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We Now Know How Much Amazon Is Paying JBG Smith In The HQ2 Deal

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The inner workings of the real estate deals JBG Smith reached to bring Amazon HQ2 to Northern Virginia are beginning to come to light. 

A rendering of the north section of Amazon's National landing, including parts of Pentagon City and Crystal City
A rendering from November of the north section of Amazon's National Landing, including parts of Pentagon City and Crystal City

The Chevy Chase-based REIT, in a report to investors released Thursday, disclosed the prices of the lease and sale agreements it made with Amazon for its National Landing campus and the amount it plans to invest in each project it has planned for the neighborhood. 

Amazon is leasing 537K SF from JBG Smith across three Crystal City buildings with a net effective rent of about $35/SF, the REIT disclosed.

The tech giant will move into the first two of those buildings, 241 18th St. South and 1800 South Bell St., in Q2 or Q3 2019. JBG Smith said it plans to invest $15M in tenant improvements for those two buildings. JBG Smith will begin renovations before year-end on the third building Amazon is leasing, 1770 Crystal Drive. The renovations will cost roughly $80M, the REIT said, and Amazon will occupy all of the building's office space, roughly 258K SF, in late 2020. 

Pen Place
A rendering of the Pen Place development, one of the sites Amazon is buying from JBG Smith

The vast majority of Amazon's campus will be centered around the land it is purchasing from JBG Smith in Pentagon City. The tech giant will pay the REIT $294M, or roughly $72/SF, for the land that has development potential of up to 4.1M SF. 

Green Street Advisors analyst Daniel Ismail, who covers JBG Smith, said the rental rates are roughly the same as JBG Smith has received for previous Crystal City leases, but the land sale price is a more positive sign. 

"What's interesting is it does show that land in Crystal City and Pentagon City does appear to have traded up," Ismail said. "It points to land values and thus commercial real estate values in Crystal City and Pentagon City being up on average. So it does provide a good read-through for the rest of JBG Smith's holdings."

The land sales have not closed yet, as JBG Smith is timing them to allow it to execute 1031 exchange transactions. It said it plans to invest the proceeds from the sales into multifamily projects. The REIT said it expects the first deal, for the Metropolitan Park sites, to close as early as 2019 and the second sale, for the Pen Place parcels, to close as early as 2020.

The REIT estimates its yield for those land sales would be 5% to 6%. JBG Smith also expects to work with Amazon as its development partner, property manager and retail leasing agent for the new construction projects. It did not disclose what Amazon will be paying in those deals. 

1900 Crystal Drive
A rendering of the residential towers JBG Smith has planned at 1900 Crystal Drive

JBG Smith also detailed the investments it plans to make in residential and retail developments around Amazon's new campus. 

The REIT plans to invest roughly $100M in its Central District Retail project, which consists of 130K SF of new retail space on Crystal Drive between 15th Street and 18th Street South. The retail will be anchored by an Alamo Drafthouse Cinema and a grocery store, though the name of the grocer has yet to be announced. It plans to start construction on the retail project in the next three weeks. 

The next project JBG Smith will undertake will be a $370M residential development. It plans to start construction in 2020 on 1900 Crystal Drive, which will consist of 750 multifamily units and 30K SF of retail across two towers. 

Combining the 1770 Crystal Drive renovations for Amazon with the Central District Retail and the 1900 Crystal Drive project, JBG Smith plans to invest $550M in the short term. The REIT told investors it expects to earn a yield of 6.7% to 7.1% on that investment. 

National Landing
An aerial view of the National Landing area showing the planned Amazon campus and JBG Smith assets

Following its 1.2M SF short-term pipeline, JBG Smith has roughly 6.2M SF of additional development potential with its holdings in the National Landing area. Those projects would grow its already-large portfolio in the area, consisting of 6.2M SF of existing office space and 2,850 multifamily units. It does not have a timeline for the future development pipeline, saying it will depend on market conditions. 

The REIT told investors it expects the office market in Crystal City and Pentagon City to improve significantly with Amazon's move. It compared the area to Seattle's South Lake Union neighborhood, where Amazon built its first headquarters. 

South Lake Union had an office occupancy of 72.4% in 2010 before Amazon built its headquarters, JBG Smith said, citing JLL research. It now has a 95% office occupancy. Similarly, annual office rents shrank by 0.3% in South Lake Union between 2002 and 2010, but it has averaged 5.2% growth in the last eight years. 

Georgetown University professor Jonathan Morris, who teaches a course on REITs and previously worked for Boston Properties and Crystal City developer Charles E. Smith, said he does not think the comparison to Amazon's Seattle neighborhood works in this situation.

"Using the Seattle office market activity once Amazon took root as a comparison to Crystal City is creative, but these are very different markets at very different points in Amazon’s trajectory," Morris said. "I don’t think having Amazon arrive incrementally in Crystal City will have the same numerical impact on the market that it had in Seattle."

Displaying its bullishness on the market, JBG Smith said it has been actively pursuing property acquisitions in the National Landing area. Before year-end, it expects to close on land that it controlled with a option-to-purchase agreement in Potomac Yard. The site, across from the planned Virginia Tech Innovation Campus, has 1.2M SF of development potential. JBG Smith said it is buying it for roughly $19/SF. 

The REIT also said it is pursuing additional acquisition opportunities in the area that it could close on as part of 1031 exchanges along with the land sale to Amazon. Any new acquisitions JBG Smith makes will have the value bump from Amazon priced in, but Ismail said it still appears to be a good strategy for the REIT. 

"New acquisitions in that market will likely be [priced] higher post-Amazon than pre-Amazon, though I do think there is value in terms of JBG Smith controlling the landscape in that submarket to placemake it the way they see fit," Ismail said. 

JBG Smith's stock price rose more than 2% from Thursday's open as of 1:30 p.m. Ismail said it is beating other office REIT stocks by about 1% on the day, showing investors see the financial disclosures in a moderately positive light.

"It is slightly, but not largely, outperforming the office group today," Ismail said. "I do think all this is helpful. The real key will be in the coming quarters, how does the rest of the office market look in National Landing and are we going to see greater interest of tenants to locate next to Amazon."