The primary reason for the continuing relocation of capitals was exhaustion of wood resources for fuel and construction. New capitals were prosperous for several decades until the sparse forests around the city became depleted. Each capital went through a stage of decline and was finally abandoned in favor of a new site.

In 1881, the powerful Emperor Menelik II and his followers moved to the foothills of the Entotto mountains near present day Addis Ababa. This temporary encampment in central Ethiopia had several advantages for Menelik II. Firstly, its location further south than any previous capital allowed him to unite the southern reaches of the empire with the more populated north under his rule. Secondly, the site had historical significance as a legendary camp of medieval kings.

In November 1886, while Menelik was off in a distant corner of the empire, his wife Taytu moved the encampment from the hills down onto the current site of Addis Ababa. She reportedly left the Entotto mountain camp and was drawn to the site of Addis by the Fel Weha hot springs.

More important than the comforts of the Addis Ababa site, was its potential for expansion. The Entotto site was perched on a ridge and offered little room for development of the grand city Menelik envisioned. The hills were also limited in proximity to water and commerce routes. Upon his return, Menelik apparently became fond of the new location and in 1892 named the settlement, Addis Ababa, proclaiming it the new and permanent capital of the Ethiopian Empire.

In the 1890's and early 1900's, Addis Ababa had not yet become the grand capital city Menelik dreamed of. Throughout the 1890's, laborers worked in construction of the two oldest structures in Addis Ababa, Menelik's Gebbi (palace) at the highest point in the area, and the St. George Church to the west.

Part of the city's indigenous character was established by the early settlement patterns of the followers and subjects of Menelik II and his nobles. The lesser nobles were each granted land on one of the hilltops of Addis Ababa as gults, or rewards for their loyalty. The servants and dependents of each noble settled on the flanks of his hill, surrounding his hilltop Gebbi, and forming clustered neighborhoods called safars. These Safars eventually became the distinct sectors known today as Ras Berru Safar, Ras Tasomma Safar, and Fitaurari Habta-Giyorgis Safar. The servants settlements on the great hill of Menelik's Gebbi gave rise to neighborhoods differentiated by occupation: Saratagna Safar (Worker's quarters), Zabagna Safar (Guards' quarters), and Weha Senqu Safar (the "Quarters of the Unprovisioned", an imperial army camp with no amenities but water).

• Perhaps the most important event was Ethiopia's victory over Italy at Adwa in 1896. This stunning defeat of a European power brought peace and stability to the region, along with recognition and prestige for Menelik and his Ethiopian army. Finished with their duties at war, the nobility settled in Addis Ababa, further concentrating the power of the empire in the capital and giving rise to the aforementioned Safars. As Menelik's fame and fortune grew, foreigners flocked to Addis Ababa to trade and conduct business in the capital of the 'Champion of Adwa.' Menelik II, Ethiopia and hence Addis Ababa, had gained credibility and the respect of the world.
• By investing heavily in Addis Ababa, these foreigners from Europe, Arabia, and India, played a direct role in preventing a relocation of the capital. The tradesmen, including merchants and craftsmen, settled in the area at the base of Menelik's hill near the Arada, while foreign diplomats and advisors, known as the 'legations', lived on the northern fringe of the town. Most of the foreign population of Addis Ababa had high stakes in the local economy and constructed elaborate homes and shops in the area.
• The completion of the railway connecting Addis Ababa to the French port of Djibouti on the Gulf of Arden in 1917 provided access to trade and transport by sea and firmly established Addis Ababa as the political, commercial and cultural capital of Ethiopia.