How Will Amazon’s Affordable Housing Pledge Affect Real Estate?

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Cities with a heavy Amazon footprint tend to have a love-hate relationship with the e-commerce giant. 

On the one hand, they love the addition of mid- and high-income jobs. It boosts employment, incomes, and local tax revenue. But those boosts also drive real estate appreciation. That’s great for existing homeowners and property tax coffers, but it can pinch housing affordability. 

To address these concerns, Amazon has pledged $2 billion toward affordable housing over the next five years. 

Amazon’s pledge

Specifically, Amazon set aside $2 billion to go toward three markets where it maintains major operations hubs: Arlington, Virginia; Seattle; and Nashville. Outgoing Amazon CEO Jeff Bezos says the funding will, “help local families achieve long-term stability while building strong, inclusive communities.”

While it’s a generous gesture, Amazon isn’t giving the money away. The $2 billion earmarked for this project will go out as a combination of loans and grants, with loans making up the lion’s share. In other words, Amazon plans on receiving most of the money back. 

For example, the Seattle Times reported that Amazon set aside $185.5 million for the King County Housing Authority in Washington. Of that, $161.5 million will be loaned to the housing agency, and $24 million will be gifted in the form of grants. The agency plans to buy three apartment buildings, and the combined money from Amazon will cover around 45% of the purchase cost. 

Amazon claims the $2 billion pledge will “preserve or create 20,000 affordable housing units over the next five years.” 

Local impact of Amazon’s presence

Amazon employs more than 1.2 million people worldwide, many of them higher-wage earners. From 2010 to 2019, Amazon hired more than 602,000 people in the U.S. and claims to have supported 780,000 jobs in related industries like construction, logistics, and professional services. The company estimates that it contributed $315 billion to the U.S economy over the last decade. 

In fact, the company has hired more employees in the last year than any employer in history. The company added roughly 50% more people to its workforce in 2020. And with a minimum wage of $15, the company pays even its lower-wage workers well. 

Even so, not everyone is convinced that Amazon is the job-generating machine that it appears. One study by the Economic Policy Institute found that when Amazon opens a new fulfillment center, it creates a boost of around 30% more jobs in the local warehousing and storage sector, but no net job gain for the county overall. In other words, it suggests that Amazon creates job losses in other sectors, such as retail. 

That matters because state and local governments have given up over $1 billion in tax subsidies to attract Amazon and these fulfillment centers, according to a report by the nonprofit Good Jobs First. These reports suggest that state and local governments aren’t actually coming out ahead on tax revenue. 

Of course, if there’s no net change in jobs when Amazon moves in, that would also suggest no sudden surge in housing costs or affordability problems either. Nor does every economist agree with the EPI’s findings: The Progressive Policy Institute found that Amazon does create jobs when it enters a new market. 

As a real estate investor, keep an eye on where Amazon opens or expands operations centers. These areas may well see unemployment rates dip, along with home vacancy rates. But maintain some healthy skepticism about Amazon’s own boasts of how many local jobs they’re creating or how their footprint will impact the local economy. 

A growing theme

Amazon and Bezos in particular have given significant sums to boost affordable housing in the past, going so far as to even open a homeless shelter on the very campus of its Seattle headquarters. 

They aren’t alone in that effort. Microsoft has dedicated $750 million toward affordable housing in the Seattle area as well, in the form of low-interest loans for the development of new affordable housing. Facebook launched its own $1 billion initiative to boost affordable housing near their Menlo Park headquarters and across California more broadly. 

But affordable housing is a notoriously hard nut to crack, at least in many high-density urban areas. To begin with, often the only way to build more housing units is vertically, which means replacing existing residential buildings with a skyscraper apartment building. Which says nothing of spiky local homeowners’ associations obstructing new development with a not-in-my-backyard attitude or byzantine local housing authorities tying up new development efforts with endless red tape. 

The affordable housing shortage

A report by the National Low Income Housing Coalition found a 7 million unit shortage of affordable housing units in the U.S. That translates to only 36 affordable housing units available for every 100 low-income families who need them. 

But it’s not an evenly distributed problem. Vast swaths of the U.S. are quite affordable. But expensive, high-density cities and states often see extreme shortages of affordable housing.  

(map here)

Part of the problem comes down to higher construction costs in recent decades. Both labor and materials costs have jumped, leading to construction costs spiking roughly 24% since 2004 according to an analysis by BuildZoom. 

Higher costs have led developers to disproportionately build more luxury homes, with their higher price tags and higher margins. And a pandemic surge in home buying has only exacerbated the problem. 

Implications for real estate investors

Many real estate investors love investing in affordable housing. 

To begin with, the units cost less to buy. Investors can build their portfolios with less cash. That in turn helps investors diversify their real estate investments, spreading limited cash across multiple properties and markets, rather than concentrating all their capital in one or two expensive investments. 

Affordable rental units also hedge against recessions. Although with today’s shortage of affordable housing units, demand remains high regardless of the economy. 

Real estate developers who build affordable housing may qualify for the Low Income Housing Tax Credit (LIHTC) to reduce their tax bill. Alternatively, real estate investors can invest money in a Qualified Opportunity Zone to reduce or eliminate capital gains taxes on other assets. 

In the case of Arlington, Seattle, and Nashville, strong demand for housing continues to buoy local markets, and there’s no reason to believe that demand will ebb. Amazon’s $2 billion commitment to these cities’ housing markets indicates that the e-commerce giant plans to stick around for the long haul, continuing to create jobs and boost local incomes. Investors should expect growing demand for both affordable housing and mid- and high-income housing. 

A word of caution, however. Cities that see a spike in housing prices often see an equal and opposite outcry against it by housing activists. That can lead to legislation such as proposals to introduce rent control in Seattle.

Final thoughts

It’s all too easy to either cynically dismiss corporate humanitarian gestures as self-serving or to overstate a corporation’s goodwill. 

Amazon knows it gets bad press periodically as a massive corporation that tangibly impacts the markets where it operates. So they practice philanthropy both for the good it will do in the community and the good it will do for their public image. 

Likewise, it’s easy to overstate the impact of these splashy announcements on local housing markets. Even a sum as large as $2 billion won’t suddenly make Seattle housing affordable for cooks and waitresses. 

Instead, consider it a long-term investment in the health of these three cities’ housing markets. That in itself serves as a strong “buy” signal for many real estate investors.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.