'Rigged From The Beginning': Critics Decry Amazon's Choices For HQ2
UPDATE, FEB. 14, 1:30 P.M. ET: Amazon has canceled plans to open a headquarters in Long Island City. This story reflects statements made before Amazon's latest decisions.
Amazon’s decision to split its $5B second headquarters project between New York and Northern Virginia is being viewed by some in real estate and policy circles as a political, cynical move that deviated from the spirit of its original RFP.
Amazon's request for proposals declared the intention of building a “transformational" project with the promise of 50,000 high-paying jobs. Instead, Amazon shocked the country by splitting its second headquarters between Queens, New York, and Crystal City, Virginia, just outside of Washington, D.C., with 25,000 jobs each.
While there were many cities among the 20 finalists where transformation would have been achieved, New York and D.C. are already two of the priciest and most powerful American cities. Both regions have a worsening shortage of affordable housing, crowded transit systems and extremely low unemployment, issues that appeared to be a concern to the world’s largest online retailer in its office project hunt.
“I'd give them a D for disappointment. I'm dumbfounded on the New York decision because it doesn't make sense on any metric,” CCIM Institute Chief Economist KC Conway said. “I don't think that they stayed true to their RFP at all.”
Conway is just one of many voices rising across the country crying foul about Amazon's "Hunger Games"-like contest to win what was supposed to be a single, game-changing headquarters for one winning city.
Some hold a cynical view about the 14-month-long search that involved countless man-hours by economic development pros across the country in a dog-and-pony show to lure the world's largest online retailer. One called the whole search “a giant ruse,” with a predetermined destination in mind from day one. Others say Amazon relied on pure, Machiavellian smarts to cater political favor on a number of fronts.
"The Amazon selection process was rigged from the beginning with [Amazon founder and CEO] Jeff Bezos likely to choose D.C., given their extensive operations already there. [New York City] was the next logical choice because most billionaires, like Bezos, obviously prefer to hang around New York City over places like Columbus and Atlanta, so no big surprise there either," Chicago-based AMLI Residential President Philip Tague wrote in an email. "The media has handled this process with the titillation of who the Bachelorette will choose as her final lover. The groveling by state and local leaders in the final 20 has been not only unseemly but downright obscene."
Talent Poaching Guaranteed
If Amazon's choice to put half of HQ2 in Long Island City was about access to talent, then it chose poorly, Conway said. Queens County's unemployment rate is near 3%, one of the lowest levels in history.
In a recent study, LinkedIn cited New York as having the largest skills gap in the U.S. — the type of skills companies are seeking versus what skills available employees possess — as well as being home of the second-largest skills shortage in the nation. Those two reasons alone have Conway giving Amazon a poor grade for its ultimate HQ2 decision.
“Unless [Amazon defines] workforce availability as workforce poachability, I don't think they hit the mark at all,” he said. “All the skilled workforce is employed.”
Politics And Incentives
Like many others, Conway said Amazon was pretty much destined to be near D.C. from day one. Aside from Bezos owning the Washington Post and a home in the District, there was a very practical reason for the move: politics.
“There are a lot of issues that Amazon is going to push the envelope on,” Conway said.
Northern Virginia puts Amazon in a place where it can influence national legislators who could make laws that could limit what industries Amazon will be able to expand into. By choosing Virginia over D.C. proper, Amazon gave itself two senators and a congressman to represent it, along with its proximity to Congress for ease of lobbying.
“Amazon was probably not worried about competition from other businesses,” said George Mason University Mercatus Center economist and research fellow Michael Farren, who specializes in the study of incentives and their effects on business and government. "It's probably more worried about regulation that would restrict its growth in the future or keep it out of other industries ... like healthcare."
Analysts have already noted that Amazon Web Services — Amazon’s cloud-based operating platform that is one of its biggest revenue drivers — is pursuing a massive, $10B Department of Defense contract to host its servers. Locating its headquarters a few blocks from the Pentagon could help improve its chances for that contract.
“Amazon likely wanted to be near the seats of power and the federal government and feel this can benefit them in the long run,” Atlanta-based SK Commercial Realty Managing Director John Poulos wrote in an email.
Those factors have led some to question whether the incentives cities were encouraged to give in the original RFP were ever really important for Amazon, a company that reached a market capitalization of $1 trillion this year for the first time, surpassed only by Apple.
During the pageant to land HQ2, governments across the country proposed billions of dollars in incentives. Some of those 20 finalists increased their offers in follow-up proposals.
Georgia, which revealed its package earlier this month, included an incentive treasure chest that involved a $1.3B megaproject tax credit, $320M in sales and use tax exemption and the creation of a new school to train talent directly for Amazon. New Jersey offered $7B in tax breaks. Maryland offered $8.5B.
Christopher Thornberg, an economist and founding partner of Beacon Economics in Los Angeles, said he knew the minute Amazon started its HQ2 search that it was going to end up in Northern Virginia. And, he said, Bezos knew it, too.
"Then why go through this preposterous charade?" he asked.
Thornberg answered his own question: It was a grab for taxpayer dollars. Politicians in every competing city had no problem catering to Amazon because, for them, it was about bragging rights in grabbing one of the largest economic development projects in history, Thonberg said.
Farren agreed with that sentiment, adding that politicians use incentives to lure companies as a way to create the impression with voters that they are being successful at driving economic prosperity for their districts.
“These jobs very likely would have come without the subsidies, so you have to ask the question: Why would the politicians offer the incentives in the first place?” Farren said. “The answer ends up becoming that's the only way they could claim credit for the jobs that have been created.”
In a world where Amazon is already claiming a huge slice of incremental retail sales growth every year over its competitors, AMLI's Tague argued that these incentive packages may have an even greater detrimental effect on the retail industry by giving Amazon an advantage over competitors.
"To be sure, Amazon is creating some new jobs, but it is destroying far more jobs and, more importantly, reducing the opportunities that entrepreneurs otherwise would have to innovate in the retail sector," he said. "The tax giveaways tilt the playing field far too dramatically in favor of Amazon. This gives Amazon an incredibly unfair advantage."
The Growing Backlash
If Amazon expected its decision to be met with throngs of cheering residents and a ticker tape parade, it may have underestimated a growing public skepticism to government tax breaks given to large corporations.
“New Yorkers have real unmet needs from their government,” the lawmakers said. “We are witness to a cynical game in which Amazon duped New York into offering unprecedented amounts of tax dollars to one of the wealthiest companies on Earth for a promise of jobs that would represent less than 3% of the jobs typically created in our city over a 10-year period.”
In Atlanta, as Los Angeles-based CIM Group pursued a record incentive package to redevelop a vast expanse of parking spaces in Downtown Atlanta into one of the biggest developments in city history — one of the sites the state offered Amazon — local residents and some city council members spent hours questioning and protesting the city’s largesse. That package was ultimately approved.
“I think that it's possible … that the HQ2 competition may represent a sea change,” Farren said. “The giant publicity behind [HQ2] may have backfired and made people more frustrated with the billion-dollar subsidies offered to literally one of the largest corporations in the world.”
Incentives come at a price: While the tax breaks incentivize jobs, the revenue they forgo could fund other key functions of government. Farren said that trade-off may be happening, with more municipalities raising bonds and passing ballot measures to raise taxes to pay for things like roads, parks or schools.
“I'm not saying those bond measures wouldn't be there, but it's likely they'd be less large … [if] they weren't giving away taxes to special interest groups and corporations,” Farren said.
At the same time, the country is faced with uneven economic growth and rising inequality, fueling this backlash, Brookings Institute Fellow Joseph Parilla said.
“People are skeptical of the argument that if we just grow the pie, we grow the base,” Parilla said. “This has been highly publicized. It’s a tech company amidst a time of growing skepticism on the tech industry and [its] benefit to society.”
Colliers International Atlanta CEO Bob Mathews said the public bidding process for Amazon may also prompt cities, states and their respective economic development organizations from chomping at the bit to participate in what resembled a season of the “Game of Thrones.”
“Amazon created an environment that exploded the old model for moving or adding an HQ,” Mathews wrote in an email. “I bet the next time they or others use an auction model, there may be fewer bidders. It's time-consuming and expensive for all of the cities who chased it.”
Conway pointed out that New York’s subway system was facing longer commutes due to overcrowding and underfunding. Amazon could exacerbate its problems.
More congestion, coupled with companies in New York and Northern Virginia facing the prospect of raising wages to stem a potential talent bleed to Amazon may actually up the table stakes for cities like Atlanta, Dallas, Miami and other HQ2 finalists.
“I think the winners are the other 18 finalists that didn’t get [HQ2], because New York and Virginia are off anybody’s list to infinity and beyond,” Conway said.
Amazon still has plenty of defenders, those who believe its strategy made sense, given the retailer's desperate need for tech talent and a launch point for its European expansion.
“It's not surprising that Amazon ultimately picked the two largest and most educated cities on the East Coast,” Parilla said.
Bezos has remained mum on HQ2 since the company’s announcement, after telling an audience during an event in New York weeks earlier that he planned on using “intuition” to make his final decision.
Coworking giant Industrious CEO Jamie Hodari said Amazon's ultimate decision made sense on a number of fronts in clustering major operations around the nation's capitals of money and political power, to say nothing of its biggest and sixth-biggest metropolitan areas.
“It is so clear at this point what they were going for,” Hodari said. “While there's some dissatisfaction with the process and with selecting cities that didn't need much help as it is, I will say the decision to spread their workforce across a broader number of cities is in keeping with the corporate strategy of most companies we see today.”