Question: Do you think the Amazon HQ2 development pause will cause home prices to fall in Arlington?
Answer: News broke Friday morning that Amazon will pause a majority of their HQ2 development in Arlington (link) – three 22-story buildings and their centerpiece, the 350ft Helix building. So far, Amazon has built two office towers and hired roughly 8,000 of the planned 25,000+ workers projected for HQ2.
The announcement of Amazon HQ2 in November 2018 led to a speculative boom in condo prices, so will this news cause a similar drop in prices?
Amazon HQ2 Led to a Condo Price Boom
The Amazon effect was massive when Amazon announced its intention to build its second headquarters in Arlington VA on November 13, 2018. The condo market went from a multi-year annualized appreciation of less than 1% to an 11.7% increase in 2019, which was only slowed by COVID lockdowns in March 2020.
The non-condo market was appreciating nicely in the years leading up to the announcement and experienced a much smaller boost than the condo market.
Note: this data defines “condo” as multi-family/apartment-style condos, not townhouse-style condos (e.g. Fairlington)
Months of Supply (MoS), a measure of supply and demand where lower MoS means a more favorable market for sellers, fell off a cliff as soon as Amazon announced HQ2. I’ve always found this chart to be one of the best visual explanations of how immediate and extreme the Amazon effect was on our market.
Prices Should Fall If Real Estate Markets Were Efficient…
Given that prices increased speculatively in 2019 because of the announcement, not actual development and hiring, hypothetically, real estate prices should fall relative to the risk that Amazon cuts, materially reduces, or significantly delays their HQ2 plans.
This should probably look something like the JBG Smith (Amazon’s development partner) stock price, shown below, which dropped about 8% on Friday, after Amazon announced they were pausing HQ2, and has recovered about half of that price drop since, finishing Monday down just under 5% from Friday’s pre-announcement price.
Just for fun, I compared the difference in average condo prices if you replace the 2019 HQ2-driven “speculative” gains with the average annual appreciation of the Arlington condo market for the three years before and after (0.8%) and keep the actual 2020-2022 gains. In this hypothetical world where Amazon doesn’t choose Arlington for HQ2, condo prices would be 11.5% below their current levels.
…But Prices Will Probably Hold
In a hypothetical world where real estate prices react like the stock market, which is efficiently priced by sophisticated models and highly informed institutional investors, we might see condo values fall by an amount that captures what is already built and the impact of a multi-year delay, and discounts for the odds that Phase 2 of HQ2 never proceeds or proceeds only partially. This would probably amount to something like a 4-5% decline from current prices or a loss of roughly 30-40% of the “speculative premium” currently priced into the market from 2019.
But, unlike the stock market, the real estate market is relatively inefficient, at least on a small scale like the Arlington condo market. Prices are set by a handful of individuals – about 1,400 condo sales in Arlington over the past year compared to over a million shares of JBG Smith traded on most days – and those individual buyers and sellers have uniquely different priorities with different factors like emotion, motivating life circumstances, property condition, etc.
Real estate prices tend to be stickier than other markets with just a couple of past sales creating a strong resistance point for buyers and sellers so it’s unlikely we will see a noticeable drop this year in prices because of Amazon’s pause on HQ2. I also suspect that there are a lot of people who will buy and sell without knowledge of the HQ2 pause, who assume that everything about HQ2 is on track; another example of the efficiency difference in pricing of stocks (highly informed) vs residential real estate (information gaps).
Prediction: No Price Drop, Just Lower Appreciation
I guess that the HQ2 pause will lower long-term appreciation (which is historically pretty low) for Arlington condos until we find out Phase 2 (development and hiring) is back on track, but I do not think we’ll see a near/mid-term drop in prices undoing the sharp increase after HQ2 was announced. The exception to this is the 22202 zip code of Pentagon/Crystal City (aka National Landing), where HQ2 is based, which might see condo prices slide slightly in 2023 because of the news.
Your thoughts and predictions are welcome in the comments!
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If you’d like a question answered in my weekly column or to discuss buying, selling, renting, or investing, please send an email to [email protected]. To read any of my older posts, visit the blog section of my website at EliResidential.com. Call me directly at (703) 539-2529.
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Eli Tucker is a licensed Realtor in Virginia, Washington DC, and Maryland with RLAH Real Estate, 4040 N Fairfax Dr #10C Arlington VA 22203. (703) 390-9460.
