Amazon HQ2 and Northern Virginia

VIEWPOINT WASHINGTON-BALTIMORE RESEARCH

What are the impacts? Amazon HQ2 and the Northern Virginia and D.C. markets

Amazon plans to split its new HQ2 headquarters between Crystal City in Arlington, Virginia and Long Island City in Queens, New York. It anticipates creating 25,000 jobs and occupying 4 million sq. ft. of office space in each city over the next 10 years. This is a watershed development for the Washington, D.C. and Northern Virginia markets and it indicates the importance of walkable environments, quality access to transit and infrastructure for major employers. More importantly, it confirms the strength of the D.C. region’s talent.

EXECUTIVE SUMMARY

The key impacts on the Northern Virginia and D.C. markets are as follows:

• Amazon’s 4 million-sq.-ft. requirement would account for 33% of Crystal City’s existing office inventory, and its 25,000 employees would comprise 11% of the D.C. region’s tech1 labor market.

• The average annual wage for tech employees in the D.C. region is $106,500, which Amazon has announced it will well exceed at $150,000.

• Amazon’s 25,000 employees would generate about 50,000 additional jobs in indirect industries and in retail, housing and services. This could jump to as many as 125,000 indirect jobs depending on the composition of Amazon employees, Amazon’s local spending and its employee spending patterns.

• Office demand totaling 7 million sq. ft. could occur from indirect job growth. In 2017, Northern Virginia’s annual net absorption totaled 2.3 million sq. ft. (4.2 million sq. ft. for the Greater D.C. region).

• As demand and rents in Crystal City rise, some businesses are likely to look for space and boost demand in other Northern Virginia submarkets.

• Amazon employees most likely will live within a 30-minute transit commute from Crystal City, which includes access to most of downtown Washington, D.C., Arlington and Alexandria and parts of Fairfax County.

• Expected wages of Amazon employees could support apartment rents of more than $3,750 per month. This is 57% higher than Northern Virginia effective rents and 20% higher than Washington, D.C. effective rents per unit.

• Additional employment impacts could increase multifamily rental housing demand by 53,000 units in 10 years, which would constitute nearly 4% of the D.C. region’s multifamily supply.

CORPORATIONS MOVING TO LIVE-WORK-PLAY ENVIRONMENTS

Big employers like Amazon increasingly are seeking urban locations that feature walkable environments, access to public transportation and other transportation options like bike lanes and dock-less bikes and scooters. Crystal City has a dedicated Metro station with two lines, which combined have a train arriving every five minutes during peak commuting hours for just a 12-minute ride to downtown Washington, D.C.

CRYSTRAL CITY STATION RUSH HOUR SERVICE

Source: CBRE, Q4 2018; WMATA

The D.C. region has a history of major companies locating or expanding near Metro stations:

• Capital One recently built a 940,000-sq.-ft. headquarters steps away from the McLean Station in Tysons.

• Nestle USA has leased 250,000 sq. ft. of office space within walking distance of the Rosslyn Station in Arlington.

• Marriott International is relocating from a suburban campus to 785,000 sq. ft. of office space in downtown Bethesda, three blocks away from the Bethesda Metro station.

Other research2 indicates that corporate moves to walkable, transit-accessible locations is a national trend from which the D.C. region—especially Northern Virginia—will benefit. As nearby Tysons, Alexandria and the Rosslyn-Ballston Corridor expand and Arlington continues to develop, properties there will benefit.

AMAZON HQ2 SIZE IN RELATION TO THE MARKET

Four million sq. ft. of office space is a substantial demand on Crystal City and nearby Potomac Yard in Alexandria, but because Crystal City’s and Northern Virginia’s office vacancy rates are near 20% as of Q3 2018, 3 the 11 million-sq.-ft. Crystal City submarket and adjacent submarkets can absorb this demand over 10 years. In the long run, much of Amazon’s demand likely will be met with new construction and owner-occupied build-to-suit development.

The employment infusion will represent a large share of the local economy. A total of 25,000 employees represents 1.7% of the Northern Virginia labor market, or 0.8% of the entire D.C. region’s labor market.4 A total of 25,000 employees represents 1.7% of the Northern Virginia labor ma rket…

While not all Amazon employees will be in tech occupations—many will perform traditional business services like marketing and sales—25,000 employees equal 11% of the entire D.C. regional tech labor market.

AMAZON HQ2 SIZE IN PROPORTION

Source: CBRE, Q4 2018.

LABOR MARKET EFFECTS: MULTIPLYING AMAZON’S JOBS

The average annual tech employee salary in the D.C. region is $106,500.

TECH WAGES IN THE D.C. REGION

Occupation Average Annual Wage

Web Developer $90,000

Network and Computer Systems Administrator $102,440

Computer and Mathematical Occupations (All) $106,550

Software Developers, Applications $116,250

Software Developers, Systems Software $125,010

Computer Scientist $125,520

Source: CBRE, Q4 2018; U.S. Bureau of Labor Statistics.

An infusion of new jobs to any region creates what economists call “multiplier effects.” When a company spends money to support its business—everything from hiring lawyers, paying utilities, hiring caterers and contracting for software—it indirectly creates additional jobs. Employees also create jobs by spending money in the local economy. Research suggests that the multiplier effect is between two and five jobs per tech employee.

Research suggests that the multiplier effect is between two and five jobs per tech employee. U.C. Berkeley Professor Enrico Moretti5 suggests that because tech employees are highly paid and spend more on personal services, they create up to five jobs each. Other economic indicators suggest that the multiplier is closer to two.

These secondary jobs likely include:

• Technology workers providing services to Amazon. • Professional services such as specialized legal and financial services. • Employees of tech start-ups locating to the region to take advantage of the concentrated labor pool. • Technology infrastructure workers providing hardware and technology systems services.

Using a multiplier of two, Amazon’s 25,000 employees would generate an additional 50,000 jobs in the region for a total of 75,000 jobs over 10 years. On the high end, this could be an additional 125,000 jobs.

AMAZON EMPLOYMENT IMPACT

Source: CBRE, Q4 2018.

RESEARCH-BASED EMPLOYMENT MUTIPLIERS

Source Employment Multiplier

Enrico Moretti (U.C. Berkeley) 5.0

IMPLAN Group (Amazon Study) 2.1

Maryland Dept. of Commerce (Amazon Study) 1.9

Greater Washington Partnership (Amazon Study) 1.9

U.S. Bureau of Economic Analysis RIMS II Data 1.9

Source: CBRE, Q4 2018.

OFFICE MARKET EFFECTS

Amazon’s HQ2 likely will spur office rent growth in Northern Virginia and the entire D.C. region. Much of this impact will come from indirect employment, which at 50,000 jobs will generate significant additional office demand.

CBRE calculates that nearly 37,500—or 75% of those 50,000 indirect jobs—will be office-using employment.6 The remaining 12,500 will be in retail, construction, housing and service-related industries.

This implies that the indirect impact of Amazon HQ2 could be as much as 7 million sq. ft. of office demand across the D.C. region , with the bulk of it concentrated in Northern Virginia and in addition to Amazon’s own 4 million sq. ft. requirement. However, Amazon is likely to settle in owner-occupied space by full build-out.

As pressure on the Crystal City office market becomes acute—especially since it is physically constrained by highways and railroads—many businesses will find greater value in adjacent submarkets and may seek more affordable space, thus increasing demand outside of Arlington.

Northern Virginia submarkets that may benefit from activity in Crystal City include Alexandria and the I-395 Corridor, which are just south of Crystal City and are interconnected by the Metro. The Potomac Yard area south of Reagan Washington National Airport (DCA) is slated for large-scale redevelopment totaling up to 1.9 million sq. ft.

AMAZON OFFICE IMPACT

Source: CBRE, Q4 2018.

Additionally, major transportation corridors along US-50, VA Rt. 7 and Columbia Pike are within commuting distance of Crystal City. Finally, the Rosslyn-Ballston Corridor— Arlington’s most successful corridor in terms of office rents—would be a prime destination for other technology firms seeking a vibrant live-work-play environment.

The impact would be felt regionwide, too, as technology-oriented law firms likely would seek space in D.C. and other firms would look in Maryland. The region is poised to attract businesses that may want to provide services to Amazon but not necessarily be in the same neighborhood.

MULTIFAMILY MARKET EFFECTS

The infusion of 25,000 Amazon employees over 10 years will be significant for the D.C. region housing market. Employees commuting to Crystal City will require housing within transit distance. CBRE research shows that 56% of millennial employees have a commute tolerance of 30 minutes .

MILLENNIALS’ COMMUTE TOLERANCE - AMERICAS

Source: CBRE, Q4 2018.

More than half (52%) of employees aged 20 to 44 in Arlington County currently commute to work without a car.7 This is higher (62%) for younger employees (aged 20 to 24). Amazon HQ2 will be transit-oriented and the workforce will commute from the Metro service area. This is where the impact on multifamily rents will be strongest, especially considering that more than 50% of Amazon’s Seattle HQ employees get to work without a car.

Within a 30-minute transit commute to Crystal City, a person can live in much of Washington, D.C., Arlington County, Alexandria and parts of Fairfax County. These corridors—along Metro lines and major bus lines—would see increased demand for housing from Amazon employees. Additionally, the 50,000 indirect employees would produce broad-based demand throughout the region.

The Amazon HQ2 employees more likely will be young, single and live in multifamily housing. While many employees may consider single-family housing, the median home value in Arlington County is $664,000 and would require an annual income of $125,000 with a 20% down payment to qualify for a 30-year mortgage.8 The average Amazon employee is expected to make $150,000 per year, so many of them may seek for-sale housing.

However, the demographic of young employees also likely will be seasonal, with an influx of college graduates in the summer, as well as summer interns, demanding temporary housing. They are less likely to require parking spaces and demand proximity to amenities, lowering the need for high parking ratios.

CRYSTAL CITY 30-MINUTE TRANSIT COMMUTE AREA

Source: Center for Neighborhood Technology.

Employees earning higher salaries in the D.C. region spend a lower portion of their earnings on rent: Those making more than $100,000 spend 23% of their earnings on rent, compared to 30% for the average person in Arlington County.9 At an average of $150,000 in annual compensation, an Amazon HQ2 employee could spend more than $3,750 a month in rent at 30% of their average salary .10 This well exceeds the $1,833 monthly effective rent in the Northern Virginia market and is also higher than the $2,419 effective rent in Washington, D.C.11

However, the 25,000 Amazon HQ2 employees would demand fewer than 25,000 units. When accounting for married persons and individuals with roommates, the average household size in Northern Virginia is 2.05 with 57% of households renting.12

Because they will be younger, more likely to rent and more likely to live alone, CBRE estimates that Amazon employees would generate a market demand for 7,500 to 15,200 generally Class A rental units, 13 depending on the specific profile of Amazon employees and how many of the them are net new to the region. The demand profile will generally be at the higher end of the market, with incomes supporting monthly rents of more than $3,750. 14

Secondary multifamily impacts also will be significant. Higher wages for college- educated employees should translate into broad-based increases in multifamily rents. The 50,000 indirect employees would generate demand for 13,900 rental units.15

The total impact could be demand for up to 29,100 rental units, 16 compared to a total inventory of 305,000 units in Northern Virginia and 736,900 units in the Greater D.C. region.

AMAZON MULTIFAMILY HOUSING IMPACT

Source: CBRE, Q4 2018.

CONCLUSION

The estimates in this report are conservative, based on prior industry research and represent a multiplier effect of two additional jobs per Amazon employee. Other research suggests this multiplier could be as high as five indirect jobs, which would yield estimates of up to 2.5 times more than those reported here.

Amazon’s decision to co-locate HQ2 in Crystal City speaks to Northern Virginia’s appeal to major companies and technology firms. The effects are positive for the commercial real estate market, especially for office and multifamily. While not discussed in this report, the retail effects will also be significant. The additional employees will certainly demand a unique set of restaurants, bars, shops and personal services catered to their demographic.

Local concerns exist regarding housing affordability and congestion impacts, as well as displacement of long-time residents. The market demand for more multifamily units is generally being met with significant construction in areas like Tysons, Reston, Arlington and Southeast Washington, D.C. This, combined with regionally-tailored housing polices, makes Amazon HQ2 a net positive to transform the region into a true 21st century economy.

AMAZON IMPACT TO THE D.C. REGION

Source: CBRE, Q4 2018.

NOTES

1. U.S. Bureau of Labor Statistics, “Computer and Mathematical Occupations.” 2. Smart Growth America (2015). Core Values: Why American Companies are Moving Downtown. 3. CBRE, Q3 2018. 4. U.S. Bureau of Labor Statistics, “Occupational and Computer Employment.” 5. Moretti, Enrico (2012). The New Geography of Jobs. New York: Mariner Books and Houghton Mifflin Harcourt. 6. U.S. Bureau of Labor Statistics, RIMS II for Washington, D.C. MSA, employment multipliers by industry. 7. U.S. Census American Community Survey, 2016, 5-year, Washington, D.C. MSA. 8. Redfin; CBRE Research Q2 2018. 9. U.S. Census indicates 57% of persons age 20-44 rent in Arlington, and an average household size of 2.05. 10. U.S. Bureau of Labor Statistics, Occupational Employment Survey, 2017. Washington, D.C. MSA. 11. CBRE Q3 2018. 12. See 8. 13. Lower estimate based on existing average statistics of 2.05 persons per household (young employees) and 57% renting (Arlington, Virginia). High estimate assumes 70% rental and average household size of 1.15. 14. Based on annual income of $150,000 per year. 15. 50,000 employees at a regional rental rate of 57% (Arlington, Virginia) and a regional household size of 2.55 for rental units. 16. 25,000 employees at 57% rental rate and 2.05 persons per household. Additionally, 15,000 units from Amazon employees.

For more information regarding this ViewPoint, For more information regarding the please contact: Washington, D.C. and Northern Virginia markets, please contact: Michael Rodriguez, AICP Leader, Market Research & Insights Kyle M. Schoppmann Washington-Baltimore Area Research Executive Managing Director 750 9th St. NW, Suite 900 750 9th St. NW, Suite 900 Washington, D.C. 20001 Washington, D.C. 20001 +1 202 585 5710 +1 202 585 5561 [email protected] [email protected]

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