Amazon HQ2 is not matching the original hype. The economy is partly to blame

When Amazon first announced plans for a second corporate headquarters in 2017, it set off an epic bidding war. Virginia beat 237 competitors to win the project, and when it finally opened last week in the Crystal City section of Arlington, Virginia Gov. Glenn Youngkin was there to celebrate. “We have high expectations because they are well placed,” he told Amazon employees, “on an organization that delivers on promises made.”

But those promises from Amazon have changed dramatically from the original vision, which called for a $5 billion complex with 50,000 employees. The newly opened HQ2, with two new, ultramodern office towers, will have 8,000 employees by this fall.

In March, Amazon announced it was delaying a second phase of the project as it cuts costs company-wide. The company says it is still committed to employing 25,000 people and spending $2.5 billion on the site — half the original plan — but it can’t say when that will happen.

“I think when you’re looking at delivering this much square feet of space over multiple years, there’s a great understanding that there’s always times of flex when you can deliver, and the timeline of projects,” said Holly Sullivan, Amazon’s vice president for worldwide economic development.

Companies nationwide are putting expansion plans on hold

Site selection experts say Amazon is not alone in scaling back its plans as uncertainty chills many parts of the economy. 

“The inflationary effects (and) the rising interest rates have given folks a lot of reasons to hit the pause button a little bit,” said Tom Stringer, a principal and leader of the site selection and incentive practice at BDO in New York. “Projects aren’t really stopping. They’re in a state of sort of stasis,” he said. “Things definitely get slow rolled for a six to eight-month period.”

The uncertainty looms large in CNBC’s latest America’s Top States for Business study. Companies are seeking locations where the economy is growing, and where state finances are strong. The Economy category also measures things like new business formation, and the health of the local real estate market. It is the third-heaviest weighted category out of ten under this year’s methodology.

Amazon began scaling back HQ2 early on. When it became clear in 2018 that the company would not be able to find 50,000 employees to hire in one location, it split the project between Arlington and Queens, New York. Then, when local opposition blew up in New York, Amazon decided to ditch New York, put 25,000 employees in Arlington, and spread the rest among its other North American hubs.

More recently, the company has faced intense cost pressures following its Covid-era expansion. Last fall, it announced the largest layoffs in its history, which have continued into this year. That belt-tightening included delaying the second phase of HQ2.

“Part of that is the economy,” Sullivan said. “Part of it is we also want to learn and make sure that what we’re building, the space that we’re delivering today, is a space that is going to be right in 5, 10, 15 years from now.”

Some losses could be permanent

Amazon real estate chief John Schoettler recently told CNBC that Arlington and Nashville, Tennessee, where it has an East Coast logistics hub, will remain areas of focus for expansion. “I don’t see us getting bigger in Seattle whatsoever,” Schoettler said. “I think that we’re pretty much tapped out there.”

But the economy is an issue for companies and economic development officials across the country, and particularly in Arlington, once home to the headquarters for dozens of defense contractors. Today, with the future of the workplace still uncertain, Arlington is struggling with a 22% office vacancy rate. And officials know that some of that space might never be filled.

“Now, we’ve got to figure out what we’re doing with those physical assets, especially those that are beyond their useful life,” said Ryan Touhill, Arlington economic development director. “We really need to start thinking about how to transition those assets into something like residential, or hotel, or another use that can not only generate revenue for the county, but, frankly, continue to have our neighborhoods be strong, economically resilient places.”

Because HQ2 is all new office space, it doesn’t help solve the vacancy problem. But even the scaled-down version of the project is going a long way toward revitalizing Arlington.

The two new office towers overlook a new community park where vacant land and warehouses once sat. New retailers are setting up shop at street level, many of them small businesses. Some of Amazon’s facilities are open to the public.

“There’s going to be a lot more buzz in the neighborhood,” Sullivan said. “In thinking about 8,000 employees coming into 2.1 million square feet, the shopping, all of that, Pentagon City right across the street here, it’s just going to have more activity and more excitement and enthusiasm.”

Because of that, local officials say they are not worried about Amazon delaying some of its plans.

“We still expect, and they have given us every indication, that they will follow through with their original vision and plan for Arlington and HQ2,” said Christian Dorsey, Arlington County board president. “It just may take a little bit longer.”

CNBC’s America’s Top States for Business rankings – where we score all 50 states in ten categories of competitiveness – are coming July 11.