|The first phase of Amazon's second headquarters began in January, just before the coronavirus pandemic hit the U.S.
Source: Clark Construction and Sission Studios
Amazon.com Inc. is moving forward with its $2.5 billion second headquarters in Arlington, Va., even as much of corporate America pauses to reassess new hires and weigh potentially smaller real estate footprints in the age of the coronavirus.
Construction on the 4 million-square-foot project's first phase, known as Met Park, began in January, and Amazon has made nearly 1,000 hires for the 25,000 planned jobs at the new headquarters, a company spokesperson told S&P Global Market Intelligence. Met Park, which will comprise 2.1 million square feet of office space, will be complete in 2023.
It is difficult to overestimate the significance of the project for Washington, D.C. The market has struggled for much of the last decade to generate net new demand from large office users, who had created a "musical chairs" dynamic in the market by trading locations while rarely increasing their footprints, Nathan Edwards, regional director for Mid-Atlantic and Southeast research at Cushman & Wakefield, said in an interview. He called Amazon's arrival a game-changer, with landlords now commanding rents of $50 per square foot or higher where previously they were in the mid-$30s.
"Amazon has really transformed that market from where it was a couple of years ago. ... The expectation [is] that in four to five years, there's going to be a dramatic uptick in demand for space after Amazon gets settled and starts to really incubate," Edwards said.
A rendering of Amazon's HQ2. The whole development will take 12 years to complete.
Amazon declined to comment on any prospective changes to the campus plan as a result of the pandemic, which hit the U.S. in earnest in March. But experts say the company may be reassessing the size and shape of the footprint as the pandemic evolves. According to Edwards, large tenants in the market have been rethinking floor layouts to accommodate social distancing standards. Cushman estimates office space demand in the coming months will be about 85% of pre-pandemic levels, with social distancing standards offsetting a measure of the reduced space needs from remote working.
"I would imagine Amazon is taking that into account like other large users," Edwards said of remote working trends and social distancing.
Jason Goldberg, chief commerce strategist with communications firm Publicis, had a similar read. "I absolutely think it still makes sense for Amazon to invest in that market and that facility," he said. "But how they design it is for a different use case than they might have been thinking about two years ago."
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It may take longer for Amazon to meet its hiring goals, and some positions may remain virtual, said Daniel Ives, an analyst with Wedbush Securities.
"There are so many unknowns in terms of how many employees are going to be in office spaces," Ives said in an interview. "The trajectory to get there is going to be a lot choppier just because of this unprecedented backdrop."
Amazon named Arlington as the site of its second headquarters in 2018. Known as HQ2, the project will span northern Virginia's National Landing, the rebranded, master-planned neighborhood to be developed by JBG Smith Properties across the Pentagon City and Crystal City neighborhoods as well as the Potomac Yard neighborhood in Alexandria. The build-out is expected to take about 12 years, and Amazon committed to create 25,000 jobs with an average salary of $150,000 as part of the deal.
A rendering of Met Park, the first phase of the development.
The project "remains fully on track" and in line with the original plan, Stephen Moret, CEO of the Virginia Economic Development Partnership, said in an email. "Amazon is delivering on or exceeding all of its commitments to Virginia."
Amazon has seen a surge in delivery orders since the pandemic dislocated vast swaths of the U.S. economy, and the company recently hired 175,000 employees nationwide to ease logistics and delivery bottlenecks . The COVID-19 crisis has shown that Amazon was "wildly understaffed" at its logistics centers, D.A. Davidson analyst Tom Forte said in an interview.
Meanwhile, Amazon's cloud-computing division, Amazon Web Services Inc., continues to fuel revenue growth.
"If anything, this has just positioned Amazon to be bigger faster," Forte said of the coronavirus crisis.
A smaller footprint
Forty-seven percent of office space users said they expected to reduce their physical office footprint as a result of the coronavirus, with more than 20% of organizations expecting to reduce their footprint by more than a quarter, according to 451 Research, an offering of S&P Global Market Intelligence. Among big tech companies, Facebook Inc. and Google LLC have already implemented long-term work-from-home plans, while Amazon has granted employees whose job can be completed remotely the ability to do so until at least Oct. 2.
New work-from-home arrangements across corporate America have been "pretty successful" from a technological and productivity standpoint, said Tom Stringer, a national site selection expert and managing director with consultancy BDO in New York.
"It's much less expensive, from a corporate standpoint, to have people working at home," Stringer said in an interview.
While it is unclear how Amazon's blueprints may change, Forte and others said the pandemic could allow the company to negotiate better terms with developer JBG Smith Properties, the real estate investment trust that owns or controls millions of square feet of office space in National Landing. Washington, D.C., remains more a tenants' than a landlords' market, they said.
A JBG Smith spokesperson referred questions to Amazon.
Wei Xie, senior manager at CBRE for the Baltimore and Washington, D.C., area, said she expects softness in office market fundamentals in 2020. Preliminary second-quarter results for the Washington, D.C., market show a slowdown in leasing volume, and she expects that trend to continue through the year.
The longer-term outlook is brighter. While the transformation of Washington, D.C., into a tech hub in its own right did not begin with Amazon, the company's arrival cemented the city's status as a viable one. The city historically has been an exporter of tech talent — the region did not have the professional opportunities to match its educational ones — but it may now become a net importer, Xie said in an interview.
"We are hearing from a lot of the tech firms that they want to access the strong labor pool that we have that has been strong and continues to grow," she said.