Amazon HQ2: Where Next for Seattle?

September 08, 2017

The news from Amazon that it is to establish a “second but equal” HQ2 is as interesting for how the announcement was made as the announcement itself. This could have been done very quietly and far more subtly than it was. It could have merely been noted that as the company expands so quickly it is natural that operations will be more spread out geographically. All of the major technology firms have significant operations in locations beyond their corporate base. Even in the context of the Puget Sound, Bay Area based firms such as Apple, Facebook and Google now have significant operations in Seattle. This shift could have been achieved in a quiet and measured manner over the coming years. Instead, Amazon has effectively launched a tender process with very detailed requirements and needs laid out. It is inevitable, and would not have been unforeseen, that it would naturally raise questions as to where this leaves Amazon’s relationship with Seattle and if this is the start of a slow departure from its hometown. Amazon and its hometown have a complex relationship. It is hard not to come to the conclusion that Amazon is sending a fairly blunt message to the City of Seattle.

Has Amazon had a major impact upon Seattle? Absolutely. The increase in demand for both downtown office space and for residential units for Amazon employees to live in has had a major impact upon the dynamics of Seattle real estate. It has contributed to a dynamic downtown office market and to the strong housing market conditions observed in recent years. Have there been negatives? Yes. These effects have contributed to the issues over affordability that dominate conversations amongst polite Seattle society. Furthermore, infrastructure investment has also at times failed to keep up. However, there have also been extraordinary positives in Amazon not only being located in Seattle but in downtown. As Amazon themselves, very pointedly, noted in their press release yesterday, since 2010 the company has contributed $38bn to the city’s economy and that “every dollar invested by Amazon in Seattle generated an additional 1.4 dollars for the city’s economy overall”. The inclusion of that statistic, together with a detailed list of the properties Amazon occupies in the city wasn’t just for the benefit of potential HQ2 bidders, but was also a clear message to the City of Seattle: – “be careful what you wish”. Recently there has been considerable talk as to how Amazon dominates the Seattle office market. However, often those articles and conversations have been focused solely on downtown which somewhat skews the picture. If one was to include the whole region, and especially Microsoft’s presence across Lake Washington in Redmond, then the perceived domination of Amazon declines significantly.

Amazon has been at the forefront of the revitalization of downtown Seattle. It is also unlikely that the redevelopment of South Lake Union would have been possible without the investment in the area by Amazon. The success of Amazon has also meant that from a technology industry perspective, Seattle is no longer a one trick pony. Today, Seattle is far more than just Microsoft. That has encouraged the established of a more diversified tech sector with firms such as Zillow and Expedia being based in the city. In addition, as already noted, the likes of Facebook also now have significant operations in Seattle. Amazon has been a major factor, directly and indirectly, behind the economic success of the city in recent years. Economic growth is all about comprise. Unfortunately, there has been little balance in the debate in Seattle, with too much focus on the negative. You will never see economic growth at the rate observed in Seattle without some downsides. Name one example of a city where economic growth to that extent has been cost free. There will be plenty of cities willing to make some sacrifices to secure Amazon’s HQ2.

In terms of Seattle real estate, the impact will be both significant and long term in its nature. The ongoing positive demand drivers that have transformed the downtown office market and the regional residential market will inevitably be affected. In particular, the impact of high earning tech employed buyers on housing will become subdued. At the very least, if Amazon’s employment growth is shared with another city the extent of the impact will be reduced. This may lead to consequences some may see as positives – a slowing, even stabilization, of house price growth. But those buyers who hoped the boom would continue may be disappointed. With the commercial market it does, if nothing else, introduce an element of uncertainty into the market place. In the short-term investors will have to take into account additional risk factors that were not on the table at the start of this week. Until things are more clear as to Amazon’s long-term commitment to Seattle, something noticeably absent from their press release, this uncertainty will likely have an impact on both investment and development activity in downtown.

So where may HQ2 go to? The obvious cities as those with major hub airports: the Chicago’s, Dallas’, Denver’s and Atlanta’s of this world. Austin has already been frequently mentioned due to the recently acquired Wholefoods being based there. Texas generally also has the advantage of Jeff Bezo’s roots in the state. What would the political ramifications be of a move to Canada, say Toronto? Some dark horses such as Pittsburgh have already been mentioned. But let’s think a little bit further outside of the box. What about Detroit or Nashville? Like an NFL team Amazon, has challenged cities to bring their best proposals to the table. It is also important to highlight that there are important differences to Amazon’s announcement to that of Boeing in 2001 when its corporate headquarters moved to Chicago. But are all of those differences positive? Despite the launch of its North Carolina manufacturing facility in 2009, Boeing still maintains the majority of their operations in the Puget Sound region. But Amazon isn’t Boeing. In tech the distinction between operations and the functions of a head office are very different to manufacturing firms, it is far more blurred and the number of jobs potentially far greater. When Boeing moved its corporate headquarters 50,000 potential jobs didn’t go with them. However, what should perhaps be the greatest concern for Seattle is how this will be perceived outside of the Puget Sound. Viewed together with Boeing’s decision, at what point do people start asking why are firms leaving and if Seattle is at least part of the problem? That is when the city really needs to get worried.