Crystal/Pentagon City Submarket Overview Q1 2019

Crystal City Submarket Overview Q1 2019

Crystal City, long a focal point for defense-related industries, has become a tech hub overnight. With Amazon’s announcement that it will put half of its second North American headquarters here (portions will also bleed over into Pentagon City and the Potomac Yard area of Alexandria), long-lingering pains from Base Realignment and Closure policies and sequestration have been dulled. Vacancies were above 17% as of 18Q4—roughly twice the 2009 rate and well above the long-term average—but it’s hard to see office demand not heat up over the next several quarters. Even prior to the announcement, leasing showed signs of life—Raytheon alone signed for more than 120,000 SF in 2017.

JBG Smith, the biggest winner on the Virginia side of the HQ2 equation (New York City will get the other half), had already committed to transform Crystal City, and was hoping that its Potomac Yard development would breathe life into the Submarket. The mixed-use redevelopment was not only going to include office but retail and apartment buildings as well. Part of Amazon’s agreement requires Virginia to invest in significant infrastructure improvements that should be a rising tide that lifts other office buildings. The state has re-implemented plans to construct a second entrance to the new Potomac Yard metro station, which recently started construction and is due to open in 2022.

Pentagon City Submarket Overview Q1 2019

Pentagon City’s relatively small office inventory recently took on outsized importance in the marketplace. Amazon’s announcement that half of its second North American headquarters will be at the newly-dubbed “National Landing,” which includes portions of Pentagon City, could mean significant growth in this sector in the near future. The e-commerce giant is planning to purchase several parcels of land from JBG Smith near the Bartlett, one of the area’s newer apartment developments that is also home to a Whole Foods Market, which will provide Amazon with room to expand its office footprint.

Construction in Pentagon City has been nonexistent since 2013, when Monument Realty delivered two build-to-suit offices comprising more than 320,000 SF for Boeing. Recent development here has been dominated by multifamily projects. The Altaire, a 5 Star, 451-unit community, delivered in 2018 on the site of a former 239,000-SF office building demolished in 2016. However, Amazon’s anticipated land purchases at Pen Place and Metropolitan Park in Pentagon City could be a catalyst for change. While not yet confirmed, many anticipate that the company will attempt to rezone the parcels (the land is currently zoned for multifamily) and construct office space.

The lack of construction has kept vacancies in Pentagon City extremely low. Low vacancies haven’t kept rents from suffering, though. While growth this year had topped 3% as of mid-November, the recent increase has been an outlier: The submarket has essentially recorded losses every year since 2012, with a lack of demand weighing on landlords’ abilities to push rents.

In a submarket as stagnant as this one, it’s no surprise that only one sale (which involved two buildings) has recorded in the past 10 years. That year, Boeing purchased the two buildings it now occupies from Atlas Capital Group for $138.7 million ($430.64/SF). However, Amazon will likely have an outsized impact here and could entice investors to take another look at Pentagon City.

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