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What You Need to Know About Amazon’s Proposed Second Headquarters

Monday, September 11, 2017

Amazon has issued an RFP for “HQ2,” a second headquarters in the United States apart from its expansive campus in Seattle, Washington. The idea of a second headquarters location – one on equal footing with their Seattle presence – is highly unusual, if not slightly suspect, due to recent tension brewing between Amazon and Seattle’s legislators. Nonetheless, city, county and state governments across the broad American landscape immediately took up the RFP. Below we provide considerations for would-be hosts and the potential impact on Seattle, which we see as negligible.

RFP Review

According to the RFP and HFF Research, Amazon’s Seattle presence equates to approximately 10 million square feet housing some 40,000 employees. Amazon envisions a second headquarters location that will, over 10 to 15 years, provide the employment of approximately 50,000 citizens, each earning an average of $100,000, over an additional eight million square feet developed in three phases. Amazon’s economic direct and indirect contribution to Seattle approaches nearly $40 billion. Every $1 Amazon invests in the underlying economy generates a 140-percent multiplier.

Requirements for the host MSA include existing contiguous vacancy of 500,000 square feet with semi-adjacent land parcels exceeding 100 acres. Further requirements include a local population exceeding one million residents, on-site access to mass transit, a commute of 45 minutes or less to an international airport and easy access to a major highway or arterial road — no more than two miles. It also asked for evidence of fiber optic internet connections and a coverage map showing strong cellular phone service at the location. Additionally, Amazon wants traffic congestion figures, lists of universities and statistics on the qualifications of local workers.The company is also requesting that the new location have a diverse population and recreational opportunities. In other words, it does not want to stray too far from the lifestyle of Seattle.

According to the significant benefits Amazon provides, many MSAs of scale have entered the competition including New York, Boston, Baltimore, Los Angeles, Oakland, Sacramento, San Diego, Chicago, Cincinnati, Houston, Dallas, San Antonio and Nashville, as well as several smaller states and British Columbia (Canadian territories are not exempt).

Considerations for Candidate MSAs

Of all the text and statistics in the RFP, perhaps the most intriguing is Amazon’s desire for a “stable and business-friendly environment.” Seemingly ubiquitous to major corporate tenants, this ostensibly is a knock against Seattle legislators who have recently attempted to levy city income taxes on citizens earning in excess of $250,000 ($500,000 for couples). Amazon clearly seeks low regulatory barriers.

Cities and states are highly motivated to attract technology companies to their locales in order to foster “sticky” job creation in a knowledge industry, and the likelihood of a multiplier impact on innovation and consumer spending. In return, companies are afforded outsized benefits, mostly in the form of tax breaks, but their economic impact far outweighs the loss in taxes.

Recent Incentive Packages Made to Corporations:

  • Foxconn: The Taiwanese electronics supplier plans to build a $10 billion factory in Wisconsin, but the state's $3 billion package of tax credits has been criticized for being too generous.
  • Boeing: Washington state approved $8.7 billion in support for Boeing through 2040 if it built its 777X plane in the state. That deal was the subject of a European Union complaint alleging that the incentives were “illegal subsidies,” though the World Trade Organization recently sided with the company.
  • Tesla: The company struck a deal with Nevada to build its sprawling battery factory, picking it over four other states. The Nevada agreement brought with it $1.25 billion in tax incentives over 20 years.
  • Aetna: The insurance giant has announced it would leave its hometown of Hartford for new headquarters in New York City, and the promise of $24 million tax breaks over the next decade.

There are multiple corporations with several regional headquarters (ExxonMobil, Conoco, State Farm, etc.), but few who house “true” dual-headquarters with dual executive management concerns. And in this event, it typically comes after a merger/acquisition to secure continuity of business revenue, key personnel and corporate culture. Lenovo, for example, housed multiple regional headquarters after acquiring IBM's personal computer unit. Additionally, Gap moved most of its business to New York City despite having its official headquarters in the Bay Area.

Considerations for Seattle

Amazon's new second headquartersFor Seattle, Amazon is surely an economic driver of the MSA’s massive success. However, the exposure Seattle also risks to a single employer, even if it is one of the most dynamic in global enterprise, has begun to percolate among commercial real estate investors.

Amazon is the biggest corporate employer in Seattle, with approximately 40,000 employees mostly populated south of South Lake Union. In order to house this workforce, Amazon as a tenant occupies 19 percent of the prime office inventory in Seattle – the largest individual corporate exposure within any city in the United States, according to The Seattle Times.

With housing prices rising significantly in the city and city income taxes proposed by legislators, Amazon has understandably long-considered the best approach to maintaining the skyrocket growth its shareholders have not only benefitted from but now come to expect.

According to Seattle City Councilwoman Kshama Sawant, “When big corporations say ‘business-friendly’ climate, it’s code for corporate giveaways and vicious policies seeking to make the biggest possible profits on the backs of working people.”

“I recognize there are many factors that went in to Amazon’s decision, but the Seattle City Council’s focus on dividing the pie of economic opportunity rather than growing the pie for the city and the region is undoubtedly among them,” said Matt McIlwain of Madrona Venture Group, a venture capitalist organization in Seattle.

Maud Daudon, the chief executive of the Seattle Metropolitan Chamber of Commerce, said she has heard similar concerns from Amazon executives and called the company’s announcement of its plan a “wake-up call for the region.”

“We have not said thank you enough to Amazon," Ms. Daudon said.

Conclusion

In reality, Amazon has no plans to leave the Seattle area, and the city, as well as its citizens and landlords, should not be concerned with Amazon’s desire to expand. In truth, further expansion will assuage Seattle further strain on its infrastructure and housing, while reinforcing proximity to the existing campus and quality of real estate is the most important concern for locals.

“I think there’s no way to accommodate another 50,000 engineers and executives in Seattle,” said Ed Lazowska, a professor of computer science at the University of Washington. “I also don’t think it would be healthy for Seattle to have that. As much as I love Amazon, to have that great a density of a single company, it means you’re a one-horse town.”

Whether Amazon is flexing to local legislators or merely conducting the same kind of “outside-the-box” thinking is has come to be known for will require time and an abundant level of work and negotiating on the part of many MSAs. And in the event Amazon does move forward, such a decision may not come for 18 months with another 15 years required for the full economic impact to be realized. For now, Seattle can therefore continue to enjoy Amazon as a significant driver of an underlying economy that so many other MSAs want to participate in.

Sources:  HFF Research, Amazon, CoStar, NPR, Seattle Times, CNBC, New York Times
 





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