 8 million residents.)

That means San Francisco has limited room for expansion. The influx of younger, wealthier tech workers with money to spend was bound to get noticed -- and it has.

Their arrival has changed the fabric of old neighborhoods in profound ways, including the traditionally working-class Mission District. For decades, it's been known for great weather, cheap eats and (relatively) low-cost housing. While the sun still shines, trendy eateries and bars catering to 20- and 30-something techies are fast replacing bodegas and burrito joints in what was a longtime Latino neighborhood.

Protesters block an Apple bus in San Francisco as a Google bus passes. Getty Images

Rents are also rising -- fast. So are the eviction notices. An anti-gentrification activist group called the Anti-Eviction Mapping Project has compiled a list of landlords who have used a 1985 California law to evict tenants. It includes 98-year-old Mary Elizabeth Phillips, who has lived in the same apartment since 1937 and is now negotiating, after her situation was publicized, to stay in her place.

Before companies from Salesforce and Twitter to Pinterest and Zynga decided to make the city their home, San Francisco already had the highest rents in the US. But it's definitely gotten more expensive here. Since 2012, the average asking price on rentals has climbed to $3,057 from around $2,700.

Housing activists fear that people who don't pull down six-figure salaries simply can't afford to live here any longer. Claudia Tirado, a third grade teacher who is struggling with that reality, moved into a two-bedroom, rent-controlled apartment in the Mission with her boyfriend and their two-year-old son six years ago. In 2012 a Google lawyer named Jack Halprin bought the seven-unit property and began to serve eviction notices on Tirado and the building's other occupants.

Vexed in the city: The tech invasion of San Francisco (pictures)

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"This is a personal fight for me," said Tirado, who has until next February to vacate her apartment. "San Francisco is not one of those cities where you have to go and search for someone to rent to. Here, if there's a place available you have 10 applicants with cash in hand. This is going to be really hard on us."

Halprin did not respond to requests for comment.

Tirado and countless other apartment hunters are facing the truth that economist Adam Smith discovered more than 200 years ago: when supply is low and demand is high, prices climb. In San Francisco, there are slightly fewer than 139,500 apartments, according to the National Multifamily Housing Council. That makes it grim for apartment hunters, especially when the other guy works for a hot Internet company whose stock price is in nose-bleed territory or when a landlord decides to cash in on a trend that has seen rentals converted into one-night stands for users of Airbnb's apartment-sharing service.

"I see what's happening here with growth going skyward and gridlock on the ground," said Lee Housekeeper, a longtime San Francisco publicist who used to be the music agent for the Doors, Jefferson Airplane and Janis Joplin. "All kinds of problems are attendant with this growth and we should be careful -- but all in all, it's so much better than not eating."

San Francisco has always been an expensive place to live. In fact, before he found fame as a Civil War general, William Tecumseh Sherman worked as a banker here in the 1850s, and later complained in his autobiography about the high cost of local real estate. In June, the median home price in San Francisco reached the million-dollar level for the first time, according to DataQuick. That's great if you're already a home owner. It's not so wonderful if you're still shopping around.

Who's to blame? There's no shortage of anecdotes about techies, and foreign buyers, who show up with cash ready to outbid rivals and pay whatever it takes to win. Indeed, people working in San Francisco's tech sector average $145,000 a year (that includes bonuses and stock options), about double the average income for other private sector jobs in the city, according to a study by South Mountain Economics.

Technology adviser Ron Conway: Tech industry is "absolutely committed to being a positive force for all San Franciscans." Dan Farber

The full picture is more complicated when you consider that the financial, legal and accounting sectors -- which are all thriving -- still make up a slightly larger part of San Francisco's economy. While people working in San Francisco's tech sector comprise about 13 percent of the city's private sector jobs, finance, legal and accounting make up 15 percent.

But here's the thing: financiers, lawyers and accountants don't run private bus systems.

So much of the debate about whether the tech industry is good or bad for San Francisco is about optics. Tech's critics have seized on the image of Wi-Fi-equipped, air-conditioned buses shuttling employees from San Francisco to Silicon Valley as a symbol of perceived privilege. Demonstrators have periodically blocked -- and sometimes pelted -- the shuttles, which take an estimated 35,000 tech workers to Google and other Silicon Valley companies each day. A coalition representing unions and local activists has since sued to stop a city hall program that would let shuttles stop at some 200 public bus stops around San Francisco.

The buses also feature as talking points in the debate over the gentrification of older San Francisco neighborhoods. Activists have pointed to a UC Berkley masters thesis submitted last year by city planner Alexandra Goldman that suggests "rental prices within a walkable distance of these shuttles stops are rising faster (up to 20%) than the rental prices outside the walkable distance."

Most technology execs have steered clear of the verbal pyrotechnics around what their handlers would doubtless argue is a no-win argument. The frankest assessment out of Google came this past June when Google co-founder Larry Page acknowledged to The New York Times that the protests partly reflected peoples' fears about social dislocations being forced by technology's advance. At the same time, he said the company is often the target of complaints that have little to do with Google, the world's biggest search engine.

"To some extent we're being used as a way to attract attention," Page told the Times. But, he admitted, "I think people have legitimate issues with it as well."

The anger and blame directed at the tech industry is a "very dangerous drift in our American thinking," said venture capital icon Tom Perkins. CBS News

One industry executive who did publicly engage tech's critics was the legendary venture capitalist Tom Perkins. In a letter to the Wall Street Journal, Perkins compared criticism of the wealthy to the Nazi persecution of the Jews. He described the anger directed at the private bus shuttles and the blame being put on the tech industry for the rise in real-estate prices as a "very dangerous drift in our American thinking."

Perkins later apologized for drawing a parallel with Kristallnacht but stuck by his assertion that successful people were under siege in an emerging class war.

Ron Conway, a well-connected tech investor and a big supporter of Lee's first run for mayor, offers a more sober assessment. "The tech community understands that it is relatively new to San Francisco and is committed to working with community leaders to work through these issues," Conway said. "We're absolutely committed to being a positive force for all San Franciscans."

Downside of a financial windfall

For any mayor who presides over myriad constituencies, the sometimes contentious give-and-take that is city politics just comes with the territory.

San Francisco has a history of activism. Labor strikes in 1934 led to two deaths and a long strike that paved the way for the unionization of ports on the US's West Coast. In the 1960s, San Francisco's summer of love featured prominently in the decade's counter-culture movement. San Francisco also elected Harvey Milk, the nation's first openly gay politician, to its board of supervisors in 1977.

Even so, Lee confesses to frustration at the depth of the tech backlash. It's even more perplexing, he said, given the increasing demands on City Hall to do more. Even if Lee could wave a magic wand and legislate a stop to the forces unleashed by post-industrial capitalism, he would be crazy to do anything that made San Francisco less attractive to tech companies.

While tech still accounts for a relatively small portion of the local economy, it's growing quickly. Tech comprised $5.9 billion of San Francisco's private sector wage total in 1990. Today, it's more than $9.3 billion. That helps to pay for expanded services to the most economically vulnerable segments of the population that Lee's responsible for protecting.

San Francisco Mayor Ed Lee (left) with Riverbed CEO Jerry Kennelly celebrating the networking company's new SF headquarters James Martin/CNET

"Yes, we have people who disagree with the changes, but these are the same people who are asking for more public housing and more social services and better transportation," Lee said. "I can't do that with a stalemated budget."

Like any politician with his eyes on re-election, Lee knows that the spillover impact from Silicon Valley's expansion into San Francisco is a crucial part of footing the city's bills.

San Francisco's local economy took a tumble with the rest of the country when the recession began in late 2008. In January 2010, San Francisco's unemployment rate set a 25-year record when it reached 10.4 percent.

An inside look at a typical day in tech wonderland (pictures)

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But Lee is that most fortunate of mayors: He leads a city enjoying one of the biggest bursts of prosperity in its 158-year history -- thanks primarily to a tech-fueled economic rebound. These days the unemployment rate is 4.1 percent, with the tech sector responsible for over 30 percent of the private sector jobs created here since 2010.

People working in technology and information sectors paid taxes on about $9.2 billion in wages in 2012. What's more, tech accounted for $480 million in tax revenues in the 2012-2013 fiscal year, up 36 percent from 2009-10.

And then there are the sundry "multiplier effects" of the tech industry's larger footprint -- all the extra oomph it has provided to the local economy, The city controller's office says tech companies are responsible for almost all of San Francisco's local employment growth since 2010.

The industry's burgeoning presence is also reshaping the local skyline. By the end of 2013, tech companies had filled some 15.5 million square feet -- roughly 22 percent -- of the local office space market. That's noticeable in a city that's just 7 miles by 7 miles.

"I need to increase revenues if we're going to increase the amounts that we're spending to help people and improve their lives," Lee said. "When people didn't have jobs, we all cried together."

Welcome to a 24/7 construction site

San Francisco's city flag features an image of a rising phoenix. But the crane -- a construction crane -- might be a more fitting emblem. Downtown resembles a big demolition and construction project as commercial developers scramble to create new office space for the city's tech coterie.

Lured by tax breaks, Twitter signed a lease in 2011 to relocate its headquarters to a seedy area of mid-Market Street, the first major development in that perennially blighted neighborhood in years. Some 15 other tech companies have also moved into the area and signed contracts to lease another 1.3 million square feet.

As more tech companies move in, more buildings are going up around San Francisco. James Martin/CNET
The tech industry is raising its physical profile in other parts of the city as well. Across from CNET's headquarters in the south of Market Street neighborhood known as SOMA, networking service LinkedIn has leased all 26 floors of a building now going up that will have room for 2,500 employees. In June, Riverbed Technology, a networking company, moved 600 people into a new downtown headquarters.

And it's not just big companies. Thousands of smaller startups and independent developers are scrambling for loft space in hot San Francisco neighborhoods like Mission Bay and Dogpatch, a short drive from downtown, where they can develop their Internet-based apps for the Web, smartphones and other devices.

Why locate in a city famous for high taxes and sometimes mind-numbing congestion? It turns out that the traffic is just as bad in Silicon Valley while the cost of living anywhere between San Jose and San Mateo can be equally expensive. What's more, in the competition to hire the best and the brightest, employers view a San Francisco address as their trump card.

"We're engaged in a daily war for talent, and it's a big advantage to have a headquarters in San Francisco," said Riverbed CEO Jerry Kennelly. "It's a global hunt for talent and when they come here, they see a lovely city with lots of young people and a bustling street life where they can meet other young people."

Careful where you flout that gadget

Sarah Slocum, a publicist specializing in high tech, found herself on the receiving end of rude and uncivil behavior in February 2014 when she walked into a bar in San Francisco's Haight-Ashbury neighborhood wearing a pair of Google Glasses.

Slocum was demonstrating how the glasses worked when a woman nearby turned around and offered a coarse suggestion where to put her high-tech toy. "I had never been verbally threatened by a random stranger," Slocum said. "I didn't understand where that hostility was coming from. I hadn't exchanged any words with her before. It was kind of weird."

It got weirder -- especially after Slocum turned on Google Glass's recording feature. "I said, `I'm going to record you guys, thinking it would change their behavior."

Instead, the situation escalated and more words -- and insults -- were exchanged. "She said I was killing the city. It was a bizarre interaction. I'd never experienced anything like that."

Then a man ripped the $1,500 glasses from Slocum's face and ran outside. Slocum gave chase and ultimately wrested them away from him. Unfortunately, when she returned to the bar, someone had stolen her angora purse -- house keys and all.

Months later, Slocum's still not sure what triggered the trouble. "I like talking about tech and innovation and new gadgets," she said. "It's always cool to wear them out because you can talk to people with similar interests and passions and you get to meet lots of cool people. Usually, there's a positive reaction and people respond with passion and curiosity."

Uniting the city

Paul Ash goes to work each day facing a relentless enemy: hunger.

This year, Ash, who runs the SF-Marin Food Bank, will distribute 46 million pounds of food to the needy from a 60,000-square-foot warehouse in San Francisco's Potrero Hill district. But even in a city enjoying untold prosperity, Ash still isn't close to declaring victory in the battle.

"We haven't found the end of where people need food in San Francisco," he said. More troubling for Ash: His customer list increasingly includes people further up the income scale.

"There's a little bit of income replacement going on," he said. "If a family of four is earning $35,000, if they can come to us and get a little bit of fresh produce, a carton of eggs and some fresh dairy, maybe that frees up money for more clothing for the kids."

But this is one area where the tech industry can help itself by helping others. Some companies -- like Salesforce, Google and eBay -- volunteer their staff to work at the Food Bank, as well as contribute with donations. But while they talk about changing the world, not all tech companies live up to their creed when it comes to doing the deed.

"These companies are still in the formational stages," Ash said. "There are very many of them who are behaving like they're going to be great corporate citizens, and then there are those who we haven't heard from, whose door is not open."

One door that's wide open is Salesforce's.

Salesforce CEO Marc Benioff is one of the biggest philanthropists in the Bay Area. He and his wife, Lynne, have personally donated $200 million to local hospitals since 2010. Benioff also created a program at Salesforce where the company donates 1 percent of its equity, 1 percent of its employees' time, and 1 percent of its products to charity. Since its inception in 1999, Salesforce has donated more than $68 million with its employees volunteering some 680,000 hours of their time.

Salesforce.com CEO Marc Benioff argues that corporate philanthropy can help bridge the social divide. James Martin/CNET

Salesforce also gives its employees 6 days off each year to do what they want, hoping that they'll use the time to get involved in community activities.

"His is a big voice," Ash said. "He's unusual. It's his culture to give."

Current tensions in San Francisco notwithstanding, Benioff believes philanthropy can serve to bridge differences in this emerging tale of two cities. "Through philanthropy, we can create models that ease the burden on those who are getting impacted," Benioff said. "It's not like this is going to stop, but it can be mitigated by good works."

Like Lee and Conway, Benioff thinks involving all the stakeholders in the debate over the future of San Francisco eventually will point to an answer.

"You only get through this if the people who are providing civil disobedience are a critical part of this equation as are the politicians, as are the business leaders, and the non-profit sector and the residents," he said. "If everybody can pull together and collaborate more, I think that we'll be better off."

It's an optimistic viewpoint. But philanthropy or public-private partnerships only go so far. Ultimately, the best way tech firms will help the city is by growing and creating more jobs, said Lee, who described Salesforce as having "one of the greatest corporate souls that I've ever seen."

"Yes, there are people with whom we have to work harder, but if our total pot doesn't grow, we wouldn't have the money to fund these different projects," he said.

Even then, more money in the city's coffers won't help people who don't have the skills necessary to apply for more technical positions. That's where those who craft social policy will have to earn their pay -- or risk a worsening social rift.

"We've got to figure it out," said Parker Harris, who co-founded Salesforce with Benioff. "This anger is to be respected. But it needs to be directed."