What happens when Amazon or another corporate giant builds a campus or fulfillment center in a new city?

A huge influx of new jobs spurs an equally huge surge in housing demand. That creates both opportunities and risks for multifamily owners and operators. 

If you expect a new fulfillment center or corporate campus coming to your home town, follow these steps to maximize the opportunity while minimizing the risk.

What is The Amazon Effect on housing?

Before 2010, rents in Seattle cost no more than the national average. After Amazon built its world headquarters there in 2010, rents soared 41.7% over the next seven years, compared to just 17.6% nationwide. During the same period, new home prices skyrocketed 83.4%. 

Amazon is the fifth largest company in the world by market capitalization, and the second largest employer in the world. When it moves into town, it’s a big deal. 

In 2018, Amazon announced a $5 billion second headquarters (“Amazon HQ2”) to go up in Northern Virginia. Between that announcement and the start of the COVID-19 pandemic, single-family home prices in the area leapt 17%. That said, Amazon has suspended Phase 2 of the project indefinitely, so only 8,000 of the projected 25,000 jobs have actually been created.

Abundant high-paying jobs attract workers to move from elsewhere in the country. Those workers need housing, and that increased demand drives up both rents and home values. 

Opportunities for residential operators

Higher rents and property prices offer plenty of opportunities for builders, property owners, property managers, and other multifamily operators. 

As rents rise from the Amazon effect on housing, they drive up multifamily properties’ net operating incomes. That pushes property values higher, creating an easy win for existing owners and sellers. 

Cities may prove more amenable to issuing building permits, to meet the higher demand. Developers, their partners, and investors often see more opportunities when a new corporate headquarters or fulfillment center comes to town. 

Land values tend to spike after a major new campus or center is announced, so existing landowners score a win.

Real estate opportunities go beyond residential owners and operators. New residents need more restaurants, retail, grocery stores, storage facilities, and other support businesses. That fuels plenty of other commercial property types beyond multifamily.

Risks and ways to mitigate them

For all the obvious opportunities in the real estate industry when a huge influx of jobs hits the local market, the challenges and risks are less obvious. 

Keep the following in mind as you navigate The Amazon Effect on housing. 

Risk of rent control, stabilization, and other regulation

Many cities around the country offered tax perks and other boons for Amazon to build their second headquarters in their backyard. Cities love the positive press around new jobs, love the influx of new residents, love the boost to the local economy.

Most of all, they love the added revenue streams those new residents bring — much of which come from higher property taxes when values rise. 

But they don’t love the inevitable backlash by residents and housing activists complaining about affordability. When rents rise too fast and housing becomes too scarce, some cities try to legislate their way out of the problem rather than streamlining new housing supply. 

More tenant-friendly regulation measures could include rent control, rent stabilization, eviction restrictions, and strict security deposit limits. Prepare to make your own voice heard in the political process if you don’t like what you see. 

You can also protect against eviction-related losses with rent default insurance. Likewise, you can also protect against property damage with deposit coverage. 

Canceled projects

Corporations can announce new planned projects, but that doesn’t mean they’ll actually complete them. Look no further than Amazon suspending Phase 2 of their HQ2 in Arlington County. 

Imagine you buy up land and start building new housing units or commercial buildings near a planned fulfillment center or corporate campus, in anticipation of thousands of new high-paying jobs. What happens if those jobs never actually arrive? 

Your project could go from brilliant investment to losing venture in the blink of an eye. The Amazon effect on housing can taketh away as quickly as it giveth.

Run the numbers on whether the local market can absorb your new units even if the planned corporate project falls through.

Influx of new housing supply

Plenty of developers make plans to build, when they hear that an Amazon fulfillment center or other major campus is coming to town. 

That raises the risk of too much new construction flooding the market with supply, even if the center actually does get built. Keep an eye on planned construction projects in your local market. 

If oversupply of housing does become a problem, you can potentially accept renters that other apartment communities decline by insuring their leases through TheGuarantors or other rent default insurers. 

Underserved renters

Influxes of new jobs don’t always spread evenly across the income spectrum. A new corporate headquarters could attract a glut of high-income earners for example, while a new fulfillment center may attract more working-class residents. 

That means the Amazon effect on housing will cause greater surges in demand for some housing classes than others. It may become difficult for renters to find available Class A units, or Class D, or anything in between. 

Look for these opportunities as an operator. If demand becomes fierce among single professionals, could you convert two-, three-, or four-bedroom units into studios and one-bedroom units? Could you build more units on an unused part of your property? 

If affordable housing becomes scarce, could you negotiate a partnership with the local housing authority to set aside a certain percentage of your units as affordable housing in exchange for a property tax abatement? With one maneuver, you could ensure high occupancy rates while slashing expenses to boost your NOI. 

As you explore ways to serve different or more renters, remember that you can guarantee rental cash flow with rent coverage. 

Disgruntlement over rent hikes

Understandably, renters don’t love the Amazon effect on housing, don’t like watching rents shoot upward. They see rents jump because of market demand, with no visible benefit to themselves.

Property managers and owners can take the sting out of rent hikes by making visible improvements. These could include upgraded common areas and units, from simple improvements like fresh paint and carpet to more involved ones like appliance our countertop upgrades. 

Multifamily operators can increase value by adding or improving property amenities such as pools, gyms, saunas, hot tubs, or coworking spaces for residents. 

These improvements further increase your potential asking rents, but at least renters can see something tangible to justify the higher rents they’re asked to pay. 

Traffic and infrastructure overload

A company can snap their fingers and hire thousands of new workers — but that doesn’t mean the local infrastructure can support them. 

The local submarket could see roads, electrical grids, and plumbing networks strained by an influx of new residents or commuting workers. While you can’t change the public infrastructure, you can brainstorm ways to reduce reliance on it. 

Could you create a coworking space at your property, to attract remote workers? Could you generate your own electricity with solar panels to cut your electric bill and reliance on strained and potentially more expensive public power? Would that attract more rental demand and higher rents? 

Run the numbers on creative solutions before you discount them. 

Pollution

Beyond the impact of fulfillment centers on housing, more traffic, trucks, and industrial activity means more pollution. 

If local air quality declines, prepare to replace the air filters more frequently. You may also need to upgrade your HVAC systems, particularly for luxury housing communities. 

Future trends for fulfillment centers

Expect major corporations to continue seeking affordable land and amenable cities who embrace them with tax incentives. 

In other words, expect more campuses and fulfillment and distribution centers in tertiary markets.

Sure, Amazon built its headquarters in Seattle, and operates fulfillment centers in major cities such as Phoenix, Baltimore, and Kansas City. But when you look at the full list of fulfillment centers, most sit in tertiary markets like Stockton, California and Lexington, Kentucky. 

The geographically diverse strategy also helps Amazon deliver packages faster, solving “the last mile” problem. 

The impact of fulfillment centers on housing is typically limited, as these aren’t the sprawling corporate headquarters adding tens of thousands of jobs like HQ2 was promised to be. But even a single fulfillment center adds hundreds of jobs, which can boost local rents — especially in smaller tertiary markets. 

The Amazon effect on housing is real, although it can be overstated. And, of course, it’s often caused by other major corporations building a new campus or center. Keep an eye on new announcements and commercial development in your submarket, and stay nimble as you brainstorm ways to capitalize on the Amazon effect without alienating your renters.