Markets

Amazon HQ2 - "Mr. Bezos, why didn’t you call?"

If Jeff Bezos had called the Global Cities team we could have saved him a year’s worth of work.

30/11/2018

Tom Walker

Tom Walker

Co-Head of Global Real Estate Securities

Amazon’s HQ2 search went live on 7th September 2017 and it selected the winning cities, New York and Washington, in November 2018. 

The Global Cities databases that we use to quantify our investments comprise exactly the data that Amazon needed to make its decision. 

It wasn’t just Mr Bezos’ time that was wasted.  When Amazon announced its HQ2 search 238 cities sent in their proposals, there really was no need for Amazon to let them all think they had a chance of success.

Cities are the focal point of the global economy and certain cities are winning the race to attract companies and employees. This is because idea creation trumps manufacturing. Schroders Global Cities proprietary databases analyse the best cities and the best real estate within that city.

Meet the Schroders Global Cities team

See the Schroders Global Cities 30 index

An illustration of how Schroders identifies global cities

Amazon = disruption

The way in which Amazon has disrupted the retail industry means that it is seen by many as the personification of disruption.  It is hard to disagree with this notion when you consider the impact it has had, and will continue to have, on the retail sector.

However, this fast growing company is not satisfied and has set its sights on many other industries, ranging from the way we use and access data (the cloud) to how we buy medicines.  The way this company will influence how we live and how it will impact once dominant companies will be seen for many decades to come.

Despite its vision and data driven ability there is one trend that they cannot change – urbanisation.

Amazon = urbanisation

In 2017 Amazon announced that it had outgrown its Seattle headquarters, where its business was founded.  It is quite an achievement to ‘outgrow’ a city as remarkable as Seattle. 

However, Amazon is no ordinary company.   As befitting a company whose growth has defied both gravity and investors’ expectations its announcement regarding its new headquarters (HQ2) was quite staggering:

”Amazon HQ2 will be Amazon’s second headquarters in North America.  We expect to invest over $5 billion in construction and grow this second headquarters to include as many as 50,000 high-paying jobs.”

It is easy to see why this announcement caused such excitement amongst city politicians across north America.  The economic benefit of having such a high quality company in your city is clear:

“Amazon estimates its investments in Seattle from 2010 through 2016 resulted in an additional $38 billion to the city’s economy – every dollar invested by Amazon in Seattle generated an additional $1.40 for the city’s economy overall.”

What was Amazon looking for?

Amazon is no different to any other enterprise, large or small.  It needs to hire the brightest minds that will continue to drive their business forward.  Talent brings innovation which leads to growth and more job creation.  This in turn drives more (talented) people to move to a particular city to further, or start, their career.  This is the self fulfilling prophecy that is urbanisation.

The virtuous cycle of global cities

In Amazon’s request for a proposal it outlined all the elements that the Schroders Global Cities fund looks for - a large city population, connectivity within the city and to other national and international cities, and of course, talent.

“We are looking for a location with strong local and regional talent…A highly educated labor pool is critical and a strong university system is required…The highway corridors must provide direct access to significant population centers with eligible employment pools.  Travel time to an international airport with daily direct flights to Seattle, New York, San Francisco/ Bay Area, and Washington DC is also an important consideration.”

Which city did Amazon select?

Having announced a short list of 20 (predictable) cities across north America it selected two cities, not one as had been previously thought, New York City and Washington DC.

Both cities rank incredibly well in our Global Cities Index, with New York slightly higher placed than Washington DC.  However, Amazon could have picked a number of other cities such as Boston, Dallas or Atlanta and still found high quality talent and great connectivity. They will all continue to thrive due to the talent and connectivity that they provide both employers and employees.

Can Amazon change urbanisation?

Amazon’s selection process for its new headquarters was very public and exciting (at least for the Global Cities team).  However, the reality is that its decision making process is no different to any other company, large or small, mature or start up. 

Companies need to be in locations where they can grow their business, both with talent and connectivity.  Talent needs to be in locations where there are great opportunities.  This is the self fulfilling prophecy of urbanisation and why it has been called the most defining trend of the 21st century.  

Global Cities = Amazon (and every other company trying to grow)

Whilst we are upset that Jeff Bezos did not call to ask for our help we are grateful to him for the very public HQ2 search.  Over the course of a year or so Amazon has helped to highlight the relevance of a Global Cities strategy.  Not even the great disrupting machine that is Amazon can escape the trend that is urbanisation.  Global Cities benefit from disruption as incubators of ideas. Talent and industry continues to gravitate towards these well connected cities.  Every day companies with a lower profile than Amazon make exactly the same decision.

In a world that is changing fast the enduring value of real estate located in the most connected part of a growing and talented city is clear to see.

Read more from the Global Cities team:

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