Crystal City’s Courting of Amazon’s HQ2

The Northern Virginia locale would see a boon to its office and retail real estate markets should the e-commerce leader’s multibillion-dollar second headquarters come to town.

Crystal City, Va., came into the national spotlight this week as one of the two rumored locations for Seattle-based e-commerce giant Amazon’s second headquarters, the $5 billion HQ2. If Crystal City is selected to serve as the HQ2 co-location—along with the second rumored host, Long Island City—the Washington, D.C.-area urban-suburban municipality will transform from caterpillar to butterfly. Half of a planned 8.1 million-square-foot headquarters and its accompanying 50,000 jobs are at stake.

“Amazon would be a gamechanger for our local economy and would breathe new life into a market that is still recovering from the headwinds of BRAC (closures), the global financial crisis and (federal government budget) sequestration,” Matthew Kelly, CEO of local JBG Smith, wrote in a Nov. 7 letter to shareholders regarding the real estate company’s third quarter 2018 performance. JBG is a leading metropolitan Washington, D.C., owner and developer of premier office, retail, multifamily and mixed-use properties—and Crystal City’s largest office landlord.

A thirsty office market

The Crystal City/Pentagon City submarket recorded an office inventory of 14.1 million square feet in the third quarter of 2018, nearly 12 million of which is home to Class B and/or obsolete product, according to a report by commercial real estate services firm Transwestern. The overall vacancy rate was 15.5 percent, weakened demand resulted in 42,000 square feet of negative absorption and rental rates inched downward. Market fundamentals could use a boost, which is exactly what would transpire in Crystal City and certain surrounding areas if halved HQ2 and its 25,000 jobs arrive.

“The positive impact to the office market will be concentrated more to Crystal City and the Rosslyn-Clarendon-Ballston Corridor and less so to neighboring jurisdictions. There is enough vacant space in the RCB Corridor to capture the rising demand without new construction,” Elizabeth Norton, a managing research director with Transwestern, told Commercial Property Executive. “And landing HQ2 in Crystal City could ultimately lead some non-HQ2-related activities to choose locations they otherwise may not have, including in communities like Montgomery, Prince George’s, and Loudoun counties.”

Norton added that, unlike the RCB Corridor, Crystal City does not have enough existing premier office square footage to house HQ2, so new construction would be in order. JBG Smith, which has been contemplating its potential involvement in HQ2 since Amazon’s September 2017 release of the RFP, asserts that it can deliver.

As noted in JBG Smith’s 2017 annual report, “Our holdings alone can accommodate Amazon’s entire long-term space requirement and we have a cost advantage over our competitors, given the existing in-place parking and substantial infrastructure.” As of Sep. 30, 2018, JBG Smith’s portfolio included three office construction projects totaling 778,000 square feet and, most notably, 43 future development assets accounting for approximately 22.4 million square feet of estimated potential development density.

Retail response

HQ2’s highly desirable effect on Crystal City’s office sector would undoubtedly spillover to the area’s retail sector. “It would impact a variety of areas because when you have an influx of that many people coming into an area with solid incomes is only going to drive the retail,” Brian Cunningham, senior associate broker with Northern Virginia commercial real estate company Coldwell Banker Elite, told CPE. Retail landlords would benefit from HQ2’s presence as well, he said, adding to their success in what is already a pretty strong retail market in general. 

“You’ve got thousands of people who are now going to be living and shopping and having various needs. Traffic drives retail and there aren’t many drivers right now that are going to move the needle in the retail community like Amazon’s HQ2,” Cunningham noted.

The pre-impact impact

Loud rumblings notwithstanding, Amazon has not yet confirmed details of its decision on HQ2’s final destination. However, even Crystal City’s position on the shortlist of potential locations has brought changes to the area. “Whether we are ultimately selected or not, this process has generated extremely valuable attention and interest in all that our region has to offer,” Kelly wrote in JBG Smith’s third-quarter letter to shareholders.

The competition has shined a light on Crystal City’s capacity to accommodate large employers, its deep and talent pool, ample housing accommodations and business-conducive environment. Kelly also pointed out that watchers are now aware of the area’s superior connectivity, walkability and plentiful greenspace. Additionally, the bid for HQ2 has also yielded regional support for the provision of an annual $500 million in dedicated funding for the Metro. 

“With a decision (by Amazon) promised by year end, we are in the home stretch and we continue to hope for the best,” Kelly concluded the letter.

Images courtesy of Crystal City Business Improvement District