Partially Attributing Economic Factors, Amazon HQ2 Falls Short of Initial Hype

When Amazon first announced plans for a second corporate headquarters in 2017, it sparked a fierce competition. Virginia emerged victorious, beating out 237 other contenders to secure the project. Virginia Gov. Glenn Youngkin recently attended the opening of the newly established HQ2 in Crystal City, Arlington, expressing high expectations from the tech giant.

However, Amazon’s initial vision of a $5 billion complex employing 50,000 individuals has undergone significant changes. The newly opened HQ2, featuring two state-of-the-art office towers, will only house 8,000 employees by this autumn. In an effort to cut costs, Amazon announced a delay in the project’s second phase earlier this year, while reiterating its commitment to employ 25,000 individuals and invest $2.5 billion in the site, which is half of the original plan. Nevertheless, the specific timeline for this commitment remains uncertain.

“Delivering such a large amount of space over multiple years inherently involves flexibility in project timelines,” explained Holly Sullivan, Amazon’s vice president for worldwide economic development.

Companies nationwide are postponing expansion plans

Site selection experts note that Amazon is not alone in scaling back plans due to economic uncertainty. Factors such as rising interest rates and inflationary effects have prompted many companies to put their projects on hold or slow them down for a period of six to eight months. CNBC’s latest America’s Top States for Business study underscores the importance of a growing economy, strong state finances, new business formation, and a thriving real estate market when it comes to companies seeking new locations.

Amazon had already begun downsizing its HQ2 plans early on. When it became clear in 2018 that finding 50,000 employees for a single location would be challenging, the project was split between Arlington and Queens, New York. Subsequently, due to local opposition, Amazon abandoned its plans for New York and decided to concentrate 25,000 employees in Arlington, while distributing the rest across its other North American hubs.

More recently, Amazon has faced significant cost pressures due to its expansion during the COVID-19 pandemic. The company experienced its largest layoffs in history, which continued into this year. As part of these cost-cutting measures, the second phase of HQ2 was delayed.

“Part of that is the economy,” Sullivan said. “Part of it is also ensuring that the space we deliver today will remain suitable in the future, for the next 5, 10, or 15 years.”

Some losses may be long-lasting

Amazon’s real estate chief, John Schoettler, has revealed that Arlington and Nashville, Tennessee, where the company has an East Coast logistics hub, will remain focal points for expansion. However, the overall economy poses challenges for companies and economic development officials nationwide, particularly in Arlington, which currently faces a 22% office vacancy rate. Officials acknowledge that some of this vacant space may never find occupants.

“Now, we need to consider what to do with these physical assets, especially those that have surpassed their useful life,” stated Ryan Touhill, Arlington’s economic development director. “We must think about transitioning these assets into residential spaces, hotels, or other viable uses that generate revenue for the county and ensure the resilience of our neighborhoods.”

Despite the downsized version of the project, which does not address the vacancy problem, local officials remain confident that Amazon will eventually fulfill its original vision for Arlington and HQ2.

“They have given us every indication that they will follow through,” affirmed Christian Dorsey, Arlington County board president. “It may just take a bit longer.”

CNBC’s America’s Top States for Business rankings, which evaluate all 50 states in ten competitiveness categories, will be released on July 11.