Amazon's HQ2 Search: Why the Washington D.C. Area Makes So Much Sense - TheStreet

Over the long run, the biggest threat to's (AMZN) - Get Report massive U.S. retail ambitions might not be Walmart (WMT) - Get Report or any other direct rival, but Uncle Sam.

That, perhaps, is the best argument for planting at least part of Amazon's second headquarters in the Washington D.C. area, as the company appears to be at least strongly considering.

Over the weekend, the Washington Post (owned by Jeff Bezos) reported that Amazon has "held advanced discussions" about building its much-anticipated HQ2 in the Crystal City neighborhood of Arlington, Virginia, which lies just across the river from Washington D.C. The paper added that the Crystal City discussions "were more detailed than those [Amazon] has had regarding other locations in Northern Virginia and some other cities nationally," and that top Crystal City real estate developer JBG Smith (JBGS) - Get Report "has pulled some of its buildings off the leasing market."

The Wall Street Journal provided a somewhat different report on Saturday: It said Crystal City, Dallas and New York City all remain in the running, albeit while adding "it's unclear how far along" the talks with NYC have progressed. It also reported that Amazon could establish smaller office sites in some of the cities that submitted bids for HQ2 but failed to land it.

Then on Monday afternoon, the WSJ reported that Amazon, worried about its ability to recruit enough tech talent at a single HQ housing 50,000 workers, plans to split HQ2 between two cities that would each contain 25,000 workers. Sources state an announcement could happen as soon as this week.

JBG Smith's shares, it's worth noting, are up over 3% in Monday trading; they were up over 5% before the WSJ's latest report arrived. JBG's stock had already been rallying in the past on hopes that Amazon will plant HQ2 in Northern Virginia. Likewise, online betting sites had already made Northern Virginia by far the odds-on favorite to land HQ2, with a number of reports suggesting the D.C. metro area is the frontrunner.

In a recent talk with journalist and author Walter Isaacson, Bezos avoided tipping his hand on Amazon's HQ2 plans. "Ultimately the decision will be made with intuition after gathering and studying a lot of data," he said. is a holding in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AMZN? Learn more now.

One major reason why it wouldn't be surprising to learn that Bezos's intuition leads him to choose Northern Virginia for at least one HQ2 location: Over the long run, there would be a lot of value for Amazon in having a headquarters close to where Beltway lobbyists, regulators and politicians live and work.

This value would consist not only of being able to easily meet with and discuss policy issues with said lobbyists, regulators and politicians, but of creating the kinds of personal connections that are bound to form when 25,000 or so Amazon employees -- including, presumably, some senior execs -- are living in the same neck of the woods as Beltway elites and those working for them.

This can't be lost on Bezos, who already owns a home in the D.C. area as well as the region's pre-eminent newspaper. Nor can other advantages of having a Northern Virginia HQ, such as better access to East Coast talent and greater proximity to Amazon's sizable European operations.

To be fair, a place like Dallas also has some major selling points, such as better weather, lower taxes and a lower cost of living. And while taxes, cost of living and perhaps also real estate availability work against it, NYC might be unmatched in its ability to attract talent across a diverse set of skills and industries, and would also allow Amazon to aggressively recruit graduates from a slew of nearby elite colleges.

However, one only needs to look at some recent Amazon headlines and market share stats to understand why having proximity to the Beltway's corridors of power is a pretty valuable selling point.

Research firm eMarketer estimated in July that between direct and third-party sales, Amazon would account for 49.1% of U.S. retail e-commerce gross merchandise volume (GMV) this year, up from 43.5% in 2017. And the total e-commerce market, meanwhile, is estimated to now account for about 10% of U.S. retail spend and is believed to still be growing around 15% annually.

Amazon is coming off a third quarter in which its North American segment revenue totaled $34.35 billion, with annual growth coming in around 25% after backing out the impact of the Aug. 2017 Whole Foods acquisition. And as is driven home by recent moves such as the acquisition of online pharmacy PillPack, the rollout of its cashier-less Amazon Go stores and efforts to support Whole Foods deliveries via its Prime Now rapid-delivery service, Amazon isn't getting any less ambitious.

The fact that Amazon Prime -- thanks to its scale, and the massive warehouse and logistics infrastructure that supports it -- is both irreplicable and increasingly a way of life for many of its U.S. users gives Amazon a huge competitive moat going forward. In addition, by creating billions in annual membership fees that can be used to help pay for new perks, Prime makes it easier for Amazon to expand into new markets where it's likely to lose money over the short-term.

Meanwhile, Amazon's enormous U.S. e-commerce share, together with Prime's appeal, gives it plenty of leverage with both suppliers and third-party sellers -- leverage that in many cases will only become more significant over time.

Naturally, Amazon's market position, along with its large economic impact and the strong likelihood of additional share gains in the coming years, has begun inviting scrutiny. From criticism of its treatment of warehouse workers (possibly a factor behind the company's recent minimum wage hike), to President Trump's claims that Amazon isn't paying its fair share to the USPS, to the EU's recent probe of Amazon's potential use of merchant data to strengthen its direct e-commerce business, it's safe to say that Bezos' company is being looked at a little differently today than it was ten or even five years ago.

Putting 25,000 Amazon workers across the river from the White House and Capitol Hill certainly won't put an end to such scrutiny. However, over the long-term, it might lessen the legislative and regulatory damage that comes from it.