National Landing Submarkets Q4 2019

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On November 13, 2018, a date which will live in infamy, Amazon announced that it would locate its HQ2 in Crystal City. There are a number of analogies that one could use to describe Amazon’s announcement to locate its HQ2 in Crystal City: white knight, life preserver to a drowning man, etc. but on that date the submarket’s fundamentals did a complete 180; turning it into one of the hottest submarket in the DC metro area, if not the entire country. I always “knew” Amazon would choose somewhere in the DC metro area, specifically Loudoun County due to its reputation as Data Center Alley; however, the choice of National Landing (Crystal & Pentagon City) is not surprising for a number of reasons.

Arlington is the most educated county in the nation with neighboring Alexandria, Fairfax, Loudoun, and Montgomery Counties coming in at #2, 5, 7, and 8 respectively. In terms of wealth (median income), Arlington ranks 5th [again] with neighboring Loudoun County, Fairfax County, City of Falls Church, and City of Fairfax coming in at #1, 2, 4, and 10 respectively. Reagan National Airport is located within the Crystal City submarket and both Crystal City and Pentagon City have metro stations; connecting National Landing to both the nation and region. Recent development at the Wharf and Navy Yard have shifted demand in DC to the Southwest and Capitol Riverfront submarkets, which are across the river from National Landing. Previously mentioned, neighboring Loudoun County, is home to the largest concentration of data centers in the world with over 70% of the world’s internet traffic flowing through its Data Center Alley. Amazon’s subsidiary Amazon Web Services currently leases hundreds of thousands of square feet of data center space with no end in sight to its expansion plans/needs.

Another compelling, but relatively unknown, factor in Amazon’s decision was the fact that JBG Smith owns 5,9920,88 SF of the submarket’s 11,195,025 SF (53.5%). This allowed the company to negotiate with one lease with one landlord to fulfill its space needs. Consistent with Amazon’s service offering, this efficient approach lowered costs and streamlined the expansion process.

Finally, Jeff Bezos has a home in Washington, DC and owns the Washington Post. Amazon’s disruption of the retail market has been met significant backlash with talks of breaking up the company under anti-trust laws. As a result, Amazon and Bezos have a vested interest in establishing close ties with lawmakers and engaging in vigorous lobbying efforts to protect the company’s position, rights, and legal status.

Amazon’s announcement combined with increases in defense spending and the submarket cluster’s proximity to the Pentagon, has led to one of, if not, the greatest reversals in fundamentals in the history of the DC metro area. Vacancy in Crystal City has dropped by an astonishing 7.5% in the past 12 months driven by Amazon leasing 585,000 SF in 4 deals and, despite 100,000 SF delivering in the same time net absorption was approximately 700,000 SF. The plummeting vacancy rate has led to strong rent growth. Interestingly, the 4 & 5-Star properties that were responsible for rent losses from 2014-2017 are now leading the resurgence. This trend should continue as both Amazon and JBG deliver new supply of both office and multi-family properties to meet growing demand.

Fundamentals in Pentagon City are deceptively positive. Its 2.7% vacancy rate is more a factor of zero supply side pressure for over 10 years. The only sale in that time was when Boeing bought its 2 build-to-suit buildings constructed in 2013. There has been no leasing and no deliveries in the past 12 months and there are no projects planned in the next 12 months. The submarket was the definition of stagnant and despite extremely low vacancy rates landlords were unable to increase rents due to lack of demand. That has all changed and the future is bright for Pentagon City. Rents increased by 4.4% over the past 12 months and its proximity to both Amazon and the Pentagon coupled with an increase in defense spending should spark a flurry of new development in the years to come as demand continues to shift from the Rosslyn-Ballston corridor to National Landing.

Crystal City

  • RBA: 11,686,539 SF
  • Vacancy Rate: 15.7% (2.7% reduction in one quarter)
  • 12 Month Net Absorption: 700,000 SF
  • Average Asking Rent: $38.65 ($0.61/SF increase in one quarter)
  • 12 Month Rent Growth: 1.9%

Pentagon City

  • RBA: 1,588,349 SF
  • Vacancy Rate: 2.7%
  • 12 Month Net Absorption: (42,500 SF)
  • Average Asking Rent: $39.43
  • 12 Month Rent Growth: 4.4%

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