Worried about Costs & Slowdown? Amazon Scuttles HQ2 Altogether, Plunges NY City Real Estate Industry “Into Despair”

Wolf Richter wolfstreet.com, www.amazon.com/author/wolfrichter

Prudent cost-cutting move artfully dressed up as response to local politicians that had railed against the $3-billion corporate welfare package.

Amazon scuttled plans to build its HQ2 in New York City today, citing opposition by some “state and local politicians.” They’d been railing against the $3-billion taxpayer-funded price tag to induce Amazon to set up shop in Long Island City, Queens. The incentives included tax credits and an outright capital grant.

A week ago — even as one of the richest companies in the world run by the richest man in the world was still being promised the $3-billion incentive package — New York City Mayor Bill de Blasio, citing a shortfall of $1 billion in revenues, told city agencies to cut their budgets by $750 million by April. These cuts would have to be recurring. And he called for an expansion of a partial hiring freeze. This squeeze didn’t exactly mollify the outrage over the $3-billion corporate welfare program for Amazon.

There wouldn’t have been much opposition to Amazon’s expanding its presence in New York City on its own, without taxpayer-funded incentives. In the blog post that announced the decision, Amazon said that it already has over 5,000 employees in Brooklyn, Manhattan, and Staten Island, “and we plan to continue growing these teams.” Why not do that from get-go – without the taxpayer wealth transfer?

A cost cutting move as the future becomes murky?

Amazon also announced that it had scrapped the idea of building any HQ2 at all and won’t reopen the bidding process to find a different location. In the second-to-last paragraph of its blog post, it says: “We do not intend to reopen the HQ2 search at this time.” It’s off the table.

This means that Amazon has decided it didn’t really need this big facility. Is it worried about retail sales not holding up? Is it fretting about competition from the biggest retailers in the US and elsewhere as they catch the drift of e-commerce? Is it worried about a slowdown at AWS, its big data-center money maker, now that the exuberance about the “cloud” is waning? Is it worried that in the future, investors will once again hound it about ballooning expenses, and hammer its stock price to smithereens?

This was a move designed to keep operating expenses and capital expenditures from ballooning further. Laying off people is one thing when push comes to shove, but getting rid of a monstrous multi-billion-dollar HQ2 is another. Something like this — especially when work has already started and money has been plowed into it but it’s not finished and cannot be used – could become an albatross around the neck of Amazon when it needs to cut expenses.

Interestingly, its project in the Washington D.C. area – in Northern Virginia, a hotbed for government contractors – is moving forward to allow AWS to feed at the big trough of the government, which is, as everyone has learned last time, great-recession-proof.

Real estate industry falls into despair

Beyond the jubilation among the “state and local politicians” and the activists that had opposed the $3 billion incentive package, there was the real estate industry – one of the primary beneficiaries of the HQ2 project, the construction activity, the influx of the 25,000 Amazon employees that all would need to find housing, etc. From one minute to the next, the industry’s once-in-a-career grand price was yanked off the table.

Forget soaring rents for apartments, forget higher home prices, and surging rents for office and industrial space, forget booming commissions. That whole dream went up in smoke today – in a market that has already come under pressure.

Here are some choice tidbits from Bloomberg about Amazon’s announcement that “plunged local real estate brokers into despair”:

The sign displayed in the storefront of a Douglas Elliman brokerage in Long Island City summed up the real estate industry’s attitude toward the controversial deal. “This business supports Amazon,” it read. Someone inside pulled the sign down after the company released a statement Thursday that it was pulling out.

“I was sitting down, so I had nowhere to fall,” said Adrian Lupo, manager of Nest Seekers International nearby on Vernon Boulevard. “We thought they were playing poker to get more concessions, but in the end it was not the case.”

Amazon’s withdrawal “sends a terrible signal to the marketplace about the ability for companies to expand in New York,” said Seth Pinsky, an executive vice president at RXR Realty.

“What happened today is a real tragedy,” said Jason Haber, a broker with Warburg Realty Partnership Ltd. He said at least 10 clients have already called to discuss what Amazon’s absence from Long Island City means for them. He said he hopes none of them back out of deals over the news, but “real estate is an emotional thing.”

“This definitely sets back the commercial market for Long Island City for sure,” said Chad Sinsheimer, a managing director at Ackman-Ziff Real Estate Group. He was on the subway when he heard the news. “My partner and I looked at each other and we said, ‘Boy are we glad we don’t have anything that’s being negotiated in Long Island City right now because it’s got to be chaos.”’

It hurts when all the hopes and hype surrounding Amazon’s HQ2 and its corporate welfare package suddenly just vanish.

But for Amazon, it may have been a prudent business decision, artfully dressed up as response to the political opposition the incentive package was facing.

Its decision to scrap HQ2 altogether may have been based on the growing uncertainty in the financial markets, on the increasing likelihood of a downturn looming just beyond the horizon, and on the stiffened resistance by its competitors around the globe.

It’s shares, despite the blistering stock market rally since Christmas Eve, are still down nearly 20% from the peak at the end of August. And not going overboard building the next palace might have been a smart cost-focused move.

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