Two weeks ago, a surge in web queries emanating from an internal Amazon.com page devoted to the company's HQ2 search, and focused on Arlington, VA hinted that the winner for the company's HQ2 location was already familiar to at least a small group of Amazon employees.
That said, Washington D.C. (and surrounding areas) winning the great HQ2 race would hardly be a major surprise: recently researchers at Hamilton Place Strategies, an analytic PR consultancy, crunched the numbers and tabulated that Washington, D.C. would be the most likely city to land Amazon’s massive second headquarters.
To be sure, for now Jeff Bezos has been tight lipped about his thought process, and all the 20 original cities listed by Amazon remain viable candidates... although Bank of America begs to differ.
In a report from cross-sector analyst, John Lovallo, the BofA strategist writes that the bank's Data Analytics team "has developed a dynamic model to narrow Amazon's current selection of 20 potential cities for its planned second headquarters (HQ2) to a short-list of five finalist prospective locations."
BofA explains that Amazon has listed certain requirements in choosing a second headquarters, which broadly encompass the city's financial strength, labor pool (size and education), cost of doing business, cost of living, transportation infrastructure and source of innovation. He then caveats that "Without specific guidance from Amazon, we have chosen to equally weight these factors (with the exception of source of innovation, due to limited input factors), but our selection could change if we were to weight certain criteria more highly."
Naturally, he then hedges:
While Amazon has stated requirements, weighting of these factors remains unclear, introducing a degree of art in our selection of possible HQ2 cities. Our analysis also focuses exclusively on the relative attractiveness of each potential market and thus does not contemplate availability or viability of specific sites for the actual headquarters
And with that disclaimer in place, BofA predicts that top five contender cities, listed alphabetically are:
Somewhat redundantly, BofA also shows a map with the five cities on it.
More notable is the detailed methodology of how BofA thinks Amazon will approach the selection process, and how it narrowed down the list to just 5 finalist cities. This is what BofA disclosed:
Our analysis assumes Amazon will build its next headquarters in a city that is similar to Seattle, while incorporating additional considerations such as affordable and reliable housing, business cost and commute. We utilize the results of two, equally-weighted methodologies to create a composite score.
Our first approach isolated the cities that were most similar to Seattle. All parameters were normalized. A Euclidean distance* was calculated for each of the 17 cities relative to Seattle. These distances quantify the similarity between two cities by taking into account all the parameters like housing, business cost, commute etc. The smaller the Euclidean distance, the more similar a city was considered to be to Seattle. This approach resulted in the following top five candidates for Amazon's HQ2 (listed alphabetically):
Los Angeles, CA
The second approach ranked the cities by each parameter/factor, determined by BofAML, in the model. The ranks were summarized within seven broader categories (financial, employment, education, business cost, housing, commute and innovation). For example, the sum of Tech occupation and Non-tech occupation's weighted ranks equates to the employment score. The score of each broad category was normalized and weighted*** to compute the final score. Lower scores in this approach imply less overall costs to Amazon for their second headquarters and are thus more favorable (listed alphabetically):
Finally, assuming BofA's list of 5 companies is correct, here are the public stocks that stand to benefit the most from the potential pick:
Amazon estimates that the city of choice for its HQ2 will reap $5bn of investment from the company and experience roughly 50K new job openings. This would clearly be a boon to the local economy of the winning city and provide a tailwind for numerous companies within the surrounding area. We highlight the following potential stock beneficiaries (alphabetically) in Table 1 for each of the five cities in our Amazon HQ2 short-list.