Amazon delays construction on D.C.-area HQ2 amid cost-cutting push

Amazon will delay construction on its second headquarters in Arlington, Virginia, outside Washington, D.C., as it looks to cut costs and trim its payroll.  

The company still plans to open 2.1 million square feet of office space that Amazon calls Metropolitan Park in June. But it has paused the second phase of the project. That phase, a 2.8-million-square-foot project called PenPlace, was originally set to break ground in the first quarter of 2023.

Because the first phase will have room for 14,000 employees, Amazon pushed the groundbreaking for the next phase “out a bit,” John Schoettler, vice president of worldwide real estate, said in a statement Friday.

“We’re always evaluating space plans to make sure they fit our business needs and to create a great experience for employees,” Schoettler said. “Our second headquarters has always been a multi-year project, and we remain committed to Arlington, Virginia and the greater Capital Region.” 

The decision to halt construction comes as Amazon is reconsidering its footprint and headcount, from corporate offices to retail spaces. 

In the Puget Sound region, Amazon’s “HQ1”, the company delayed construction on its Bellevue campus in July and plans to let one of its leases in South Lake Union expire next April. That is only the second major lease the company has let expire during its explosive growth over the past decade. In 2020, Amazon also let go of its lease at 2201 Westlake and planned to relocate about 1,000 employees.

The company lost $2.7 billion in 2022, according to the most recent financial data. Amazon attributes part of that loss to its investment in Rivian, an electric vehicle startup that has struggled with production delays. 

In the fourth quarter of 2022, Amazon’s reported net income decreased to $300 million. That’s compared with net income of $14.3 billion for the same quarter in 2021.  

CEO Andy Jassy told investors in February that Amazon “just had more capacity than we needed.” That realization kicked off an evaluation of all parts of the business, with a search for areas that might not be “big needle movers” for Amazon.

So far, the review has led Amazon to close its physical bookstore, pause expansion of its brick-and-mortar grocery stores and freeze hiring for corporate roles. The company cut 18,000 jobs over the past few months, including 2,300 from Seattle and Bellevue. 

“Amazon is not immune to a weaker economy,” Christina Boni, an analyst for Moody’s Investor Services, said in a statement after Amazon’s earnings call in February.

Growth of Amazon Web Services, the company’s cloud computing division, has slowed and online sales have declined, Boni said. But, she said Amazon had made progress to “restore profitability” by reducing excess costs, slowing down investment in its network of warehouses and eliminating some roles. 

Analysts for Morgan Stanley noted that Amazon’s management team used the word “streamline/streamlining” six times during a call with investors in February. They said “efficient/efficiencies” five times. 

At the same time, Amazon is gearing up to bring workers back to the office. It announced in February that employees would be required to work from the office three days a week, starting in May. That’s a shift from Amazon’s current policy, which allows leaders to decide for their teams where they would work. 

The return-to-office mandate left some questions unanswered, including what it means for workers who have moved far from their primary office or mostly work with team members based in other parts of the world.

At the end of last year, Amazon had 1.5 million full- and part-time employees, including those in its warehouses. HQ1 in the Puget Sound accounted for about 65,000 of those workers.

Amazon in 2017 announced plans for a second headquarters that would ultimately house 50,000 employees, prompting cities around North America to bid ferociously for the project.

After evaluating dozens of proposals, the company announced it would split the campus between New York and Northern Virginia, but opposition from local politicians and union officials prompted executives to abandon New York. Governments in Virginia committed to roughly $800 million in tax breaks and infrastructure improvements over 15 years in exchange for 25,000 of those workers.

At “HQ2” in Virginia, Amazon has hired more than 8,000 employees, a spokesperson said Friday, and will have room for 6,000 more when Met Park opens in June.

The second phase of the project, PenPlace, is slated to include three, 22-story office towers and the development’s iconic structure, the Helix. The 350-foot-tall structure is expected to include a corporate conference center and indoor garden designed to echo the Spheres, plant-filled orbs at the heart of the company’s Seattle headquarters.

News of Amazon’s decision to pause construction had some public officials questioning the initial bidding war. Representative Alexandria Ocasio-Cortez wrote on Twitter that the decision to oppose Amazon’s move to New York “protected NYers from a scam deal.”

Arlington County said Friday it continues to “value the ongoing partnership” with Amazon. It echoed the company’s sentiments in a statement.

“HQ2 has always been a multi-year project and it continues to be a long-term commitment to Arlington and Virginia,” the statement read. “We’re confident Amazon remains committed to the second phase of the project – PenPlace – and its benefits to the community.”

Arlington officials granted PenPlace its most important approval in April.

Following that vote, Amazon and its developers considered starting to dig the foundations and underground parking garage of that block immediately, a person familiar with the plans told Bloomberg. That person requested anonymity to discuss confidential deliberations.

Amazon and its developer, JBG Smith Properties, had for months been discussing modifying the PenPlace plans, in part to speed construction to meet commitments the company made to provide community benefits, said that person. Those commitments include hosting a high school geared toward adults and building a public plaza, bike path and retail space. 

In an extended delay, Amazon will likely have to modify those arrangements.

Plans for the site approved by Arlington-area governments require the company to meet construction and permitting milestones by April 2025, unless the officials grant an extension. The company expects roughly three years between groundbreaking and the arrival of the first employees in a completed office tower.

This story includes information from Bloomberg News.

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