As you probably know, Amazon recently announced that it would place its two additional headquarters in New York and in Washington, DC. That was the headline, but in the body of the various articles, you see that Nashville also got quite a nice consolation prize.
"After announcing that New York City and North Virginia had won the contest for Amazon’s headquarters, the giant online retailer surprised many with the news that it would create an operations center with 5,000 high-paying jobs in Nashville."
I think that for real estate investors, the articles buried the lead. The impact of 5,000 jobs on Nashville is likely to be much larger than the impact of 25,000 jobs in New York. The Wall Street Journal sees it the same way:
"For a city of 1.9 million and an office market that is a fraction of the size of the two East Coast hubs, Amazon’s decision to invest $230 million may have greater significance for Nashville than the larger investments will for New York and Arlington, Va., outside of Washington, D.C…
An additional 5,000 jobs in Nashville is more meaningful compared to 25,000 jobs in each of these two cities,” said Bernhard Krieg, managing director at Brookfield Asset Management’s Public Securities Group."
In addition to the difference in scale, in which a smaller drop makes bigger waves, there's also the fact that Nashville didn't have to give away the store in order to get Amazon to invest there:
"Officials in Tennessee also provided fewer incentives and concessions to Amazon compared with the two HQ2 cities, which means Nashville could glean more from the jobs created."
Plus, the Nashville decision is more of a confirmation signal of upward momentum, whereas the New York decision seems to be more of a signal that perhaps decline has not set in yet, despite population and business out-flow.
"The Amazon decision drives even more momentum to property markets in the Southeast and Southwest. These regions, which include newly booming cities like Austin, Texas, and Charlotte, N.C., were largely ignored after the financial crisis but have recently heated up because they offer lower-cost alternatives to expensive coastal cities.
And it isn’t just Amazon that is boosting demand for Nashville office space and other property. Ernst & Young LLP said last week it will be investing $20 million in the city to build a facility that will create 600 jobs over the next five years.
Nashville had an office vacancy rate of 10.5% in the third quarter, down from 10.7% in the second quarter, according to CoStar Group data assembled by real-estate firm Marcus & Millichap."
The way I like to approach geographical allocation of capital is to focus on data. For example, Nashville has roughly 1.8 million people in the metro area:
That makes it 0.65% of US population. And yet it is a much lower proportion of a cap-weighted real estate index.
You may also note that PPTYX's productivity-weighted approach is much closer to the true population share, whereas cap-weighted approaches take money that might have gone into rapidly growing areas, such as Nashville, to put into the formerly rapidly growing markets, such as New York and San Francisco.
But it's not just a matter of share of population. Office buildings need high-income, high-productivity workers to fill them, and Nashville has a significant sub-population of high income ($200,000 or more per year in income), in excess of 5% -- much higher than the average American metro area:
I've written about Nashville in the past, but it's not favoritism; Nashville is part of an overall pattern of cities, often in the South, with affordable real estate and large in-migration, which are overlooked by Wall Street's backward-looking allocation methods. Investment, by its nature, is forward-looking, and when a forward-looking company like Amazon places a big bet in a city (proportionately bigger than the headline HQ plans for New York and DC), it's just one more story to illustrate what sound principles and solid data already told us.