What does Amazon’s site shortlist mean for investment?

At the start of 2018, US e-commerce giant Amazon revealed the 20 cities or areas that made the first cut in its site selection process for a second North American headquarters. The cities were culled from a list of 238 proposals that Amazon publicly invited when it announced in autumn 2017 that it was searching for another home.

Ever since the 20 cities were named, the race has been on. One city will win Amazon’s $5bn headquarters, which is expected to provide as many as 50,000 high-paying jobs, while 19 will go home with nothing. Cities are heavily competing for this prize, offering billion-dollar incentives, sometimes to the chagrin of local residents.

A new cachet

But will those 19 losing cities really be losers in the long run? There is a theory that landing on Amazon’s shortlist has given these municipalities a certain cachet that could influence other investors going through a site-selection process.

Scott Crowe, chief investment strategist of CenterSquare Investment Management, for example, is intrigued by the list of 20 cities. What Amazon did was essentially show its hand in what it values in a location, he says. Most companies, by contrast, tend to keep this thinking to themselves. “That is information we are always trying to find out: where a company wants to be and why,” he says.  

Of course, some of the cities were already on investors’ radar as large gateway hubs: New York, Washington, DC, Boston, Chicago, Miami, Los Angeles and Toronto (the only non-US city among the 20). There are also some submarkets outside these large cities on Amazon’s list, such as Montgomery County in Maryland, Northern Virginia and Newark, New Jersey.

But there is a surprisingly wide range of secondary cities that Amazon is also considering that could very well cause site selection decision-makers to give them a second look. These cities include Atlanta, Austin, Columbus, Dallas, Denver, Indianapolis, Nashville, Philadelphia, Pittsburgh and Raleigh.

It is an accomplishment for these cities to have made it to Amazon’s second round, says Tom Corrie, principal at accounting firm Friedman. “Amazon is very selective in what it is looking for. These cities are the top 10% of the locations that submitted proposals in the first round.”

It is also instructive to examine which cities did not make the list, he adds. Detroit, for example, reportedly offered Amazon a 30-year tax break. When Detroit did not progress to the second round, that suggested that Amazon is placing a higher value on other attributes, such as proximity to a talent pool.

Incentive envy

On the other hand, making it onto Amazon’s shortlist could come back to haunt these areas. Several states made quite a splash when news of their incentive offerings leaked or was announced. Among them, Maryland is offering $5bn and New Jersey $7bn of incentives.

It is easy to imagine another large company – say, Apple – assuming it would receive similar generosity, says Mr Corrie. And while it would be expected that cities and states would compete just as intensely for another Apple headquarters, the calculations they made for Amazon would not necessarily be the same as they might make for an Apple.

“They’ve spent a lot of time thinking about the revenues that this investment would bring and, on the other side of the equation the infrastructure improvements they would have to make and how they would go about funding the package before they offered it,” says Mr Corrie. Apple or another large company, in other words, might not necessarily be worth the same package.

Another potential drawback (albeit one for the long term), would be the negative impact that could result from the newfound popularity of a particular location, Mr. Corrie said. Indeed, this is why some residents are leery of having Amazon move to their city and irked by the large-sized incentive package their local government is offering. “If a large number of companies, especially one the size of Amazon, start to move into a smaller city, there is a good chance that the cost of housing and commercial real estate will increase,” Mr Corrie says. 

Not transparent

Not everyone is convinced that these 20 cities’ stock has soared overnight merely by landing on Amazon’s shortlist. Amazon has not been that transparent about what it ultimately wants, says Peter Cohan, a lecturer in strategy at Babson College. 

“If Amazon was more transparent about how it applies its criteria to these 20 cities, its selection of a city might have a more compelling signalling effect for other companies,” he says. “But even if Amazon was more transparent, what might matter for its headquarters could be very different from what matters to other companies.”

Since the announcement was made, Mr Cohan says he has not seen much evidence of companies suddenly deciding to relocate to one of the 20 cities. “To be sure, corporate relocations take time – especially for large companies – so I would not expect to see this as a trend for some time, either way,” he adds.

Mr Cohan adds that some of the 20 cities appear to be far better positioned to win Amazon’s headquarters than others. “For example, Boston, Austin and maybe Pittsburgh look like they will be in the top five,” he says. “Other cities like Atlanta seem to me to be missing the supply of executive talent that a headquarters would require.”

But what does not work for one company might well work for others. In March, Mercedes-Benz USA announced that it had chosen Atlanta for its first Lab1886 global innovation hub in the US. The company said it selected Atlanta because of its higher education institutions, tech talent and growing community of innovative companies, attributes that would appeal to any number of companies.