Amazon’s HQ2 Decision: Are the Winners Ready for Prime Time?

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Wharton's Susan Wachter and William Riggs from the University of San Francisco discuss how Amazon's headquarters decision will impact the chosen cities.

After Seattle-based Amazon this week chose Long Island City in Queens (New York City) and Arlington in Virginia as its second and third headquarters locations, the impacts of that decision are beginning to register beyond those two cities. Experts at Wharton and the University of San Francisco identified some of the major takeaways from Amazon’s so-called HQ2 selection process, which began 14 months ago and saw 238 cities vie for the $5 billion in investments and 50,000 jobs the company promised to deliver over 12 years.

Amazon’s decision on the locations for its two new headquarters is “a brilliant move,” according to Susan M. Wachter, Wharton professor of real estate and finance, who is also co-director of the Penn Institute for Urban Research. However, the move will certainly impact housing prices, Wachter noted. “The problem with Amazon is that wherever it goes, it’s going to have a major impact, raising housing prices and therefore making it unaffordable.”

“The runners-up may be the big winners in this situation,” according to William (Billy) Riggs, assistant professor at the University of San Francisco’s School of Management. “The profile of every one of the 238 cities that competed for investment really changed our dialogue on economic development in the U.S. So even though it’s seen as a big PR stunt by Amazon, it started a different conversation on urban renewal and economic development.”

Wachter and Riggs discussed the key takeaways from Amazon’s headquarters choices for the cities and their residents on the Knowledge@Wharton radio show on SiriusXM.

Gains vs. Incentives

Amazon’s decision to locate its next headquarters in two cities means they would split the gains – $2.5 billion in investments from the company and 25,000 jobs each, with hiring starting in 2019. It has also selected Nashville, Tenn., to set up an “Operations Center of Excellence.”

Amazon said that with its presence, New York City would earn an extra $10 billion in taxes over 20 years. In exchange, the city has offered the company performance-based incentives totaling $1.525 billion in tax breaks and other perks, including $48,000 for every new job the company brings. Virginia has agreed to pay Amazon up to $22,000 for every job it creates with minimum average wages of at least $150,000 annually, with a cap of $550 million. If Amazon creates more than the 25,000 jobs it has promised, it would get more incentives. The state will invest another $195 million in transportation projects, and more than $425 million in educational programs to help expand its talent pool.

The two cities will pay Amazon those incentives over a decade, calculated as a percentage of the annual wage of $150,000 or more over 10 years, and conditional upon fulfilling the target of 25,000 new jobs in each of the cities. In Nashville, where Amazon plans to hire 5,000 people, it would earn $102 million in incentives.

“Are there other parts of the states – particularly Virginia and New York – that end up suffering because of the investments that end up going to these areas?” –William Riggs

Riggs noted that the two cities are also “the most able to absorb the number of jobs that Amazon is putting out there.” However, he said “the key questions” are what the communities in those cities will be forced to give up to attract those jobs and if they would be worse off in the long term. He pointed out that the number of jobs Amazon would bring accounts for less than one percent of the total number of jobs in those regions, “so it doesn’t make a transformative impact in these areas.”

“For most businesses, the issue of location choice now is driven by labor: Will we be able to attract the white collar skills we need?” Wharton management professor Peter Cappelli told Knowledge@Wharton in a recent article that tracked Amazon’s headquarters search process. Amazon has more than 610,000 employees worldwide, including over 250,000 in North America, and has top rank on LinkedIn’s U.S. Top Companies as desirable workplaces.

The trade-off between the incentives and the gains from having Amazon is also a statewide issue in both cases. “Does this siphon funds away from [other parts of] New York in terms of some of the investments that will have to be made in the immediate Queens neighborhoods?” Riggs asked. “Are there other parts of the states – particularly Virginia and New York – that end up suffering because of the investments that end up going to be these areas? And those are trade-offs that citizens and policymakers are going to have to make.”

Wachter was more optimistic than Riggs about the potential for the cities themselves and the gains from the investments their respective states would make as part of their deals with Amazon. “It will be transformational for Crystal City and also for the Queens area,” she said. “These are disinvested and underutilized, and yet both of them are within extremely dynamic markets – the center of New York City and Washington D.C. This will increase the draw and the power of both New York and Washington. It’s a net win.”

Virginia’s governor Ralph Northam, for one, is optimistic that the benefits will not be limited to Amazon’s immediate location, but extend throughout the state, according to a press release from his office. In addition to the 25,000 jobs, he expected Amazon’s presence to help create more than 22,000 permanent, direct and indirect jobs across the state. Over the 20-year term of the incentives deal with Amazon, Virginia expects to earn net revenues of more than $3.2 billion in taxes, after accounting for the financial incentives it would extend to Amazon. The company will locate its Virginia operations in a neighborhood now branded as National Landing, which includes portions of Pentagon City and Crystal City in Arlington County and Potomac Yard in Alexandria city. The company’s initial growth is likely to be in Crystal City and Pentagon City.

Stimulant for Urban Renewal

According to Wachter, “this is the beginning of the development of both [Queens and Crystal City].” She noted that housing prices have risen “in all of the areas surrounding New York City,” except in Queens. “It is quite incredible that through this process, [Amazon] found the needle in the haystack in the whole of the U.S.,” she said. “Queens and Crystal City are two needles but they are in fact potentially powerful places. Amazon is going to bring those tech jobs to make them powerful.” That explains the “great excitement” in National Landing and in Queens, she added.

“There are consequences for affordable housing that need to be taken into consideration.” –Susan Wachter

At the same time, “there are consequences for affordable housing that need to be taken into consideration. Steps should to be taken to protect affordable housing,” said Wachter. “There is no doubt going to be a house price impact,” especially in Queens, she added. In order to meet that challenge, both Crystal City and Queens would need to see new, market-rate housing come up that would be affordable to those earning $150,000 annually, she noted. Both locations have the capacity to accommodate such new housing developments, she added.

Fresh investments in regional transportation projects and new housing developments could buffer some of the pressures the new jobs will bring to home prices, said Riggs. Those considerations explain the transportation projects proposed in the incentives packages from the two cities, he added. He noted that the New York location as a regional employment center has good transportation connections.

Amazon’s promise of a minimum wage of $150,000 for the new jobs has different meanings in each of the cities it has selected. A salary of $150,000 in Nashville “will stretch much further than in New York City or Arlington,” a CNBC report noted, citing comparisons on NerdWallet’s cost of living calculator. For Amazon’s new employees in Nashville to maintain the same standard of living, they would have to earn $230,000 in Queens and $228,000 in Arlington, the report added.

Potential for Local Backlash

Wachter noted that in Queens, Amazon would have the so-called “as-of-right” ability for new developments. That means it would not need to seek specific permissions from New York City’s Planning Commission or its Board of Standards and Appeals before launching development projects. According to Wachter, that is “an amazing win” for Amazon, which required the blessings of both New York City Mayor Bill de Blasio and state governor Andrew Cuomo.

“A lot of cities are keyed up for the next-level investment….” –William Riggs

The arrival of relatively higher-wage earners and giving Amazon as-of-right entitlements for development projects could bring two unwanted outcomes, Riggs said. One is a backlash from existing communities. “The as-of-right building regulations that [avoid] project approval process at the local level is a slippery slope. It takes the voice away from some of the people that may not be hitting that $150,000 threshold.” He noted a similar backlash in the San Francisco Bay area from existing residents to technology employees earning more and “commanding a certain type of housing,” he said. Lifelong residents of the area who do not have technology jobs may also feel left out, he added. “So that really calls for more of a local dialogue, not less of a local dialogue.”

Gains for Other Cities

The race between cities that aspired to land the Amazon headquarters has galvanized many of them to position themselves more competitively. “It’s not the end of the game; it’s the beginning in some ways,” said Wachter of how Amazon’s investments could stimulate similar investments. “This need for infrastructure [applies to] all our cities, and this [shifts the focus] on what needs to be done going forward for job growth.”

Added Riggs: “A lot of cities are keyed up for the next level investment, and that – as we saw with Nashville – very well could be Amazon.” For example, Riggs saw the entire Nashville to Chicago stretch as ripe for investment. Large talent pools and relatively inexpensive housing in states like Kentucky, Indiana, Illinois and Ohio could trigger a resurgence of interest from employers, and perhaps reverse the “brain drain” that has occurred over the years in some of those places, he added.

Detroit found an opening to reposition itself, and it now wants to attract what he called “green collar jobs,” or jobs that blend manufacturing and high technology, said Riggs. He pointed also to Indiana — called the crossroads of America — as “a logistics haven.”

“Companies that are bringing huge numbers of jobs [to cities] will have to be mindful of the negatives they bring with them.” –Susan Wachter

These opportunities would come with new stakes for both employers and urban planners. “Companies that are bringing huge numbers of jobs [to cities] will have to be mindful of the negatives they bring with them,” Wachter said. Many cities that pitched for the Amazon HQ saw what she called “the Amazon effect,” which was a backlash from some local communities saying they did not want the company in their cities. Their argument was that Amazon’s presence would end up raising housing prices and increase congestion, among other adverse effects, she noted.

Capital Presence

In selecting Virginia as one of its HQ locations, Amazon has underlined the need for it to have “a policy presence” in government circles, Riggs said. That is especially important for the tech sector these days, he added. “Across the tech sector, we’re seeing the pivot to being regulated, but also a dialogue about what type of regulation is appropriate.” Against the backdrop of those new realities, Amazon made “a very safe and a very smart location decision.”

Wachter agreed that Amazon made a wise move in choosing Virginia. “For these large companies that are so impacted by regulation, they need to have a presence where the dialogue on regulation is occurring.” Equally important is a need to forge strong relationships with local governments. “They can’t impose their own will. For their own good, they must figure out the win-win for the city as well as for the people in the community.”

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