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Crystal City Office Market Feeling Early Impacts Of Amazon HQ2 On Leasing, Rents

Amazon finalized three leases in Crystal City last week, the first offices of its second headquarters, but the neighborhood already began experiencing an office market resurgence before the tech giant's deal became official.

The office buildings in Crystal City, with the D.C. skyline in the background

Crystal City claimed a disproportionate share of Northern Virginia's office leasing in Q1, the first full quarter since Amazon announced it would establish its second headquarters in the area. While the leases signed may not be a direct result of Amazon's arrival, the momentum comes as Crystal City's building owners are growing increasingly bullish on the neighborhood's future, a confidence that is changing the way they are approaching office lease negotiations. 

In the first three months of 2019, Crystal City's 366K SF of leases accounted for 23% of Northern Virginia's total leasing volume, according to CBRE. That represents a larger-than-usual share of the pie, as Crystal City's 11.2M SF of office inventory makes up just 6.8% of Northern Virginia's total office stock. 

"This is the first time in a long time that we see of the top 10 [Northern Virginia] transactions in the quarter, four out of 10 were in Crystal City," CBRE Research Manager Wei Xie said. "That is very unusual. I don't think I've ever seen it." 

The office building at 1225 South Clark St. in Crystal City

The area's latest leasing activity, a mix of renewals and relocations, comes from a variety of private and public sector tenants. 

PBS signed a 120K SF lease in January to move its headquarters to 1225 South Clark St., relocating from another building in Crystal City. 

Booz Allen Hamilton in February inked a deal to renew its lease at 1550 Crystal Drive and expand by 10K SF to an 84K SF footprint. 

The General Services Administration signed a 72K SF lease renewal for the Federal Emergency Management Agency at 2200 Crystal Drive. Surescripts signed a new 42K SF lease at 2511 Jefferson Davis Highway, according to CBRE's Q1 report.

Companies also signed new leases in nearby neighborhoods, such as Flir Systems' 30K SF headquarters deal in Pentagon City and a 43K SF SF lease in Rosslyn from technology company Yext.

Many of these deals were likely initiated before the HQ2 announcement, and Xie said it is too early to measure exactly how large of an impact Amazon is having on the market. But she said it has instilled a new sense of optimism in Crystal City.

"I think without a doubt Amazon has generated a lot of energy in the market," Xie said. 

Crystal City Business Improvement District President Tracy Gabriel said she is heartened to see longtime tenants of the area renewing their leases, an affirmation they have a positive view of the area's future. She has also seen an uptick in activity from new tenants looking at the market for potential relocations. 

"There has definitely been an increase in demand and interest in the area," Gabriel said. “We anticipate that there will be companies that want to be in Amazon’s orbit and that it has opened doors for the area in terms of the greater market seeing the potential."

A rendering from November 2018 of the north section of National Landing, including parts of Pentagon City and Crystal City

Cushman & Wakefield Senior Director of Research Nathan Edwards said Amazon HQ2 is having a noticeable impact on the way office landlords are approaching their leasing strategies and structuring the deals they are closing. 

The peak of the Amazon effect may still be a few years away, but landlords in Crystal City are proactively raising rents and structuring deals to give them the ability to hike rates in the future, Edwards said. 

"The way some of these owners in Crystal City are starting to structure leases is they think the optimum time for the market to really see a turnaround is about five years out," Edwards said. "They're structuring deals with a preference for five-year terms and at that point they're expecting real demand to kick in and to see upward pressure on rents."

When tenants insist on leases with longer terms than five years, Edwards said Crystal City landlords are building future rent bumps into the deals, something he said he has rarely seen in the region's office market over the last decade. 

"We used to see it downtown when the market was relatively tight," Edwards said. "In Northern Virginia, we haven’t seen a whole lot of those built-in rent bumps."  

The slide in JBG Smith's investor presentation, citing Transwestern and JLL research, that projects future office growth in National Landing

JBG Smith, the dominant landlord in the National Landing area, detailed the new office market strategy it is taking in the neighborhood in an investor presentation last week. The REIT, which was unavailable to comment for this story, told investors it is taking an "offensive posture" in National Landing office leasing. One of the key facets of that posture, according to the presentation slides, is executing shorter-term leases with fixed rent bumps and mark-to-market resets. 

The REIT also detailed the impact it expects Amazon to have on the National Landing office market over the long term. Using JLL and Transwestern research, JBG Smith highlighted office occupancy and rent growth in Amazon's South Lake Union neighborhood in Seattle. It looked at the same metrics in National Landing ahead of Amazon's arrival and forecast the future effect HQ2 could have on the market. It projected office occupancy could rise from 82% to 93% and rents could grow by as much as 5%. 

"Amazon isn't just 38,000 jobs — it's a catalyst for significant growth," JBG Smith said in the presentation.