Amazon’s HQ2 in Virginia Leaves a Real Estate Firm Poised to Cash In

Nov 14, 2018 — Julie Creswell


The Galvan, a JBG Smith property in Rockville, Md. Amazon’s expansion plans in Northern Virginia will be a windfall for the real estate company.

Credit


Two years ago, Matt Kelly couldn’t have known that a failed merger involving his real estate firm would propel him toward a central role in Amazon’s expansion plans.

In May 2016, Mr. Kelly and his firm, then known as the JBG Companies, had an agreement to merge with a large real estate investment trust based in New York. But shareholders of the New York fund balked, and the deal collapsed.

A few months later, JBG, based in Chevy Chase, Md., had a new partner. In a deal valued at $8.4 billion, JBG merged with a Washington unit spun off from the real estate behemoth Vornado Realty Trust.

The new company, JBG Smith, with Mr. Kelly as chief executive, became the dominant landowner in a Northern Virginia region now being called National Landing, a dilapidated area that includes parts of Crystal City, Pentagon City and Potomac Yard. Amazon announced on Tuesday that it was choosing this area, along with New York City, for two new headquarters, with 50,000 employees between them.

Since Amazon started its search for a so-called HQ2 over a year ago, the Washington region had been considered a front-runner. The region gives the company access to a large, tech-savvy work force and the transportation and infrastructure it wanted. Additionally, Amazon’s chief executive, Jeff Bezos, has a home in the area.

For Mr. Kelly, Amazon’s decision validated a plan that he had been selling for the better part of a year: revitalizing Crystal City and its neighbors.


Mr. Kelly’s pitch was to turn a ghost town, as it has been described, into a thriving hot spot, including public green space and hip new retailers and entertainment venues. The plan relied on redeveloping 1970s-era office towers into sleek residential buildings.

Skeptical investors have become believers, sending shares of JBG Smith up 7 percent in the past month.

Analysts warn that Amazon most likely flexed its muscles to negotiate a deal with highly favorable terms, possibly pushing for below-market leases in an area that already trends well below national and Washington averages.


For JBG Smith, the HQ2 deal may pay off in an uptick in occupancy and rents for residential, retail and other properties it owns adjacent to Amazon’s new offices. But it could take five to seven years for this bonanza to arrive, said Danny Ismail, an analyst and lead of office coverage for the real estate research firm Green Street Advisors.

“This isn’t going to be an overnight thing,” Mr. Ismail said.

Amazon said it intended to lease 500,000 square feet of office space in three buildings owned by JBG Smith. Amazon has also agreed to buy numerous plots of land held by JBG Smith that could be developed for an extra 4.1 million square feet. The purchase price of the land and other terms were not disclosed.

JBG Smith officials did not respond to requests for comment. But in the announcement on Tuesday, the firm said it planned to accelerate construction on other projects in the area, including developments that would create more office and retail space as well as hundreds of residential units.


Amazon’s move is a chance for JBG Smith to turn lemons into lemonade.

For the past year, JBG Smith’s publicly traded real estate investment trust has trailed its peers, largely because of Crystal City and adjoining areas, which make up about a third of JBG Smith’s portfolio.

Charles E. Smith Commercial Realty first developed Crystal City in the 1960s and 1970s, and Vornado acquired that company in 2002. The Crystal City holdings eventually became an albatross for Vornado.

Crystal City was once a thriving hub of government agencies and military contractors, but its fortunes sank after a 2005 mandate, in part for antiterrorism concerns, to relocate thousands of jobs from suburban office buildings to nearby military bases. In the following years, Crystal City lost 17,000 jobs, and 4.2 million square feet of office space became vacant.