The Truth About What Amazon in New York Means for NYC Tech

As a lifelong New Yorker, I remember when nearly 30 years ago, Citicorp, as it was known at the time, constructed the largest building outside of Manhattan in Long Island City. My father would drive our family to the city from Long Island via the 59^th Street Bridge and we’d pass by the building while it was being built, wondering why it was there, completely out of place, and not in Manhattan. Citigroup was one of the largest private employers of New Yorkers for many years with as many as 29,000 workers in the city, the largest bank in the US, and one of the most valuable companies globally.

To attract Citigroup to LIC, then-Mayor Koch doled out tax abatements, subsidies, and even cheap electricity to get the deal done in hopes to transform a desolate area into a viable commercial district, which never really came to fruition from a commercial aspect. Under the agreement with the city, Citicorp was to develop three buildings in LIC to house its burgeoning staff; away from the high commercial rents of Manhattan.

Citigroup only ended up constructing two of the buildings with the second coming in 2007, nearly 20 years after the original agreement. The third designated area was never developed and was being sold to property developers to build housing for the growing demand in the area, due to its proximity to Manhattan. In 2015, Citigroup ended up selling its interest in the real estate aspect of the project and leased space from the new owners as its workforce began to shrink. Citi has been looking to get out of Long Island City and fast and the company just announced that it would be moving 1100 workers so that Amazon could move into the main building at One Court Square.

This can be a cautionary tale for the City and the new tenants at One Court Square. Or it could be the signaling of a change in guard in New York as it diversifies its economy from Wall Street and real estate to the new economic realities that the internet and globalization have brought. Only time will tell…

In the meantime, let’s take a look at the key issues surrounding Amazon HQ2 and how it will impact the New York Tech community and New Yorkers at large.

Shortage of Talent

Amazon’s ambitious plan to build a staff of 25,000 in NYC by 2028, the agreed upon figure and timeline for it to maximize the key tranche of subsidies, will have significant long-term consequences for startups in the city to attract talent as competition will undoubtedly increase. Pundits have come out to say that the benefits of an Amazon moving in will outweigh the short-term shortage of workers by attracting new people to New York.

I contend that the shortage of talent will not be short-term. According to CGR, a Rochester-based think tank, these are the 20 largest employers in New York State, by full-time employee count:

1. Northwell Health: 54,000
2. Montefiore Health System: 32,000
3. Mount Sinai Health System: 29,000
4. Walmart: 28,000
5. NYU/NYU Langone Medical Center: 27,000
6. University of Rochester & Affiliates: 27,000
7. Verizon NY Inc: 27,000
8. JP Morgan Chase: 25,000
9. Citigroup Inc: 25,000
10. New York Presbyterian: 20,000
11. McDonald’s: 18,000
12. Wegmans Food Markets: 17,000
13. Macy’s: 17,000
14. Cornell University/Weill Medical College: 17,000
15. Rochester Regional Health System: 16,000
16. Consolidated Edison: 15,000
17. Bank of America: 14,000
18. Home Depot: 14,000
19. Memorial Sloan-Kettering Cancer Center: 13,000
20. Morgan Stanley: 13,000

According to the New York State Department of Labor, which does not provide employee counts, the largest private employers in New York City proper in 2017 were American Airlines, Columbia University, JPMorgan Chase, Memorial Sloan Kettering Cancer Center, Morgan Stanley Children’s Hospital, Mount Sinai Hospital, New York, Presbyterian Hospital, Nielsen Company, Northwell Health, and Verizon.

These first figures, which include employee count, are for New York STATE and not even the city. Amazon plans to recruit for 25,000 jobs in NYC in the next ten years. Not an easy task given the existing talent pool available. Presently, according to Angel List, less than 1% of software engineers in the NYC metropolitan area are unemployed. Amazon’s employee count numbers 45,000 in Seattle where HQ1 has been since its founding in 1994.

There is already fierce competition for recruiting technical talent in the City among startups. At a recent panel, a seasoned startup entrepreneur was discussing the challenges of hiring in the city and thought it prudent to beg, “Please don’t poach our engineers” during the course of the evening. This tune will likely change to “Amazon poached our engineers!” The promise of stock options with real tangible, underlying value from a $1T+ company and a reliable salary may be enough to dissuade engineers or product managers from launching or joining an emerging startup that doesn’t have the certainty of an Amazon or Google. Google, in fact,  is also ramping up its own hiring in the City to the tune of 12,000.

Beyond the myopic startup bubble that I live in, Amazon’s race to get to 25,000 workers is going to put pressure on every industry in NYC. Look at the list above – not a single one of those companies is a tech company. Depending on what study you subscribe to, there are 300,000+ individuals working in the NYC Tech economy. According to EMSI, this labor force can be categorized as follows:

The agreement with Amazon includes a provision where the city, state, and affiliates entities will invest $15M for technical jobs training in underrepresented areas to support Amazon’s hiring. It’s impossible to think that this relatively nominal figure will be enough to support the needs of Amazon and the other companies that need to hire. Amazon must make a concerted effort to have people move to New York to join Amazon and the greater tech community at large. The tech ecosystem has its “anchor tenant” but does the City have the talent to feed the beast?

Infrastructure

Housing

The dearth of affordable housing has always been an issue in New York City as a whole and a workforce of 25,000 making on average of $150,000, will inevitably drive up housing costs in Long Island City as well as anywhere along the G line, as LIC becomes untouchable and residents seek refuge in Brooklyn. When the news of Amazon moving to LIC was unofficially leaked last week, NYC brokers were reporting that buyers were purchasing apartments in LIC sight unseen via text. New York is a town built on speculation and more and more money will move into the LIC and surrounding markets, pricing out a significant portion of the population where the median income in the City is ~$68,000. LIC has been one of the fastest growing housing markets in the city and there has been an increasing amount of development. The question is will it be affordable?

Public transportation

It’s no secret that the NYC transit system is in an utter state of despair. The subway system was declared to be in a state of emergency in 2017 by Governor Cuomo. The fiscal and operational mismanagement is so pronounced that the MTA is begging entrepreneurs to help fix the system through an “accelerator program” that provides no cash to startups to potentially pilot with the MTA. The State and City have been unable to find a way to harmoniously work together to fix the infrastructure issues facing public transit to the detriment of New Yorkers.

The imminent L train shut down already has New Yorkers traveling through Court Square in Long Island City to get into Manhattan.   According to the MTA website, average weekday ridership for the Court Square station was 23,764 in 2017. Add in roughly another 25,000 in the next ten years for the Amazon effect. To put things into perspective, the subway handles 6M passengers per day system-wide, 25,000 more is not a significant amount when compared to this but expect Court Square station to undergo a revamp to accommodate more people. Also, LIRR’s East Side Access project, which is four years away from completion and will connect Grand Central to Hunters Point, should alleviate some of the burden from workers reverse commuting or coming in from Long Island along with the Mayor’s much-heralded ferry system.

Immediate Beneficiaries

While this may present a grim picture, let’s look at some of the beneficiaries and positive effects that Amazon will have.

Retail tech, Direct-to-Consumer, Cloud Companies to Thrive as Acquisitions Flourish

It’s almost certain that Amazon will be sending members of its corporate development team to New York and recruiting to expand this team. New York already has a rich history in Next Gen Commerce and associated technologies and this will to continue as Amazon builds out its HQ2. Amazon is a data-driven company and its decision to enter New York is strategic and deliberate. The fact that Walmart has made several acquisitions in the New York area recently (Jet.com, Bonobos, ELOQUII, Parcel) hasn’t gone unnoticed in Seattle at HQ1 and this expansion gives them a direct purview into what’s happening in New York at the consumer level in commerce and retail as well as the enterprise level as Microsoft’s Azure continues to gain ground in the cloud war against AWS, largely through enterprise customers.

According to CrunchBase data, Amazon has acquired 79 companies and 6 or 7.6% of those are in New York. These acquired companies include GoButler, Touchco, Rubberduck, Comixology, UpNext, and BodyLabs. Expect a pronounced increase in acquisitions as Amazon cements itself into the landscape of the city and Amazon’s organic growth slows.

The Universities of New York Will Reduce Championing Entrepreneurship and Replace it with Go Work at Amazon

As a result of the financial meltdown of 2008, the universities within the city were forced to retool themselves away from a dependency on Wall Street hiring. The employer base that was taking freshly minted graduates disappeared nearly instantaneously and the universities shrewdly began championing entrepreneurship as a means to have students working on something when they left the halls of academia. As Brian Cohen, Chairman of the New York Angels, likes to say “the opportunity cost of entrepreneurship is unemployment.” Now with an abundance of well-paying jobs at the most valuable company in the world only a train ride away from most colleges, expect universities to send their graduates in droves to LIC and expect Amazon to welcome them with open arms as it looks to fill its new campus.

Technical training centers like Pursuit (previously known as the Coalition for Queens) in Queens and Andrew Rasiej’s Union Square Tech Training Center will also flourish.

What Will This Cost New York? 

The state is on the hook for $1.75B in incentives using the baseline figure of the creation of 25,000 jobs. The city will likely be kicking in an additional $1B in incentives that Amazon is reported to be applying for.

Some back of the envelope math for both scenarios:

Tim Bartik, an economist at WE Upjohn Institute for Employment Research indicates that incentives typically provided a national average of approximately $30,000 per job. While the New York’s incentive plan amounts to $110,000 per job, location-specific costs for Amazon will be significantly higher in New York than nearly any other market considered and the City and State were forced to sweeten the deal. According to Robert G. Lynch, author of Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Development, state and local taxes are a small consideration in a decision to consider relocation or expansion.   Employers are more concerned about the accessibility to workforce, location-specific costs, and public services available.

Looking at other recent government incentives to lure employers, Foxconn, the Chinese manufacturer best known for assembling iPhones, convinced the government of Wisconsin to provide $4.5B in subsidies for its production facility that had planned to hire 13,000 workers, amounting to an employee acquisition cost of $346,000 per worker in Wisconsin. $2.7B for double the number of jobs and much higher paying jobs doesn’t seem so bad. Already the Wisconsin project is running into issues as Foxconn is scaling back its plans as it is having difficulty in recruiting talent locally and the company has even considered bringing in engineering talent from China.

Is this cost worth it to NYC?

On the surface, it seems like NYC HQ2’s has a very high employee acquisition cost using taxpayer dollars, especially considering that Alexandria is providing only $523M in subsidies for the same number of jobs. But I’ll dive into the numbers using the state and city’s current income tax structure. Currently, NYS income tax is 6.65% for those making between $80,650 and $215,400 while NYC Income tax is $2176+3.876% for any income over $60,000:

Just in employee income tax revenue, the project leaves a shortfall of nearly $1B. However, this does not account for the spending of the employee within NYC or the newly created spending of Amazon as a company within New York. If the employee spends a meager amount of $10 per day to buy anything within the confines of the City, the sales tax revenue alone will bring in another $500M over this same ten-year period.

Coupling this with the effects of money supply using a simple example where HQ2 employee buys something from a deli, deli owner pays deli employee, deli employee buys something and pays sales tax, deli owner takes profit, and buys something for him or herself and so on and so forth… Amazon will also invest $2.5B of its own money into this project that will also enter the NYC economy through construction costs, building materials, etc. It’s then clearer that Cuomo’s estimation that every $1 spent will result in $9 in incremental revenue for the city and state is actually feasible and attainable.

It’s important to note that the analysis above is based on net new jobs, with the assumption that every employee was not contributing to the New York income tax base as a result of being previously unemployed or not working in New York, which we know will not be the case. While it’s impossible to account for the portion that will be net new and not the result of displacement, the economics, and 9-1 estimate ensure that the project is still profitable from the city’s and state’s perspectives if managed properly.

There are other factors in play here as well. The diversification of the tax base in the City, the creation of a real tech hub outside of Manhattan, and increasing diversity in technology through borough inclusiveness all have tangible benefits that are difficult to quantify today.

Success factors

The City and the State must figure out a way to work together and with continuity through administrations to ensure that the vitality of the New York Tech economy is preserved for future generations as well as those who are already entrenched in its hairs. The key success factor will be the ability to develop a true partnership with Amazon to facilitate measured expansion and growth. The City, the State, the residents of New York, and the tech community have ten years to figure out how to manage Amazon’s HQ2, which will have a profound effect on the City of New York for years to come. The clock just started ticking…