Amazon threatens to back off Seattle growth, but it wouldn't be easy to leave

The Seattle Times

Posted In — News & Press | In the News

In the month since Amazon first suggested it would consider a pullback in Seattle, the company has posted ads for more than 1,200 jobs based in the city. And its massive footprint would be difficult and costly to unwind because it has built and leased so much.

Despite Amazon’s threat to scale back in Seattle after the city enacted a head tax, it could be costly for the giant retailer to retreat from its hometown.

The company, which has more than 45,000 employees in Seattle, has amassed an equally gargantuan real-estate footprint during a decadelong office-space shopping spree.

Based on average office rents in the greater downtown area, Amazon’s office rent bill is likely north of $200 million a year – far more than its estimated $12.5 million bill under the head tax. It would be a herculean task to empty a big chunk of that space and find new tenants, real-estate industry sources say.

There’s little to suggest Amazon is putting such plans into action yet. In the month since Amazon first suggested it would consider slowing its growth in Seattle, the company has posted ads for more than 1,200 jobs based in the city, a pace similar to the company’s feverish hiring of recent years.

“They have a lot invested,” said Brian Hatcher, executive vice president of the Kidder Mathews commercial real-estate brokerage in Seattle. “Amazon has a bunch of people here already, they all have families and lives here. I just don’t think they’re going to pick up and leave, or scale back.”

When the City Council voted in May to implement a tax on large employers, Amazon said the “hostile” attitude from the council caused it to question its expansion here, raising the prospect that Seattle’s engine of economic growth might stall or go into reverse. The company hasn’t elaborated on its thinking in the weeks since, though it did back an initiative to repeal the levy by popular vote in November.

But an analysis of Amazon’s footprint, based on conversations with real-estate industry sources, technology executives and corporate recruiters, highlight the challenges the giant retailer would face if it opted to scale back. While Amazon has options, including subleasing space and shifting new job openings elsewhere, they could be costly to implement in the short term.

Amazon has about 6 million square feet of leased office space now – roughly 60 percent of its total footprint here – with plans for more, including more than 1 million square feet worth of future leases that it has already signed.

The company doesn’t disclose its office-lease terms, but most significant office leases in Seattle span at least seven years. Leases at brand-new buildings, which Amazon favors, are usually around 10 to 15 years. Amazon began moving into the majority of its leased space in the last few years, so the company is likely on the hook to pay the bulk of its office rent through at least the middle of next decade.

That means Amazon would have to sublease its space if its plans change, and the company would face uncertain demand.

Starbucks, Zillow, Redfin, F5 Networks, Expedia, Weyerhaeuser, zulily, Tableau, Safeco, Facebook and Google could all double their presence in Seattle and still wouldn’t come close to filling the 7 million square feet of office that Amazon has committed to under its leases. Some of those companies have expanded their presence in Seattle in the first place to poach employees from a growing Amazon.

In reaction to the head tax, Amazon floated the idea of subleasing space at the future Rainier Square tower it agreed to lease last fall. That could be difficult.

The 722,000 square feet in that project represents more Class A office space than any company in Seattle currently occupies, and is equivalent to nearly half of the space leased in large deals in all of 2017 by companies other than Amazon, according to data from the Broderick Group, a commercial real-estate broker.

Unless a huge out-of-town company moves in, Amazon would have to chop the building into several subleases and hope to piece together enough tenants to fill the building, Hatcher said.

The stakes would be high: Based on office rents for other new skyscrapers that have opened recently, Amazon’s bill for Rainier Square figures to be about $35 million a year, or about triple the company’s annual burden under the head tax at its current size.

And then there’s the other 3.6 million square feet of office space that Amazon owns, which includes portions of a six-block stretch of South Lake Union between Westlake Avenue and Fairview Avenue, as well as the company’s two purpose-built towers adjacent to the Amazon Spheres. Another million square feet is on the way, most of it in the form of a third, nearly identical tower.

Amazon could sell some of that space. But the sight of Amazon even trying to sell would likely make the land less valuable as it raised questions about the durability of the local technology boom the company helped start.

“That’s a pretty daunting task, and if they did go down that road, it would really be a long-term process,” said local developer Jake McKinstry. “It’s extremely cost prohibitive to say that they would relocate their campus tomorrow, just for the sake of doing it.”

Amazon declined to comment on its plans.

In good shape to grow
Easier than uprooting its home base, real-estate industry sources and corporate recruiters say, would be shifting more of the company’s prodigious hiring outside of Seattle.

Amazon is already in better shape than most companies to grow elsewhere, after laying plans for a second headquarters in another still-undetermined city, and setting up significant outposts in cities across the continent. The company in the last year has announced real-estate deals that gave it space to tack on 10,000 workers in its network of North American satellite offices. The 17 largest of those already hold a combined 17,500 people.

Next year, a new option opens up, when Amazon has said it will place the first employees in its second headquarters campus.

“That flexibility, to them, is important,” said Jon Scholes, chief executive of the Downtown Seattle Association. “They move fast, it’s part of their DNA. That could also be the pace at which they grow in another city, if they make that decision.”

Amazon has said little about how quickly it aims to ramp up in whichever of the 20 finalist regions it plants HQ2, a project the company says will eventually host up to 50,000 people.

The company’s request for proposals asked for 500,000 square feet of office space at the outset, enough space for about 2,500 workers.

Some HQ2 hopefuls believe Amazon will move faster. The Maryland Legislature, in documents related to a multibillion-dollar tax break targeting Amazon, assumed the company would hire about 3,500 employees during the first year at the new site.

People who have talked with Amazon executives say the company could grow more quickly than that in its first years in HQ2, by making use of short-term leases or coworking spaces, among other options.

Amazon said it may give executives and workers alike the option to move to the new headquarters after it opens.

“There is certainly a large percentage of [their workforce] who have moved here in the last five years,” said a recruiter who works with the company. “Folks who have already moved once for Amazon, why wouldn’t they move again?”

It’s unclear whether the company would try to uproot entire teams and set them in a new city, which would risk departures by employees unwilling to move.

Such a move would likely be expensive. U.S. employers in 2015 paid an average of about $25,000 per person to relocate employees who rented their homes, and, in the case of homeowners, nearly $80,000, according to the Employee Relocation Council, a trade group for relocation firms that regularly surveys companies.

Pace of expansion
In the long term, Amazon has more flexibility to let its presence in Seattle stabilize or decline through attrition and the expiration of leases.

Plans announced before the head-tax fight would give the company an estimated 14 million square feet in Seattle by 2022, enough room for about 70,000 people at the rate Amazon fills office space.

An executive at UDR, a real-estate company that owns about 3,000 apartment units in the Seattle area, said on a recent conference call that he was under the impression Amazon may now top out at about 50,000 employees in Seattle instead.

Amazon’s hunger for employees has outweighed recent doubts about its ties to the city, though.

The last time people were worried about Amazon pulling away from its hometown was in September, when it announced plans for HQ2. Yet its pace of expansion in Seattle did not change after the announcement – it signed three major new leases since then. The company has taken over an additional 2 million square feet of office in the eight months since, and bumped its total future footprint by another 2 million square feet as well.

Amazon recruiters are frantically trying to fill that space with new hires. The company was seeking about 5,800 new employees in Seattle as of Thursday.

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