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The Challenges of Siting a New Headquarters Amazon Courts New York City.pdf
Andrew Hoffman

The Challenges of Siting a New Headquarters: Amazon Courts New York City

Published by WDI Publishing, a division of the William Davidson Institute (WDI) at the University of Michigan.

© 2020 Sidharth Mahajan, Aloka Narayanan, Bo Shi, Charlie Warner, and Lane Wollerton. This case was written by University of Michigan graduate students Sidharth Mahajan, Aloka Narayanan, Bo Shi, Charlie Warner, and Lane Wollerton, under the supervision of Andrew Hoffman, Holcim (US) Professor of Sustainable Enterprise, a position that holds joint appointments at the University of Michigan’s Ross School of Business and School for Environment and Sustainability. The case was prepared as the basis for class discussion rather than to illustrate either effective or ineffective handling of a situation. The case should not be considered criticism or endorsement and should not be used as a source of primary data. The opening situation in the case is fictional.

In January 2019, Lane Bradfort,i Amazon’s director of economic development, sat pensively as she scrolled through yet another op-ed bemoaning Amazon’s decision to choose Queens, New York, for an additional headquarters. Since the November 2018 announcement, the backlash had been unexpectedly fierce. She shook her head, still in disbelief that after such a rigorous decision-making process and intense due diligence that she and her team had not seen this coming, or at least not to this degree.

Bradfort remained convinced that the New York City borough of Queens, and Arlington, Virginia, were the best locations for splitting Amazon’s new second headquarters, for a myriad of economic reasons. That said, choosing a location with an overwhelmingly business-friendly environment had been a top priority. Now, given the seemingly unending protests against a decision that she and her team had been so proud of only months before, she was beginning to doubt whether Amazon could be successful in New York.

Bradfort recalled the first time she walked into Amazon’s Seattle headquarters when she started with the company back in 2016. Amazon was rapidly growing and that trajectory had only continued (see Exhibit 1). In the 12 months preceding the end of Q3 2018, Amazon had become one of the largest retailing companies in the world and unequivocally the largest online retailer, with net sales of $134.5 billion in North America alone (see Exhibit 2).

When Bradfort was assigned to the project team to find the ideal location for Amazon’s second headquarters, she talked with founder and CEO Jeff Bezos about why the company had chosen Seattle as its first headquarters. He reminded her that when he launched Amazon.com in 1994, the company only sold books online. Bezos told Bradfort of three primary reasons the company had chosen the Washington state location. First, there was an ample supply of talented software engineers in the area. Second, the location was close to Roseburg, home of the largest book distribution warehouse in the country. Finally,

i Lane Bradfort is a pseudonym.

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The Challenges of Siting a New Headquarters: Amazon Courts New York City

as Amazon did not have a physical store in Washington, state law did not mandate the collection of sales taxes. As Bradfort and her team began to build out an initial list of top priorities for the second, additional, headquarters, she kept in mind the logic and justification behind Bezos’ considerations for the first HQ.

The Need for a Second Headquarters

Amazon’s search for what it called “HQ2” was a logical next step given the company’s skyrocketing growth between 2010 and 2018. The company was by no means unique in searching for a second headquarters location. Firms such as CenturyLink, Bank of America Corp., and Samsonite (among many others) had established multiple headquarters for reasons ranging from CEO changes and mergers to tax advantages.1

In 2010, Amazon had only 5,000 local employees, but over the next eight years that number increased to 45,000 employees in the Seattle office.2 Worldwide, its job force went from 33,700 employees in 2010 to 575,000 in 2018.3 The influx of specialized and highly skilled workers resulted in a “prosperity bomb” for both Amazon and Seattle.4 Amazon outdid every other global firm in market capitalization growth between 2011 and 2018.5 By 2018 Amazon occupied 33 buildings in Seattle, and had plans to grow to 40 (see Exhibit 3). By comparison, in the District of Columbia the entire federal government operated a total of 55 buildings.6

Amazon’s search for an HQ2 location was prompted not only by the need for more real estate for its growing workforce, but other driving factors as well. While the prosperity bomb benefited Seattle businesses growth—pumping just shy of $40 million into the city’s economy between 2010 and 20177—there were also casualties. In that same seven-year span, Seattle apartment rents rose by 64% and home prices jumped month over month.8 A growing number of people were priced out of housing. By 2015, Seattle declared its homelessness problem a state of emergency.9 In a comprehensive review of US metropolitan areas, the Brookings Institution ranked Seattle third in prosperity, but 86th in inclusion, due to a rising income gap and lopsided wealth distribution.10

While one company cannot solely take the blame for a homelessness crisis of an entire metropolitan area, many people saw Amazon’s ballooning growth as a direct catalyst of the problem in Seattle. One of the main and most pernicious root causes of homelessness in the US was a lack of affordable housing. An analysis found that nearly half of households that rented in Seattle were “housing cost burdened,” meaning they spent over 30% of their income solely on rent.11

The spikes in rent and homelessness prompted local government officials to intervene. One of the most vocal was Seattle City Councilmember Kshama Sawant, a registered Socialist elected in November 2013. Sawant ran on a platform focused on raising the minimum wage in Seattle to $15 an hour and imposing taxes on Amazon and other large businesses in the city to raise money for addressing the increasing homelessness problem.12 In 2014, the Seattle City Council voted unanimously to raise the minimum wage to $15 an hour.13

The wage increase was not a welcome policy change for Amazon. In addition, animosity was growing between Amazon and local government and citizens. Many blamed the company for skyrocketing gentrification and homelessness. In late 2017, amid this growing conflict and rising tensions, the Seattle City Council formed a task force to uncover ways to generate funding for programs addressing homelessness. On March 1, 2018, the task force presented recommendations that the City Council raise $75 million from an employee hours tax, also known as a “head tax,” that would apply to any company with revenues exceeding $20 million.14

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The Challenges of Siting a New Headquarters: Amazon Courts New York City

Naturally, businesses vigorously opposed the proposal. After its announcement but before the council voted on it, Amazon pointedly halted construction of a new building specifically to signal that it might move business elsewhere. Sawant called this move attempted blackmail, but Mayor Jenny Durkan felt differently. “I’m deeply concerned about the impact this could have on a whole range of issues,”15 said Durkan, referring to the economic fallout that likely would take place if tensions between Amazon and the local community continued to rise. Despite fears that Amazon might relocate in retaliation, the City Council approved the tax in May 2018.16 In response, business interests created No Tax on Jobs, a committee backed by the Seattle Metropolitan Chamber of Commerce, explicitly to put a referendum to kill the tax on the November 2018 ballot. Amazon and numerous other Seattle-based businesses including Kroger, Starbucks, and Albertson’s, donated $25,000 each to the committee, which ended up raising over $450,000.17 No Tax on Jobs mounted an aggressive lobbying campaign and momentum began to shift. Less than a month after they voted for the tax, on June 12 council members voted 7-2 to repeal it.18

It was amid this environment of political turmoil and bitter emotional clashes between local groups and government officials and the business community, even before the tax approval and repeal, that Amazon announced its intent to develop a second headquarters location. On September 17, 2017, Bradfort and her team released an eight-page request for proposal (RFP), formally opening the search.19

Amazon’s Search Criteria

Bradfort’s job was not going to be as easy as touring a few cities and picking whichever option she felt would best suit Amazon’s needs. The process would require careful consideration of several factors, including the willingness of cities to make concessions and offer incentives to entice the company.

It was made clear by the C-suite that cities must meet certain thresholds before they could even be considered. Some of these criteria were quantifiable, such as a metropolitan area with a minimum population of one million and a track record of being able to attract and retain strong technical talent. Others were more general, such as “communities that think big and creatively when considering locations and real estate options.”20 These were absolute musts that would help Bradfort’s team narrow the field.

Then came the logistical needs of the company. These consisted primarily of proximity to the population center, major transportation channels such as international airports, major highways, and public transit, and square footage for the proposed 50,000+ employees. As a point of reference, Bradfort and her team created a summary of Amazon’s Seattle headquarters features for bidding cities to benchmark against.

With the biggest requirements laid out, Bradfort was then left to consider other details that would still be critical for the success of HQ2. Amazon prided itself on having a culture defined by smart, talented, and driven employees. HQ2 would need to maintain and reflect that culture, so talent was a priority. The chosen city would not only need to have such an existing talent pool but also the ability for it to grow to ensure Amazon’s human capital needs would be met in the future.

Transportation, as mentioned, was vital for both employees as well as product logistics. The RFP emphasized a desire for proximity to airports with nonstop flights to Seattle, New York, the San Francisco Bay area, and Washington, D.C. Applicants would need to provide this information along with estimated travel times from proposed HQ office locations to the metro center, airports, and major highway corridors.

Bradfort and her team struggled somewhat to define the last set of requirements an applicant city would need to meet before Amazon could make its final decision: incentives. Bradfort believed that Amazon’s HQ2

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The Challenges of Siting a New Headquarters: Amazon Courts New York City

proposal would be a boon to any city, based on the growth Seattle experienced. The proposed influx of jobs with an average compensation above $100,000 a year would be a huge attraction for any local government, not to mention the additional jobs created by the company’s proposed $5-billion capital investment. Her team believed the prestige alone would be a big win for any political official.21

Knowing the value that it brought, Amazon expected significant concessions from the applicant cities to entice the board’s final approval, such as tax credits, cash grants, or guarantees for infrastructure investment. Bradfort and her team decided to ask the applicant cities for detailed incentive plans, including whether the incentives were guaranteed vs. non-guaranteed, whether they would require state legislative approval, the timetable for incentives, and whether or not tax credits could be transferred, refunded, or carried forward in future time periods. In particular, likely based on Amazon’s experiences in Seattle, the RFP made it clear that “a stable and consistent business climate is important to Amazon.”22 Bradfort was aware that Amazon was creating a bidding war.

The Bidding Process

Unlike what companies typically do regarding expansion plans, Amazon decided to conduct its bidding process in an open forum, welcoming public knowledge of which cities were bidding for the HQ2. Bezos indicated that making the search more open would attract public support and momentum. Contrary to this was Amazon’s intention to refrain from publicly sharing the specifics of the winning city’s bid until after the close of the deal.

RFP bidding officially closed on October 19, 2017, with 238 applications received. Bradfort and her team of about a dozen Amazon employees including economists, human resources managers, and real estate executives, began honing the list. The public nature of the bidding allowed cities to continue lobbying for Amazon’s attention with promotional campaigns.

By January 18, 2018, Bradfort’s team announced it had narrowed the applicants down to 20 metropolitan areas:23

• Arlington, Virginia (bordering Washington, D.C.)

• Atlanta, Georgia

• Austin, Texas

• Boston, Massachusetts

• Chicago, Illinois

• Columbus, Ohio

• Dallas, Texas

• Denver, Colorado

• Indianapolis, Indiana

• Los Angeles, California

• Miami, Florida

• Montgomery County, Maryland (bordering Washington, D.C.)

• Nashville, Tennessee

• Newark, New Jersey

• New York City, New York

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The Challenges of Siting a New Headquarters: Amazon Courts New York City

• Northern Virginia (bordering Washington, D.C.)

• Philadelphia, Pennsylvania

• Pittsburgh, Pennsylvania

• Raleigh, North Carolina

• Toronto, Ontario, Canada

Bradfort’s team began to look more deeply into each city, taking extensive tours and conducting interviews. They also insisted on non-disclosure agreements from officials in candidate cities. Eventually, the team reached a consensus. On November 13, 2018, Amazon announced co-winners: the Long Island City area of the New York borough of Queens, and Arlington, Virginia.24

Both deals were very detailed. From Arlington, the incentive agreement provided $550 million in cash grants and $23 million from tax incentives. Additionally, Amazon was eligible to receive up to 15% of Arlington County’s hotel tax revenue. Furthermore, Arlington County committed up to 50% of any incremental tax revenue for the coming 10 years to be devoted to infrastructure improvements surrounding Amazon’s new headquarters. In return, Amazon committed to occupy 64,000 square feet by July 2020 and 6 million square feet by 2035.25

New York City had offered a significantly higher price. It said the state would give Amazon $1.2 billion in refundable tax credits provided that 25,000 jobs were created by 2028. The state further promised $505 million in capital grants to reimburse the company for costs associated with building its offices. From the city itself, Amazon would be eligible to receive a number of incentives through programs such as Industrial and Commercial Abatement and New York City’s Relocation and Employment Assistance. All told, through local and state incentives, Amazon could receive up to $3.4 billion over 10 to 20 years. Unlike Arlington, New York City tied the incentives to the number of jobs created, with benchmarks at 25,000 and 40,000 positions.26

With the bidding and selections completed, Bradfort’s team thought their work was over. As thorough as the team was, however, they did not anticipate the momentous New York backlash.

Stakeholder Analysis

In understanding Amazon’s decision to move forward with the Long Island City location and resulting backlash, it is essential to recognize that the public decision was not made in a silo. Several groups had a stake in the move to New York. Key stakeholder perspectives are detailed below.

Amazon

Amazon’s decision to come to New York was informed by several factors including the practical needs of the company, availability and quality of talent, transportation infrastructure, a business-friendly environment, and a huge incentive package.27 However, Amazon also considered the business environment that would result from longer relationships with the region. Debates in Seattle regarding increasing taxes on high-net-worth companies, and the resulting turmoil from gentrification, created an unfavorable business and political environment for the company there. Thus, Bradfort and her team likely considered those possible consequences in the New York decision.

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The Challenges of Siting a New Headquarters: Amazon Courts New York City

Government

City: Mayor Bill de Blasio’s decision to submit a bid was primarily fueled by the economic development prospects Amazon would bring. After Amazon finalized the decision to move forward with a New York site, de Blasio told the State Legislature the Amazon deal would lead to positive growth in the technology industry in the city.28 De Blasio repeatedly defended the package that brought Amazon to New York, having been at the table in brokering the deal. His negotiations took place prior to City Council hearings.

City Council members weighed the number of jobs that would be created by Amazon, the expected dollars in investment into city infrastructure and jobs, as well as the company’s stance toward unions in evaluating the deal.29 Council members held several hearings on the subject and no members were in favor of the deal. City Council Speaker Corey Johnson called it “insulting” that Amazon’s representatives did not submit to open hearings immediately following council member requests.30 Johnson criticized the company and its CEO for taking billions of tax incentives in exchange for operating in New York while accumulating trillions of dollars in revenue.

State: Governor Andrew Cuomo was in support of the final deal, having brokered several conversations between union leaders and Amazon to make sure they came to a consensus about building the HQ2. He was dubbed “Amazon Cuomo,” given his ardent support for the move. HQ2 was in line with his vision to reform New York City into a tech giant rivaling Silicon Valley.

Federal: The member of the US House who represented Long Island City, Democrat Carolyn Maloney, expressed support for the deal for its promise to situate New York City as the “high-tech capital of the East Coast.”31 House members representing some other New York districts, particularly Democrat Alexandria Ocasio-Cortez, felt differently. Ocasio-Cortez expressed intense opposition to the agreement, saying Amazon had a poor record with labor rights and citing high tax-money incentives in lieu of city/state investment in infrastructure.32

Organized labor

New York had a long history of labor activism and had been characterized as “the cradle of the American labor movement.”33 Some of the largest skirmishes between workers and corporate entities in the United States had taken place in New York. For example, in the wake of the 1911 Triangle Shirtwaist Factory Fire, which took the lives of 145 garment workers, organized labor and sympathetic city officials went to bat against owners and management. One protest was attended by nearly 80,000 people.34 Since these battles, organized labor had remained an important stakeholder for new projects in New York City.

In 2018, a leaked internal training video revealed Amazon anti-union sentiment, pitting organized labor against the best interests of customers and shareholders.35 Amazon’s labor practices had come under fire for years before the deal, with exposés showing the rate of serious injury at warehouses for full-time workers (9.6 per 100) to be more than twice the average in the warehousing industry.36 The rapid pace of work and emphasis on efficiency encouraged Amazon managers to continue working employees even in unhealthy and unsafe conditions, such as during a gas leak in a warehouse in Eastvale, California.37

Though Amazon’s labor practices were heavily criticized by several union leaders, labor was willing to make compromises with the company to ensure HQ2 could find a place in Queens. Amazon was resistant to unionizing attempts at a warehouse facility in Staten Island, which made regional union leaders question the company’s intent in Queens. Governor Cuomo brokered meetings between union organizers and the company in discussions around HQ2, however, which resulted in tentative agreements around unionizing in Staten Island and employing unionized labor in the Queens facility.38

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The Challenges of Siting a New Headquarters: Amazon Courts New York City

Public

Public sentiment about the Amazon HQ2 agreement was mixed, with specific considerations garnering more discontent than others. Protests at City Council meetings and charged opinions from across the nation characterized the debate.

Just a day after the New York HQ2 decision was announced, about 100 protesters assembled in Long Island City Park to protest.39 Dissent picked up soon afterward, with protesters swarming Amazon stores later in the month, demanding the company not open a second headquarters in New York. The Amazon Books store in Manhattan was overrun with protesters on November 26, 2018, several of them chanting and carrying signs with vitriolic messaging against the New York governor, the mayor, and the CEO of Amazon.40 Protests continued at City Council meetings. At one session in January 2019, council members grilled Amazon executives and New York City development officials, while members of the public held banners calling out Amazon’s work with the US Immigration and Customs Enforcement Agency and stance against unions.41

Before and after Amazon announced the HQ2 decision, social media conversations about HQ2 buzzed. Though Amazon was public about its search, transparency was limited, with the 20 shortlisted cities signing non-disclosure agreements.42 Of course, this had the impact of fueling public speculation and debate. After HQ2 was announced, New Yorkers took to Twitter to highlight how the influx of tech workers could exacerbate existing supplies and services.43 Users around the world jumped into the conversation about potential adverse and positive impacts of the decision on the city.44

One particularly contentious issue surrounded the $3 billion in state and local tax incentives that were offered to Amazon. This money, some argued, could have gone toward public services instead of to a well- situated company. Public sentiment regarding the tax incentives centered on the question of when gains from the HQ2 creation could be realized, and whether the initial subsidy estimate was accurate. The City Council Finance Committee reported that tax breaks could be much greater than $3 billion, considering officials accounted for only minimum investments in the initial report on incentives.45

While the billions in tax incentives could theoretically have been apportioned to city services, Governor Cuomo argued that, under the offer, every $1 in tax incentives would result in $9 in realized gains over 25 years, for a grand total of $27.5 billion in revenue.46 The number touted by Cuomo was not adjusted for inflation, and a report commissioned by the state concluded the benefit-cost ratio would be 6.3:1 rather than 9:1.47 A potential public gain also included the 25,000 jobs that would be added at the HQ2 facility at an average salary of $150,000 over a 15-year period.48 As a part of the deal, Amazon promised to provide public resources in the form of a tech startup incubator, artist studios, public open space, and workforce development for lower income residents and high school students.49 By Amazon’s estimates, which were debated, it would have added 15,000 jobs to the city by 2034.50

While residents would have benefited from many of the perks in the agreement, Amazon’s search for a new HQ2 had brought up contentious Seattle issues that could easily have repercussions for New York residents as well. Long Island City’s 2018 median household income was $67,000 and less than 50% of residents had a bachelor’s degree or higher.51 Jobs created by Amazon’s HQ2 were slated to go mainly to people with high educational attainment, and create an influx of highly skilled workers to the neighborhood, leaving less specialized workers with fewer opportunities. Many feared HQ2 would raise the cost of renting and buying homes, due to high demand, creating a challenging political and social environment similar to Seattle.52 These conversations, and a desire to avoid the pattern of expedited gentrification that took place in Seattle, were fodder for grassroots action against the HQ2 plan.

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The Challenges of Siting a New Headquarters: Amazon Courts New York City

Backlash

“When Amazon made the original HQ2 announcement in September 2017, Senator Bernie Sanders (D-VT) hadn’t yet targeted the company’s wages and labor practices and Alexandria Ocasio-Cortez was still a New York bartender and a complete unknown on the national political stage.”53 – Jason Del Rey, Vox

“Amazon is a billion-dollar company. The idea that it will receive hundreds of millions of dollars in tax breaks at a time when our subway is crumbling and our communities need MORE investment, not less, is extremely concerning to residents here.” – Alexandria Ocasio-Cortez, Twitter, 12 Nov. 2018

Despite the public nature of the bidding war between cities, many of the provisions that Mayor de Blasio and Governor Cuomo negotiated with Amazon were largely decided behind the scenes. Indeed, the New York HQ2 deal did have many proponents, but they were ultimately unable to prevent an outpouring of negative sentiment about the move. In October 2017, during the bidding for HQ2, community groups implored that de Blasio not concede tax benefits to Amazon.54

Some critics viewed the Amazon HQ2 bidding process as a ploy to gain the most tax benefits as possible from the competing cities.55 Amazon’s search criteria contained opaque language, which simultaneously obscured the selection process and incited a furious race to win out against other cities with whatever incentives possible.

The New York City Council, feeling left out of the process until the deal was already solidified by de Blasio and Cuomo in November 2018, decried that the agreement was made in back rooms without transparency to the public. Anti-HQ2 demonstrators gathered outside the three City Council hearings that ensued after the deal was made. While Amazon hired lobbyists to help with public relations, grassroots organizers were unsatisfied.56 Many of the organizations that supported Ocasio-Cortez on her path to victory for a House of Representatives seat were on the front lines of the HQ2 protests.57 A December 2018 poll found that while 60% of Queens residents supported the HQ2, 78% demanded more government involvement in order to make the deal more favorable for local residents.58