Once considered tier-2 submarkets in Arlington, Crystal City and Pentagon City are primed to become the hottest areas in the region with Amazon’s announcement to locate its HQ2 in National Landing. Questions still remain as to what ancillary demand will result from the most significant corporate move in recent history.
Crystal City’s office market has historically been dominated by federal agencies and contractors, but Amazon has changed all that. The result is a complete reversal of the negative fundamentals that have plagued the submarket for years.
In Q2 2019 alone, Amazon signed 3 deals with JBG Smith totaling approximately 537,000 SF with plans to occupy later this year and early next. In addition to this, Amazon plans to purchase 2 sites at Pen Place and Metro Park for the location of their future headquarters. These sites have over 4 million SF of development potential. Amazon’s deal with Arlington County stipulates that it must occupy at least 6 million SF by 2024.
BRAC hit Crystal City hard. At the end of 2018 vacancies were above 17% with more than 2.1 million SF of vacant space; however, recent increases in defense spending may create additional demand. Northrup Grumman, Raytheon, and Lockheed Martin recently won a $4.1 billion ballistic missile defense contract and with its proximity to the Pentagon, Crystal City may benefit as a result.
The old and tired buildings of Crystal City are seeing a revitalization through conversions into residential uses or renovation to compete with 4 & 5 Star properties and attract new tenants that want to be close to Amazon. Apart from Amazon, one significant delivery is the 460,000 SF building planned for 701 E. Glebe Rd which will house the Institute for Defense Analysis. Even surrounding areas will benefit from Crystal City’s renaissance with JBG’s Potomac Yard development in the south and Amazon’s campus spilling over into neighboring Pentagon City.
As a result of all this, rents in Crystal City are posting quarterly gains with 2.4% growth over the past 12 months.
With the majority of the submarket being owned by a few players, namely JBG Smith, sales activity has been low; however, there has been a flurry of activity in the multi-family market.
With only 1.6 million SF of office space, Pentagon City is a small submarket. The lack of inventory and no new deliveries have kept vacancies low, but a lack of demand has historically hurt rent growth with recorded losses every year since 2012. That being said, rents experienced their first meaningful growth in the last 12 months at 3.3%. This trend should continue as the Amazon factor takes effect. The most recent office delivery in Pentagon City was a 320,000 SF building in 2013, which was built for Boeing. Development in this submarket has been dominated by multi-family projects. While the only sale in the past 10 years was Boeing’s purchase of the 2 buildings previously mentioned, Pentagon City’s proximity to Amazon’s HQ2 should give investors cause to take a renewed look at opportunities here.