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Market Moves Happening Behind The Scenes In Northern Virginia Following HQ2 Deal

ARLINGTON, VIRGINIA — The month since Amazon announced its HQ2 campus in Northern Virginia has been filled with endless speculation and studies about market impacts, community meetings, panels and other public musings on Arlington's major economic development win.

But amid the Amazon hysteria, key stakeholders in the neighborhood branded as National Landing have been quietly moving chess pieces, from an apartment owner putting a large building on the market to new office and retail tenants seeking space to corporate housing operators scouring the market for available apartments to the area’s largest landlord buying up even more property.  

The Meridian at Pentagon City apartment complex

Amazon-Adjacent Apartment Tower Hits The Market

The owners of a 534-unit apartment complex across the street from one of the sites Amazon is buying for its campus began seeking buyers in the weeks following the HQ2 announcement. HFF is marketing the Meridian at Pentagon City apartments on behalf of UBS Asset Management and Paradigm Development

The sellers did not put out a public release on the property hitting the market, and HFF declined to comment for this story, but a brochure on HFF's website markets the building as a value-add opportunity next to Amazon HQ2. Nine out of the 12 pages in the brochure include Amazon's name, making it clear the HQ2 campus is a key selling point.

The property could attract the attention of JBG Smith, the largest landlord in the area and the company that landed Amazon. The REIT told investors Thursday it is actively pursuing new acquisition opportunities in the National Landing area, focusing on existing multifamily assets with additional development potential.

JBG Smith CEO Matt Kelly said in an interview with Bisnow Friday that the company does not disclose specific deals it is chasing, but he said Meridian at Pentagon City is the type of property it could seek to buy. 

"I believe it's 15 years old, but it's well leased and any assets like that at the right price are definitely the type of things that we focus on," Kelly said. 

The brochure does not list an asking price, but Real Estate Alert reports that bids are expected to come in around $210M, or $393K/unit, significantly higher than the $205K/unit price the building last sold for in 2009. 

Transwestern Executive Vice President Dean Sigmon, a multifamily investment sales broker active in Northern Virginia, said the reported price of $393K/unit seems aggressive for the Pentagon City submarket, but he believes there are investors out there that would pay it. 

"I could still imagine people bidding that price. There’s just not enough deals to feed the appetite of equity chasing apartments in our market," Sigmon said. "Before the Amazon announcement, there were some [investors chasing deals], now that the announcement is here there are even more. I'm very positive of that."

A rendering of the Virginia Tech campus at Potomac Yard

Development Site Sells To Neighborhood's Largest Landlord

Already moving ahead with its acquisition strategy, JBG Smith expects to close this month on the purchase of a Potomac Yard development site across from the planned $1B Virginia Tech Innovation Campus, the REIT said in Thursday's investor report. The sale of the site, which could support 1.2M SF of development, came out to roughly $19/SF, or about $23M.

The site is currently planned for office development, Kelly told Bisnow. He said the proximity of the future Virginia Tech campus and the upcoming Metro station were primary factors in its decision to buy the property.

Kelly expects the area to see increased office demand from companies wanting to be near the campus for its research and development efforts and pipeline of tech talent. He said that future growth, in addition to the price of the property, made the deal too good to pass up. 

"To own land across the street [from the Virginia Tech campus] is a great bet from a long-term, strategic standpoint," Kelly said. "We also like it because the price was right and we think it's a great investment at this value."   

JBG Smith CEO Matt Kelly at the Nov. 13, 2018 Amazon HQ2 announcement

Office And Retail Tenants Ramp Up Activity

Several market studies have aimed to project when and to what extent National Landing will experience additional demand from companies wanting to locate near Amazon. But on the ground, Kelly said that is already happening. 

"In terms of other companies expressing interest in locating here, we’ve already seen that," Kelly said. "I can’t say who, but we’ve had a substantial increase in inbound inquiries from other companies that noticed what Amazon did."

Kelly said that demand has manifested itself in the form of inquiries and tours, but it remains to be seen how soon it will translate into leasing activity. It has been just one month since the announcement, and most large companies take several months to make relocation decisions, but he expects to see leasing ramp up in the near future. The increased demand in a market that has experienced high vacancy rates for years should help landlords like JBG Smith increase rents, Kelly said. 

"It's a reasonable assumption to believe that with Amazon and more demand in the market that we will see more rent growth," Kelly said. "When you're leasing office space you're leasing for multiple years, five, 10 or 15 years, and you always try to reflect the value of the space in the future. There's a lot coming in the future ... and with that will come an increase in value and growth in rents and income." 

On the retail side, Kelly said there has also been a growing number of companies asking about space in the National Landing area. 

"As you can imagine there’s a lot of buzz and excitement around Amazon coming and a lot of retailers want to be as close as they can be to that base of their employees," Kelly said. "We have had a noticeable increase in interest."

JBG Smith signed movie theater and restaurant chain Alamo Drafthouse Cinema last year to anchor the Central District Retail development it is launching. Kelly said JBG Smith is making a strategic decision to wait until the project nears completion to finalize leases with other retailers. 

"Certain retailers make decisions later in the process and if you wait for retailers sometimes you get better concepts and better rents, and now having the favorable Amazon decision does give us greater demand and interest in that space," Kelly said. 

LCOR's recently completed Altaire building in Pentagon City and the adjacent Verizon property it acquired for another project

Multifamily Developers Shape Leasing Strategies, Project Plans

LCOR in September completed its 451-unit Altaire building in Pentagon City, across from the Pen Place development site Amazon is acquiring. In October, it acquired an adjacent property where it plans to build another 280-unit building. 

The Altaire building was just above 36% leased as of early December, LCOR Vice President of D.C. Metro Development Josh White said. He said the holiday season is typically slow for leasing, but it did seem slightly higher this year. White is not sure that can be attributed to the Amazon announcement, but he said he expects leasing to ramp up next year when Amazon employees begin working in Crystal City

White said the developer is not increasing its rents in anticipation of Amazon's move, but he said he believes it will help the leasing and has made LCOR more patient. Altaire's north tower has a collection of large, high-end units that have been slower to lease and might have led the landlord to offer concessions or bring down rents, but with Amazon beginning its move next year, he said LCOR is deciding to wait it out. 

"We can be patient with those units and wait for some of this momentum to catch up to where we are in leasing, and so we’re taking a thoughtful, patient approach to leasing up the building," White said.

The most noticeable impact the Amazon decision has had for LCOR's project has been the large increase in corporate housing operators asking the developer about available blocks of units they could lease and then operate as short-term rentals, White said.

Corporate housing has traditionally been common in Pentagon City given the proximity of the Department of Defense and its contractors, but he said the Amazon announcement has ramped up the activity, and since Altaire is one of the only actively leasing buildings in the area, it has experienced that firsthand. 

"We've seen significant activity on the corporate housing side," White said. "In the last week or two, we've gotten a lot more interest from corporate housing providers wanting to lease in our building."

The developer has not set the rents yet for the next building it is planning, but White said he expects the timing coinciding with Amazon's move will boost its absorption, and he believes over time the gap between rents in the Pentagon City/Crystal City market and the D.C. market will begin to shrink. 

LCOR is not the only developer with existing and planned apartment buildings around Amazon's future Pentagon City hub. 

Kimco's The Witmer apartment tower at Pentagon Centre, photographed in 2018

Kimco Realty is nearing completion on a 26-story, 440-unit tower that also sits directly across from Amazon's Pen Place development site. Later phases of the project will include another 253-unit building, a 200-room hotel, 705K SF of office space and 346K SF of retail. The first building will begin pre-leasing in Q1 ahead of its late-spring delivery, Kimco Senior Vice President of National Development Geoff Glazer said. 

Glazer said the market was already well-positioned for a new apartment building given the proximity to the Pentagon and the relative lack of new supply. Amazon's move will only boost apartment demand, Glazer said, but it is too early to put a number on how meaningful the increase will be for leasing pace and rents.

"We feel even stronger now there should be some bump because there will be a little greater demand as the Amazon team comes in and their complementary companies that will come with them," Glazer said. "We would anticipate there will be some bump [in rents]."  

Kettler owns and manages several apartment buildings near Amazon's future home, including the 198-unit m.Flats building in Crystal City that delivered in 2016. It also owns two apartment buildings in the Metropolitan Park development, where Amazon acquired a parcel for development of HQ2, including the Millennium, which delivered last year, and the Acadia, which delivered in 2015. 

Each of those buildings are fully stabilized and are already experiencing annual rent increases between 3% and 5%, Kettler CEO Bob Kettler said. He believes Amazon's move will only escalate the rent growth in the Crystal City-Pentagon City submarket and bring it closer to its counterparts across the river.

"Now I think there’s anticipation of these being viewed differently and the submarket having a different character," Kettler said. "We think it’s going to shift the center of gravity of the subregional neighborhood, and if you look at rent differentials from The Wharf and other areas on the waterfront, the ballpark, there’s a gap between that and Pentagon City. Right now, Pentagon City and National Landing are a value play, and I think that’s going to evaporate." 

A sign in Crystal City showing a map of the neighborhood

The BID Looks To Expand

The Crystal City BID has been meeting with property owners in neighboring Pentagon City and Potomac Yard to discuss their possible inclusion in the organization, which could expand beyond its original neighborhood, Crystal City BID Executive Director Tracy Gabriel said. She said this expansion has long been a goal of the business improvement district, which she began leading in June, but the Amazon announcement only makes it more urgent. 

"Amazon helps to accelerate the realization of the vision we’ve long had for the area, and that includes the opportunity to unify the district," Gabriel said. "The selection speaks to the proximity between our neighborhoods and how this really can be experienced within a single district ... It also highlights the need for a BID to help advocate for connectivity between our neighborhoods that will make it more seamless in the future."

Many of the property owners have been interested, Gabriel said, and she hopes to realize the expansion for the BID's next fiscal year starting July 1. The expansion could double the BID's budget to roughly $5M, she said. It has not decided on what the name would be if the BID expands beyond Crystal City, but she said it could potentially adopt the National Landing brand that Amazon and JBG Smith introduced with November's announcement.

Arlington Economic Development has been focused largely on public activities, such as speaking at community events to talk to neighborhood residents about the Amazon plans and answer questions they have. But it has also been working behind the scenes with the tech giant to meet with leaders, AED Director Victor Hoskins said. 

"We’re working directly with Amazon and they are in the process of meeting a lot of our local community leaders," Hoskins said. "They’re meeting our elected officials. They’re beginning to work with our planners on the development process."