January 18, 2018

The $5 Billion Question: Will Cities Win or Lose in the Bid for Amazon’s Second Headquarters

By: Penn IUR
amazon.headquarters.web

Amazon's first global headquarters (pictured above) are housed in 14 buildings in Seattle's South Lake Union neighborhood. Cities throughout North America are now vying to host Amazon's second headquarters, known as HQ2.

In September 2017, Amazon announced that it would build a second headquarters, equal to its Seattle campus, in some North American city. In response, 238 cities from 43 states, the District of Columbia, Puerto Rico, seven Canadian provinces, and three Mexican states submitted proposals to host the new headquarters, nicknamed “HQ2”. Amazon just released a list of 20 finalists for the competition, and has said it will announce the winning city “sometime in 2018.” In the meantime, urban experts are discussing the enormous ramifications that HQ2 could have on the selected city.

We asked nearly a dozen urban experts: How will cities gain or lose from the competition to host Amazon's second North American headquarters?

 A Decision with the Potential to Ignite Tax Incentives | Timothy Bartik 

Cities Should Invest in Their Future Rather Than Compete to Give Away the Store | Angela Glover Blackwell 

Amazon's Big Mistake | Richard Florida

Let’s Keep the Momentum Going | Amy Gutmann

 All Cities Can Win-- If They Take the Opportunity to Rethink Economic Growth | Amy Liu

The Winning City May Also Be the Loser | Arthur C. Nelson

The Amazon Sweepstakes | Jeremy Nowak 

 The Path to Innovation in Philadelphia | Frederick Steiner

 A Way for All Cities to Win: Make the Proposals Available for Public View | Mark Strauss 

 An Opportunity for Cities to Consider What They Need to Attract Capital Investment | Tom Wright 

 A Huge Win for a Lucky City | Mark Zandi 


A Decision with the Potential to Ignite Tax Incentives

Timothy J. Bartik

Whether cities gain or lose from the competition for Amazon will depend upon how the winning city’s success is interpreted. If the winning city provided large long-term tax incentives, this may be interpreted by many local policymakers as a rationale for escalating incentive offers to other businesses. This may divert resources away from educational investments that may be more cost-effective in promoting local economic development.

From 1990 to today, average economic development incentives in the United States roughly tripled. But the big increase was in the 1990s. From 2001 to the present, average incentive offers in the U.S. were roughly stable.

The Amazon competition could reignite tax incentive competition. But such incentives are often not the most cost-effective way of creating local jobs. Most estimates suggest that the typical incentive offer tips location decisions for less than 15% of incented firms. Tax incentives are not large compared to cost variations across local areas due to such factors as labor skills. In addition, because businesses heavily discount the future, the incentive provided 10 years from now does not much affect business location decisions. But that tax incentive does potentially undermine future funding for public schools or universities, which can do more to help promote higher local earnings per capita.

I suspect the winning city will largely be chosen based upon whether it offers Amazon the land and labor it needs to be productive – and these land and labor factors were prominently mentioned by Amazon in its RFP for Headquarters II. But despite this, media reports suggest that some cities and states have offered Amazon incentives worth billions of dollars. If the winning bid does include very large long-term tax incentives, some policymakers will argue that this “success” rationalizes increased use of tax incentives in the future, for other businesses. 

Timothy J. Bartik is a Penn IUR Fellow and senior economist at the W.E. Upjohn Institute. Bartik’s research focuses on state and local economic development and local labor markets. 


Cities Should Invest in Their Future Rather Than Compete to Give Away the Store

Angela Glover Blackwell

Amazon’s competitive process for siting its second headquarters has led to a mad scramble by local governments craving new economic activity and a high-profile groundbreaking ceremony. But decades of experience indicates that when cities compete with each other to attract corporate facilities, it leads to a race to the bottom. 

Expert analysis has shown that when competing against each other for site locations, cities regularly subsidize large facilities to the tune of over $600,000 per job – an amount that cannot plausibly be paid back through new economic activity that the facilities generate. Cities simply can’t negotiate reasonable subsidy and taxation arrangements when they’re in competition with each other to provide a private company with the cushiest landing spot. In the competition, the importance of equity to the revitalization of cities gets lost. Resources gained too often fail to support the city’s most vulnerable populations, the people of color whose numbers are growing and are an important workforce resource.

Instead of trying to outdo each other on tax cuts and other subsidies, cities should invest in strategies that will attract and sustain economic activity over the long-term, and that focus on training that opens up workforce opportunities widely. Amazon seeks circumstances that will appeal to highly-educated workers, the same resources that are sought by all community members: reasonable housing prices; a functional transit system; and public amenities that make a community a desirable place to live and work. These factors attract corporations and the people that run them. They can, however, best serve all residents and the local economy as well. Rather than entering into a short-term competition to see who can best give away the store, cities should act to successfully build equitable, sustainable, and broadly -shared economic and social opportunity for all.

The city that wins the competition for the next Amazon site headquarters may end up losing, as a large new development arrives without paying the taxes and fees that support the increased need for public services.  The real winners will be the cities that invest in a shared future for all residents, one defined by equity—just and fair inclusion into a society in which all can participate, prosper, and achieve their full potential. 

Angela Glover Blackwell is a Penn IUR Fellow. She is CEO of PolicyLink.


Amazon’s Big Mistake

Richard Florida

Amazon’s bid to build a second headquarters may seem like one of the biggest opportunities for cities in recent memory. But from where I sit the entire thing is a big mistake.

A backlash is already brewing. An auction that pits more than 200 cities against each other in a bidding war makes no sense for anyone. Even the proverbial winner is likely to feel taken, when Amazon extracts millions upon millions in tax incentives. (Amazon already hauls in a bundle from states and cities. Last year alone, it raked in more than a billion dollars in such giveaways).

As any economic developer knows, the entire process is a ruse. There are very few places that can actually house a new headquarters with 50,000 people. And Amazon probably knows exactly where it will go already.

When I got into this in a speech to an international conference of economic developers this summer, the room burst into applause. 

It is in Amazon’s interest to dump the fake competition and take a higher road. The company should issue an “Amazon Pledge” that it will not accept any tax or financial incentives, but invest alongside cities to create better jobs, build more affordable housing, and develop better schools, transit, and other badly needed public goods, along with paying its fair share of taxes. This goes not just for the city where its new headquarters will be built, but for the countless localities across the US and the world where Amazon has distribution centers, offices, and other facilities. Whatever Amazon gives up in tax and financial incentives is peanuts compared to what it will gain in terms of bolstering its brand with cities, politicians, and its customers.

Richard Florida is a Penn IUR Scholar. He is University Professor and Director of Cities at the University of Toronto’s Martin Prosperity Institute;  Distinguished Visiting Fellow at NYU’s Shack Institute of Real Estate; and the co-founder and editor-at-large of The Atlantic’s CityLabHe is author of The Rise of the Creative Class, and most recently of The New Urban Crisis.


Let’s Keep the Momentum Going

Amy Gutmann

There is nothing quite like a clear assignment with a drop-dead deadline to focus minds and promote collaboration, innovation, and success. When a city is presented with such an opportunity it changes the mindset from ‘What if? – ’ to ‘How do we? –.’ This crucial shift in focus makes an enormous difference. The Amazon Request for Proposals set out specific criteria including the need to start with at least 500,000 square feet of building space in 2019, moving to as much as 8 million square feet within eight years. Plus fiber communications connectivity and airport, highway, and related transportation needs. The best way – and only effective way – to respond to this challenge is to bring together expertise from across the city’s many diverse constituencies, point them in the right direction, encourage them to think big, and set them loose to deliver a great plan. What a liberating experience. This was an electrifying collaboration across the whole Philadelphia community – business, higher education and other key non-profits, government, and the widest range of citizens.

Philadelphia Mayor Jim Kenney told a packed crowd at the October unveiling of the city’s proposal that he had never been more proud of our city and our region. I agree. The ambition of this effort and the positive collective energy it has brought forth are an unquestionable win for Philadelphia. Let’s keep the momentum going!

Amy Gutmann is the 8th President of the University of Pennsylvania, serving since 2004. She is also Christopher H. Browne Distinguished Professor of Political Science in the School of Arts and Sciences and Professor of Communication in the Annenberg School for Communication.


All Cities Can Win – If They Take the Opportunity to Rethink Their Approach to Economic Growth

Amy Liu

It’s ironic that Amazon, a future-oriented tech firm, used an old-school playbook to find a new home for its second North American headquarters: spurring interstate competition to maximize public subsidies. And over 200 cities and states fell for the trick. If reported tax incentives are doled out, Amazon, even more than the selected city, will come out the winner. For all cities in this competition to gain, leaders must instead reprioritize the fundamental attributes that create jobs and opportunity in the modern economy.

The evidence is clear: state and local use of tax abatements to attract individual firms is inefficient and ineffective. What’s unique today is the scale of the rip-off at a time when major social programs are being cut – $1 billion for Tesla, $3 billion (and climbing) for FoxConn, and potentially $7 billion for Amazon HQ2. Furthermore, the chosen city will likely incur costs associated with rising housing unaffordability, increased congestion, residential displacement, and a widening gap between rich and poor residents due to the influx of high-paying jobs and investment, if Seattle’s experience is any guide.

For cities to become engines for inclusive economic growth in the digital age, leaders need to de-emphasize business attraction and double down on investment in their existing people, firms, and assets. Here, Amazon did cities a favor by publicly signaling what matters to a 21st century company – a skilled, technical workforce, creative partnerships between schools, universities, and local industries, a modern transportation network, connected and sustainable urban spaces, and an inclusive, diverse culture. Rather than import 50,000 high-tech workers, cities ought to train 50,000 local residents for a range of digitally-oriented careers, whose new skills can help local (and outside) firms expand.

In many cities, preparing a bid to attract Amazon generated unprecedented collaboration among business, civic, and public sector leaders. Leaders should capitalize on that unity by collectively strengthening the attributes that comprise a modern, inclusive economy.

Amy Liu is the Vice President of the Brookings Institution and director of its Metropolitan Policy Program.

Arthur C. Nelson

And the winner is [name your city here] but the loser is [name the same city here].

This century's (or millennia's?) biggest prize is landing Amazon's HQ2. In case you're the last person the planet who does not know, Amazon will select a North American city as its second headquarters. It will invest billions to hire 50,000+ high-paying workers who will occupy 5+ million square feet probably in a downtown setting like it has in Amazon City (aka Seattle). 

Amazon has not become a nearly half-trillion dollar comany by being charitable. If anything, it is as hard-nosed a corporation as America has seen.

Amazon says all metros of 1+ million are eligible. Not a chance. The economic multipliers suggest that 150,000 new workers will be tied to Amazon which really means about 250,000 people which means about 100,000 new homes -- in 5 years.  Only metro areas of 4+ million are nimble enough to absorb this shock especially in and near downtown. 

Moreover, Amazon is the galaxy's biggest distribution operation. Though its distribution logistics can be handled anywhere, there's no substitute for being close to your shipping apparatus. And where is America's biggest shipping center? Probably Atlanta. It has the nation's busiest airport, among three of the nation's most important freeways run through its downtown, it remains one of the nation's most important rail hubs (Atlanta used to be called Terminus), and it serves the continent's largest market area within 1,000 miles (2 of 3 Americans). But I am not a betting man because Amazon will take the best offer that increases its shareholders' wealth.

One thing is certain: Amazon will select a location where its uniquely branded workforce will be happiest. That may not be Atlanta but rather Philadelphia or Toronto or such. The winning city will be transformed even if it is already vibrant. There will be a huge price to pay, however, in strained transit, demand for higher quality infrastructure, price pressure on housing, and stress on local institutions. Maybe it's good stress. But if the price to pay Amazon exceeds the resources it generates that can be used to manage the stress, the winning city may also be the loser.

Arthur C. Nelson is a Penn IUR Scholar. He is Professor of Urban Planning and Real Estate Development at the University of Arizona and a Presidential Professor Emeritus of City & Metropolitan Planning at the University of Utah.

Jeremy Nowak

The Amazon request for proposals for a second headquarters has had a negative and positive impact for economic development practice.

For several decades the best thinking in economic development emphasized the importance of the basics: work force quality, an entrepreneurial eco-system, access to cutting edge research, a business friendly environment, and quality public amenities. While public agencies continue to offer subsidies to bring companies to their community, organic growth is preferable. To the extent that the Amazon sweepstakes creates a new wave of company chasing, it has a negative influence.

On the positive side, the Amazon request for proposals forced communities to analyze their economic and social value. Some of the civic and government activity used to put together the proposals emphasized using the analysis as a forward looking useful diagnostic. Communities that take this seriously will benefit and hence the sweepstakes will have a positive effect.

Finally the entire process has become a celebrity event, like LeBron James making an announcement regarding what team he will join. The contest is performance art as much as economic development. Policy analysts and bookmakers have merged in their importance and frankly I find bookmaker odds more believable. Years after the announcement is made, the meaning of the event will be explored more for its cultural meaning than its economic impact. 

Jeremy Nowak is a Penn IUR Fellow and Advisory Board Member. He is Co-author with Bruce Katz of The New Localism: How Cities Can Thrive in the Age of Populism.

Frederick Steiner

The prospect of Amazon’s HQ2 in Philadelphia has energized our region’s business, education, and civic leaders. I share their enthusiasm; Amazon would be a great boon to this city. Still, the trajectory of Philadelphia’s future does not rest on Amazon’s decision. Even if Philadelphia loses its bid to house HQ2, the city should build on the momentum and communal energy that the bid process has generated.

Whether it wins or loses Amazon’s competition, Philadelphia needs to keep driving forward as to become a leader in innovation. I have in mind, for instance, a new venture whose social impact could far exceed Amazon’s: the launch of a design innovation lab. Its mission would go beyond e-commerce and entertainment media to the development and application of materials and technologies known and as-yet-unknown. Such a facility could revolutionize not just the way we design supply chains, warehouses, and delivery systems, but also how we design and manufacture products; build our homes, schools, churches, and offices; and deliver improved outcomes in education and healthcare.

At Penn, we have the seedbank for such an entity. In the School of Design, we have established research centers and world-renowned faculty devoted to building performance, energy policy, urbanization and ecology, conservation, robotics, transportation, geographic information systems, urban spatial analytics, and the design of interrogative objects. We have a unit dedicated to bridging the academic and professional communities, PennPraxis. We are engaged in numerous cross-disciplinary projects with far-reaching implications. And Pennovation Works, the University’s new campus in the Gray’s Ferry neighborhood of South Philadelphia, provides an ideal location for building synergies among many Penn schools—especially engineering, business, and medicine—and Philadelphia’s many other institutions of higher education.

From climate change to social justice, and a host of other urgent challenges facing Americans, Philadelphia has a historic opportunity to continuing growing its innovation assets and lead the way forward—with or without Amazon.

Frederick Steiner is a Penn IUR Faculty Fellow. He is Dean and Paley Professor at the University of Pennsylvania School of Design. The author, editor, or co-editor of 18 books, he has served as dean of the University of Texas School of Architecture and taught at Arizona State University, Washington State University, and the University of Colorado at Denver.


A Way for All Cities to Win: Make the Proposals Available for Public View

Mark Strauss

The release of Amazon’s HQ2 Request for Proposals, which seeks to identify a second headquarters city to accommodate as much as 8,000,000 square feet of office space for 50,000 employees, has been the most publicly discussed procurement for urban redevelopment, since the master planning competition for the rebuilding the World Trade Center site, in Lower Manhattan, sixteen years ago. However, unlike the World Trade Center competition, which was New York-centric, this competition has stimulated interest, nationwide and beyond.

With 238 proposals, nearly every major city in North America has responded to the request or at least thought about its future in reaction to the same criteria. All of these cities have considered their growth, their appeal to millennials, and their competitiveness, in ways that were probably not considered, previously. As such, from an academic perspective, the response to this RFP is a seminal moment in urban planning history and if properly examined could offer a learning opportunity on the future of North American cities.

With that in mind, I am less interested in what location Amazon selects for its second headquarters than I am in finding a way to make all the responses available for public view and consideration. Just like Amazon’s website, which offers product information for comparison shopping, wouldn’t it be magnificent if Amazon made all the proposals available for study. I could imagine a book that examines the responses, and the launch of a major exhibition that celebrates how North American cities are thinking about growth and their future. In this way, all cities gain from this competition, regardless of where the Amazon roulette wheel lands.

Mark Strauss is an architect, planner, urban designer and Senior Partner at FXFOWLE Architects. He is also Past President of AIA New York. 


An Opportunity for Cities to Consider What They Need to be Attractive for Capital Investment

Tom Wright

Amazon’s announcement that it was looking for a second headquarters received considerable fanfare in economic development circles in the New York metropolitan region. The hope was that this competition would be more like New York’s bid for the 2012 Olympics, which may have failed to bring the sports competition to town, but succeeded in advancing plans for Manhattan’s west side and other communities that are now growing. Rather than focus on cutting a deal, HQ2 offers an opportunity for cities to consider what investments in infrastructure and communities they need to be attractive for capital investment.

New York City proposed sites that were already planned and under construction (Lower Manhattan and the Hudson Yards) and others that could be shaped more to Amazon’s needs (Brooklyn’s Tech Triangle and Long Island City). The challenge is the classic New York dilemma of high housing costs and the fact that the City is doing very well producing jobs already (over 500,000 new jobs in the last six years alone), so it isn’t clear why the City should offer incentives to Amazon that it wouldn’t for any other business looking to expand.

Connecticut jumped in with proposals for Stamford and Hartford, both of which have been shedding corporate headquarters for the past decade. Unfortunately, if anything the bids underscored the tough environment facing the Nutmeg State: cities that are losing jobs; an overburdened and aging infrastructure system that is struggling to keep up; and yearly budget deficits despite an improving overall economy.

Perhaps the most intriguing of proposal came from Newark, NJ. With Amazon-owned Audible as an anchor tenant, the Washington Park/Broad Street Station neighborhood is thriving. It is just 20 minutes from Manhattan (via NJTransit’s Midtown Direct service) and Newark Liberty International Airport, has plenty of redevelopment opportunities (including an impressive waterfront project just getting underway), and access to an extraordinary, educated workforce.

The question for Newark is, how best to attract Amazon and its 50,000 potential workers?

The State Legislature approved a bid that could offer up to $5 billion in tax breaks. While the numbers are eye popping, the fundamental truth is that Newark depends on a fast, reliable and easy commute to New York City to make an attractive bid.

The rail link between New Jersey and Manhattan relies on Amtrak’s two tracks, built in 1910. The tubes move each day with the tide, are already over capacity after a generation of ridership growth, and flooded during Superstorm Sandy. The damage from saltwater has led Amtrak to conclude that sometime in the next ten to twenty years they will need to close the tubes for major repairs. In the meantime, delays and failures have been steadily increasing as the system slowly crumbles under the weight of too many riders.

Ever since Governor Christie’s shortsighted decision to kill a project to build a tunnel under the Hudson River in 2010, Amtrak and the leaders in both states have been working to gain momentum for a new tunnel, called Gateway. There is no higher infrastructure priority for the nation than to get this tunnel planned, design, financed and built as quickly as possible.

Imagine for a moment that Governor Christie had not cancelled the tunnel, which was scheduled to be completed later this year. It would have been the centerpiece of the State’s bid – a new tunnel doubling capacity across the Hudson River.

Instead, without a real plan for upgrading infrastructure or communities, the State is proposing massive tax breaks – as much as $100,000 for each new job.

Not exactly the model for the 2012 Olympics, which led to the Hudson Yards, Long Island City, and so many other success stories for New York City.

Tom Wright is president of Regional Plan Association, an independent urban planning think tank focused on improving the prosperity, infrastructure, sustainability and quality of life of the New York-New Jersey-Connecticut metropolitan region.

Mark Zandi

And the winner is…

Some very lucky city will hear these words this year when online mega-retailer Amazon announces where it plans to put its second headquarters. Amazon says it has outgrown its Seattle HQ, and will pick a new city for “HQ2,” which will eventually employ up to 50,000 highly-skilled and -paid workers.

Amazon’s decision will be transformational for that city, and not only because of the tens of thousands of good new jobs and billions of dollars in investment. Amazon’s presence is sure to be the catalyst for growth in other high-flying, innovate companies. Their workforce is young, highly educated and focused on a range of activities, some of which are sure to be fountains of future growth. This includes everything from logistics to cloud computing, to big data analysis, to drones, to… These are still buzzwords in many companies; not in Amazon.

It is thus no surprise that hundreds of localities from New York City to Gary, IN have made their case for HQ2. Hard to imagine so many places working so hard to be chosen, unless they were convinced it would catapult their economy forward.

There will be growing pains, to be sure. House prices and other living costs will rise, making it more expensive for existing residents, and traffic congestion will be more of a problem. Other businesses that will compete with Amazon for talented workers may also be at a disadvantage.

But these are minor problems in the grand scheme. Getting Amazon HQ2 will be a HUGE win for whichever city wins it.

Mark Zandi is a Penn IUR Fellow. He is chief economist of Moody's Analytics, where he directs economic research. 

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