Thursday, September 28, 2017

For Amazon’s Second HQ’s Search, Bigger May Be Better

While there has been no shortage of market conjecture in recent weeks on where Amazon will decide to locate its new 'co-headquarters,' we decided to crunch the numbers using CoStar’s unparalleled database of commercial real estate information using the key criteria identified by Amazon in its Request for Proposal (RFP).

The rankings weighed the percent of a metro’s population holding a bachelor’s degree or higher, the total number of computer and mathematics jobs in the metro, the rate of tech-related job growth from 2013-2015, the total amount of proposed office space tracked by CoStar in the market, the average price/square foot of office properties in the metro based on CoStar sales data, and the affordability of the metro based on CoStar apartment rental data.

With this additional analysis of the specific commercial real estate availability by market, CoStar Market Analytics managers identified the San Francisco-Oakland-East Bay metro area as the top prospect in the new ranking of more than 50 major U.S. metros that fit Amazon’s requirements and preferences for locating a second national headquarters.


Six of the nation’s 10 largest cities showed up in the top 10 markets, which are listed in order as follows based on the CoStar Market Analytics ranking:

San Francisco-East Bay
San Jose-South Bay
Washington, DC
Dallas/Fort Worth
New York-NNJ

Primarily driving those results were the individual metro areas’ ability to meet Amazon’s need for office space.

To be clear, Amazon HQ2 is not a typical headquarters site selection opportunity. As stated in the online giant's RFP, the proposed investment by Amazon in its new HQ2 project is expected to generate billions of dollars in new investments in the area’s economy and tens of thousands of new jobs. Bidding metro areas must have 500,000 square feet of space available by 2019, and the capability or proximity with other potential HQ2 sites for collective capacity for up to 8 million square feet beyond 2027.

What put the San Francisco Bay region on top was that it scored in the top five in all three of the labor force categories: holding a bachelor’s degree or higher, the total number of computer and mathematics jobs in the metro, and the rate of tech-related job growth from 2013-2015.

Most prognosticators have overlooked the Bay Area as a potential landing site for Amazon’s HQ2 campus, citing the region’s high cost of living and office rents, and relatively close proximity to the Amazon's original headquarters in Seattle. Although valid, these cost concerns have not deterred the world’s largest technology companies (and Amazon competitors) such as Google, Apple and Facebook, from continual expansion in the region for good reason. Silicon Valley remains the mecca of global tech talent. High-skilled tech workers continue to flock to the South Bay, one of the few markets in the country where Amazon could immediately find a workforce with the skills needed in mass to establish a second headquarters.

Amazon has also shown a preference for the Bay Area in the past three years, signing leases for more than 366,000 square feet in that time in San Francisco-East Bay, according to CoStar data. Throw in Sunnyvale, CA, and the internet retailer has taken more than 770,000 square feet in that time.

Outside of Seattle, the only market where Amazon has leased more office space is New York. Last week, Amazon announced that it would be adding 2,000 new jobs in Manhattan at a new office at Brookfield's 5 Manhattan West in Hudson Yards, where it signed for 360,000 square feet of space. That brings its total office leasing in New York-NNJ to more than 978,000 square feet in the last three years.

Midsize Markets Offer Cost Advantage

Outside of offering more space or more educated tech workers, the mid-size markets have a clear advantage on cost of occupancy and housing. Only two of the top 10 ranked markets made it onto to the top half of most affordable occupancy costs: Atlanta at No. 16 and Philadelphia at 25.

Atlanta ranks second overall among the MSAs analyzed. Significant points were scored in affordability, with the average housing cost in Atlanta about 50% less than average of the other top 10 contenders. Office space was also 50% less than the average among the top 10 contenders, underlining the lower business costs associated with the metro

While Austin ranks eighth on the list, it and Dallas/Fort Worth are in one of the most business-friendly states in the country. Texas boasts no income tax, offers generous benefits for corporate relocations, which can help offset some of the higher real estate and housing costs.

Given that unemployment in Denver is close to 2% (by far the lowest of any large metro in the country), Amazon would have to rely heavily on net migration to fuel its growth. And in that regard, dozens of major firms have chosen Denver for major expansions or relocations this cycle, including a number of West Coast tech companies.

Philadelphia ranked squarely in 10th place. Philadelphia’s sheer size in terms of population and the large scope of office projects in planning helped push it into the top 10. But where it falls short is in its smaller pool of technology workers, where it ranked 41st.

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