Two years ago, Crystal City’s office vacancy rate was headed up — so Vornado Realty Trust headed out.
But what may have led Vornado to sell its sprawling property in the Washington, D.C., suburb also could have made the neighborhood an attractive option to Amazon for its much-hyped second headquarters.
The e-commerce giant on Tuesday announced that its new HQ2 will be split between Long Island City in Queens and “National Landing,” effectively a rebranding of Crystal City in Arlington, Virginia. The newly created neighborhood also includes parts of nearby Pentagon City and Potomac Yard. The Crystal City location was appealing, in part, because it offered “a huge block of available space,” said Alexander Goldfarb, an analyst at Sandler O’Neill & Partners. “That’s why this space is attractive. It’s a campus.”
The location offers quick access to transit and lots of available office space, most of which is now owned by real estate investment trust JBG Smith, which the company took over for Vornado in 2016. The REIT, market pros say, may have been holding all those properties, waiting for one big deal to come along.
Enter Amazon. The company will lease 500,000 square feet of existing office space at JBG’s 241 18th Street Street, 1800 South Bell Street and 1770 Crystal Drive. Amazon will also purchase several development sites from JBG that have a total of 4.1 million square feet of buildable space. As part of the deal, JBG will serve as Amazon’s development partner, property manager and leasing broker.
Though technically not a planned community, Crystal City was built by developer Robert H. Smith, then president of the Charles E. Smith Companies (which was later acquired by Vornado), according to the Washington Post. The neighborhood began taking shape in the 1960s and was named after one of the first apartment buildings to rise in the neighborhood, which had a crystal chandelier in the lobby. That project was called the Crystal House, and the moniker was attached to subsequent projects, like Crystal Towers and Crystal Square. The neighborhood now has a population of a little over 16,000. As part of its deal with Amazon, Virginia’s state government offered Amazon $573 million in grants and tax credits.
In 2010, Arlington County officials approved an ambitious mixed-use plan. It included adding a total of 5.3 million square feet of office space, 1.5 million square feet of new retail space and 7,600 new housing units to the neighborhood. Last month, JBG reportedly secured approval for a four-story retail project as part of the larger plan for the area.
The company also halted plans to convert the 250,000-square-foot office building at 1750 Crystal Drive into residential units. The vacant building will instead remain offices and will include an Alamo Drafthouse, according to the Washington Business Journal.
Meanwhile, in Long Island City, developer Savanna announced on Tuesday that it has entered into a letter of intent to lease approximately 1 million square feet of office space at One Court Square to Amazon.
Over the last five years, Crystal City’s office vacancy rate has hovered at about 20 percent. According to Cushman & Wakefield, it was at 20.1 percent through October. That’s on par with Arlington County on the whole, which had a rate 22.5 percent.
Chad Arnold, Colliers International’s executive vice president of Northern Virginia brokerage, said the exodus of federal agencies and government contractors a decade ago left the area’s office market without a clear direction.
“There was a big sucking sound — everybody moved out and nobody wanted to move back in,” he said. “Buildings in Crystal City were old, tired and frankly, they were obsolete.”
Many tenants instead looked west to places in the state like Tysons, Reston and Ashburn. Goldfarb said that the D.C. office market is in need of “a shot in the arm.” He noted that the tepid office market in part pushed Vornado to shed its assets in the region in 2016.
“It was a difficult space to lease up,” he said.
Already, though, the prospect of a major tenant setting up shop in the neighborhood has been a boon for Chevy Chase, Maryland-based JBG. After reports in the Washington Post that Amazon was in late-stage talks to open its second headquarters in Crystal City, the REIT’s share prices hit a record high of $40.23.
Known as JBG Companies, it was formed in the 1960s by three attorneys from a Rockville, Maryland-based firm, Brown, Gildenhorn & Jacobs. In the next five-plus decades that followed, JBG became one of the largest developers in the Washington-area.
In October 2016, JBG merged with Vornado subsidy, Charles E. Smith Companies, creating a new public company called JBG Smith. As part of the $8.4 billion deal, Vornado shareholders received 73 percent of the new firm’s stock. Vornado’s Steve Roth also became chairman of the board, a position he still holds. The merger immediately made JBG Crystal City’s largest owner of commercial real estate, according to the Washington Business Journal.
The company, which is led by Matthew Kelly, has 48 office properties spanning 13.7 million square feet, 15 multifamily assets totaling 6,307 units and four other assets totaling 765,000 square feet, according to the company’s latest quarterly report. Kelly told the Washington Business Journal last year that his company’s empty office space would likely help attract large tenants like Amazon. On Tuesday, JBG representatives noted that the company owns 6.2 million square feet of existing office space, 2,850 multifamily units and controls 7.4 million square feet of additional development opportunities, not including Amazon’s proposed land purchase, in Nation Landing
According to a June report by financial services company Stifel, the company’s Crystal City office holdings bring in roughly 50 percent of its overall office net operating income and 38 percent of its total NOI.
Over the last few years, underground retail has been moved above ground in an effort to revitalize the area. But Arnold said Crystal City still largely shuts down after 5 p.m. because those who work in the neighborhood don’t live in it. Amazon may not be able to change that on its own — a lot of multifamily development in the neighborhood would need to follow. Still, he said the hope is that Amazon can help attract other tech companies to the area.
Crystal City is just across the Potomac River from Washington and about five miles from Arlington. Because of the swaths of available commercial space, it offers a rare opportunity to create a large campus within an urban framework, industry experts said. Nate Kunes, vice president at cloud-based property-management software company AppFolio, said the region will likely see price increases until residential supply is able to keep up with more demand.
“This obviously will place additional demand on the rental stock,” he said. “It’s going to raise rents for everyone in that area for one to four years before it starts to normalize back.”
JBG “mothballed” much of its office space, Arnold said, turning down government contractors and other prospective tenants who came along. He said many industry professionals have long suspected that Amazon would land in Crystal City.
“It was sort of a no-brainer,” he said. “They might as well have put Christmas wrapping on the buildings and wrote Amazon on them.”