First of an occasional series on the future of housing.
Entrepreneur Chris Smith just moved a company called Kipsu into new office space in downtown Minneapolis, a long way from competitors on the coasts.
He has no intention of ever leaving, not if that means trading away the big cost advantage Kipsu has over its competition.
You don’t usually hear CEOs talk about our region as a low-cost place to set up shop. Smith may have an opinion about state tax policy — I forgot to ask — but what he knows is that it’s far cheaper for Kipsu staff to live a good lifestyle here than in a region with astronomical housing costs like northern California.
You would think with lower costs he would be trying to win on price, but instead he’s winning on service. Kipsu can simply afford to employ far more people to solve customer problems.
Smith frames the challenge of good and affordable housing in a way you don’t usually hear. It’s undeniable that our region needs far more decent places to live for people who don’t make much money, but that’s true nearly everywhere. Red flags are popping up about housing availability for a far broader swath of the Twin Cities, like in the dearth of so-called starter homes.
An analysis by the Seattle real estate firm Zillow found that the reason more starter houses aren’t hitting the market is that a big percentage of the people who currently own them can’t qualify for a mortgage on a bigger place.
What this tells us is that we are at risk of squandering a key advantage for the region, the availability of a high-quality lifestyle at a reasonable cost.
There are formal rules for what qualifies as “affordable” at various levels of household income, but it’s useful to consider what a typical place costs to own or rent compared with the income opportunities people can find here.
Housing here isn’t exactly cheap. The median value of an owner-occupied housing unit in the Twin Cities is about 20 percent higher than both the national median and the value of a house in greater Milwaukee, according to recent census data.
On the other hand, we have an edge in prosperity. In fact, of the top 10 metropolitan areas in the country as ranked by median household income, only two are not on the East or West coasts: Denver and the Twin Cities.
Assuming a 20 percent down payment, making the mortgage payments for a median house would cost somebody at the median about 16 percent of income in the Twin Cities, according to Zillow. That’s less than the nation as a whole, and it’s a lot less than some places that are known for having a lot of great-paying jobs.
In the Boston, New York and Denver metro areas covering the mortgage on the median-valued house takes a quarter or more of the median income. In the booming San Francisco Bay Area, the region that leads the country in household income, the mortgage payments on a median-housing unit could take closer to half of the household’s income.
The Silicon Valley technology giants certainly pay stunning salaries. The median pay at Facebook last year was more than $240,000, meaning half of its 25,000 or so employees made more than that. Pay at the Google parent Alphabet wasn’t that far behind. Minnesota’s corporate giants, like 3M Co. and U.S. Bancorp, reported median compensation last year that was only about a quarter of Facebook’s.
Smith has been thinking a long time about the trade-off between the Twin Cities and Silicon Valley, as earlier in his career he worked as a venture capitalist who spent much of his time there. Smith co-founded Kipsu in 2010, with a plan not that common in Silicon Valley — bootstrapping the company rather than seeking investor capital. It’s no surprise that Smith described himself as particularly sensitive to costs.
Now approaching 60 employees, Kipsu sells technology and services to help resort operators and other businesses dependent on delivering top service connect more easily with customers. Guests all carry smartphones, so why not make it easy for them to quickly let the manager know through a digital message that a unit’s air conditioning doesn’t seem to work?
He has made job offers to people living in California, and according to his numbers the average salary for a software engineer in northern California is well into six figures and at least 40 percent higher than it is here. But the median one-bedroom apartment costs more than twice as much there.
As Smith has worked out the numbers, the trade-off between cost-of-living and career opportunity makes the Twin Cities pretty hard to beat. He added that he’s not interested in paying people less than they are worth but in providing them a better lifestyle here.
That reality has allowed him to adopt a different business model than his competitors. Technology entrepreneurs love the idea of selling an application that basically sets itself up and then just runs, but the customer gets much more than that from Kipsu. Smith called it “value-added hand-holding,” meaning Kipsu employees do things like train customers and solve business process problems.
The players in Kipsu’s niche all charge about the same price, he said, but nobody else can come close to affording the customer support staff of Kipsu.
He’s clearly frustrated that entrepreneurs in the Twin Cities fail to recognize this advantage, instead mostly coveting the kind of vitality that exists in big technology clusters like Silicon Valley.
To Smith, where to locate a business looks a little like the choice in the moviemaking business. A big-budget blockbuster like a superhero movie generally gets created only in Hollywood, where the infrastructure and money are to make it. That’s Silicon Valley, and if an entrepreneur wants to build the next Uber or Airbnb, that’s the place to give it a try.
He’s found that to make a great independent film or documentary, there’s more than enough talented people here, where they can afford a richer life without needing a Hollywood salary.