How will Amazon’s Selection of National Landing Impact the DC Commercial Real Estate Market and Shape the Region for Years to Come?

Well folks, it’s official. After months of swirling rumors, Amazon formally declared its intention to split its coveted HQ2 requirement between Arlington, VA and Long Island City, NY.

And what a win it is for the DC region and Crystal City in particular.

Having been decimated by the BRAC (Base Realignment and Closure), sequestration and government consolidations since 2012, Crystal City (the largest area within the newly coined hub, National Landing) has struggled mightily to attract and retain tenants. It lost over 17,000 Department of Defense workers in the last decade, causing the vacancy rate to skyrocket to as high as 27%.

In the wake of the government’s departure, the Crystal City BID made several attempts to attract businesses to the city, particularly millennials and technology companies, and achieved moderate success doing so. It landed several incubators and co-working operators like 1776, WeWork, Eastern Foundry and TechShop and cultivated promising start-ups like Notarize and ByteCubed. However, the oversupply of office product in the surrounding DC and Northern VA markets, coupled with the massive hole left by the government’s exit, prevented Crystal City from gaining any real momentum.

And herein lies why the Amazon announcement is so impactful. There is simply too much dependency on the federal government. The fact that a single government initiative – in this case BRAC – can crumble a market so drastically is what makes the Amazon announcement such an important win for the area.

Don’t get me wrong, Washington has always been and will always remain a government town, but we finally have a force that can deflect some of the federal government’s gravitational pull away from the Capitol and help bring balance and diversity to the region.

We still have a long way to go to claim the title, “Silicon Valley of the East” but those of us from the DMV know the talent here is deep-rooted.  This is a passionate town filled with innovative people focused on solving the world’s challenges. Amazon’s recognition of that is something for us Washingtonians to be proud of, and on a personal note, validation for why I started TechOfficeSpaces.com in the first place.

With all that said, let’s take a look at how Amazon’s announcement may impact the DC region:

First, where is National Landing?

• The immediate area of National Landing will include portions of Crystal City, Pentagon City and Potomac Yard.
• JBG SMITH, the prominent landlord for much of National Landing’s existing buildings and future development sites, will emerge as the major beneficiary of the HQ2 announcement.
• Amazon plans to occupy 4 million square feet in National Landing with the opportunity to expand to 8 million square feet.
• Initially, Amazon will lease 500,000 SF of office space across three of JBG’s existing buildings in Crystal City:
  • 1770 Crystal Drive (currently 1750 Crystal Drive): 272,000 SF building that will undergo renovations at the end of the year.
  • 241 18th Street South: 330,699-square-foot building that was formerly occupied by the US Marshals Service. Renovations pending.
  • 1800 S. Bell Street: 221,000 SF building that is entirely vacant, except for University of Phoenix space on the lower levels.
• JBG SMITH controls an additional 6.2 million square feet of office and multifamily development opportunities, all of which are advancing through the planning, entitlement and design process for potential future development. Preliminary plans have been released on two of those sites — PenPlace and Metropolitan Park — in Pentagon City:
  • PenPlace: Mixed use project that with the potential to include 40,000 SF of retail and two 7-story towers with over 300 apartments.
  • Metropolitan Park: Comprising the last two remaining undeveloped parcels in this six-block development site. One of the sites has been entitles for a 22-story residential building with 577 units. Amazon may seek to convert the residential approval to office.

Rendering of National Landing

Rendering of National Landing

1770 Crystal Drive

241 18th Street South

1800 South Bell street

The Impact on National Landing’s Commercial Real Estate

• As I mentioned earlier, Crystal City was hardest hit by the effects of BRAC, sequestration and government consolidations. There has been an over-supply of office product in Crystal City for many years so by no means will the initial 500,000 SF occupancy create a shortage of available space.
• According to Savills Studley research, the current availability rate of 19.2% is expected to drop to 14.6% after Amazon’s initial 500,000 SF occupation.
• I think it’s fair to say that landlords may become more bullish in the surrounding markets to National Landing by steadily increasing rents and providing fewer concessions, but this will play out over time as more concrete plans take shape.

The Regional Outlook

• The true impact on the commercial real estate the market will not be felt overnight. However, the announcement could have a psychological effect on landlords that have struggled to drive leasing activity since the great recession. Many owners have been starved for positive news that could justify increasing rents and lowering concessions which are the highest in the nation (i.e. free rent and improvement dollars). Landlords may also look to sell their buildings to investors eagerly looking to capitalize on the region’s growth potential.
• In reality, it will take many years for the office supply to be filled and for the tables to turn to a landlords market, if at all. With dozens of transit-served, amenity-rich markets across the region, the Washington Metro area will continue to be tenant-favorable for the foreseeable future with a wide range of leasing options at, or similar to, current rental rates and concessions.
• The future growth of Amazon and the migration of other industries to the area is obviously unknown. However, if Amazon’s HQ1 in Seattle can provide any foresight, we can expect that Amazon will continue to surpass growth expectations:
  • Amazon currently occupies roughly 3 million SF of office space across more than 40 buildings in Seattle Metropolitan Area (19% of all Seattle’s office space).
  • Over the past decade Amazon HQ1 has leased, on average, 900,000 SF of additional space each year, driving office rents to increase over 3% annually.
  • Seattle’s vacancy rate was a high of 20% during the recession and today is a modest 5.7%
  • There have been over 100 tech companies from outside of Seattle/Bellevue that have come into the area to set up shop over the last three years. Here is a time-lapse video showing construction during that period:

Other Areas to Keep Our Eye On 

• Battle for Talent – the battle to attract and retain talent is going to intensify tenfold as Amazon settles and other major employers follow. Skilled workers, especially those with security clearances, are licking their chops at the prospect of a bidding war for their services. In fact, I recently attended a symposium on recruiting, rewarding and retaining GovCon talent and the conversation was dominated by the current shortage of skilled workers with security clearances and how Amazon’s arrival is only going to exacerbate that.
• Housing Market – housing prices within a 30 minute drive of DC are already outrageous and the addition of 25,000 Amazon employees and possibly another 22,000 indirect employees will only increase costs further. This is true for both home sales and rental units. I hope jurisdictions around the DMV impose strict affordable housing measures so DC residents are not displaced.
• Congestion – Drive on the beltway at 5PM? No thank you. Traffic is already horrendous and the metro can’t get their act together to bolster loyal ridership. The bright side is according to an article published by the Urban Institute, Amazon employees are less likely to commute by car compared to other large corporations, as about 55 percent either walk, bike or take public transit. I’ll believe it when I see it.
• Innovation Campuses – Virginia Tech plans to build a $1 billion graduate campus within walking distance to National Landing in an attempt to double the annual number of graduates with bachelor’s and master’s degrees in computer science and related fields. Similarly, George Mason University plans to build a new school for computing and digital innovation, as well as committing up to $125 million over the next 20 years to expand GMU’s campus in Arlington. How will these innovation campuses mold the next generation of students in the region? Time will tell.
• Ripple Effect – To me, the biggest variable in this equation is predicting how many companies migrate to the DMV as a result of Amazon’s announcement. Some forecast a 3x tail that will span from retail operators, restaurants, other tech companies, professional firms, recruiters, etc. that want to be around Amazon to do business with the giant or compete against it.
• Architectural Landscape – Washington isn’t exactly known as a city with unique, modern architecture. The majority of office product, especially in the District, are 12-story glass boxes or neoclassical off-white buildings. However, with Amazon teaming up with one of the most prominent DC developers in JBG SMITH, will they push the envelope for their future development sites in National Landing? And will other developers design buildings with tech users in mind as opposed to the traditional law firms, associations, GSA and GovCon tenants in the area?

If you couldn’t already tell, I think there is lots to be excited about despite the number of unknowns. Not since the mid-90’s when AOL was the most recognizable brand on the internet has there been a tech giant like this in our backyard.  I will continue to monitor the effects on the market as the dust settles, but I think it’s safe to say the impact of HQ2 will be felt for decades to come.

I am curious to hear how you think Amazon’s announcement may shape the region.  Please feel free to email me at [email protected] to share your thoughts and ask any questions I may not have addressed.