JBG Smith Launches $40M Office Repositioning To Capture 'A Bigger Piece Of A Shrinking Pie'

The largest landlord in the National Landing area around Amazon HQ2, JBG Smith, has shifted away from office, making the neighborhood more dynamic by converting older buildings to apartments, hotels and retail. 

But now, it is doubling down on one office building where it has 43% vacancy and sees an opportunity to capture more tenant demand. 

The REIT is launching a $40M repositioning effort of the 11-story building at 2011 Crystal Drive, adding a suite of amenities that it says will attract companies not only to that property but to the ones it owns nearby. JBG Smith shared the renderings with Bisnow, and Chief Strategy Officer Evan Regan-Levine laid out the theory for why this bet on office will pay off. 

The plan began when JBG Smith saw the office market settling into a post-Covid normal, with companies taking far less space as employees maintained remote and hybrid work schedules. 

“We wanted to understand what we could do to position the portfolio for leasing success in a world where there’s just less aggregate overall demand,” Regan-Levine said. “So if we were going to capture a bigger piece of a shrinking pie, we wanted to make sure we were programming the elements of our office buildings the right way for how people are using space.”

After evaluating its portfolio, JBG Smith zeroed in on the 2011 Crystal building as one where the location made sense to invest in upgrading the office offering. The building sits next to the sites where a Crystal City Metro entrance, an Amtrak and VRE station, and a pedestrian bridge to Ronald Reagan National Airport are all planned to open in the next four years. And it is steps from 1,600 new apartments and a host of new retail that JBG has delivered.

JBG Smith also owns several nearby office buildings that stand to benefit from these improvements, and the tenants of those buildings will be able to access the new conference space and food-and-beverage amenities it is adding to 2011 Crystal.

“We’re shrinking the denominator of office, and what office is left we want to amenitize. And that’s a big part of what this plan is: to put this at the center of the bullseye of the remaining office and service tenants in this building and beyond with the kinds of facilities and amenities that they’re looking for,” Regan-Levine said. 

The 445K SF office building had struggled with “static vacancy” on its lower floors for years, he said, so JBG Smith decided to invest in making those floors more attractive. The landlord partnered with architecture and design firm A+I to create the repositioning strategy.

It has designed a new entryway and lobby, and it is devoting large portions of the first-floor space to a series of conference rooms of varying sizes up to a 300-person meeting space. 

The thinking behind these conference rooms, Regan-Levine said, is that many tenants no longer want to devote part of their leased space to meeting rooms, and they would rather shrink their footprint and rent out facilities on-demand when necessary.

While this could allow some of JBG Smith’s tenants to give back portions of their office space, he said that is better than seeing them vacate for another building. 

“Tenants are going to shrink, so let’s be the building that’s the easiest possible place for them to shrink into,” he said. “As long as they shrink into my building and they don’t shrink into a competitor's building, that’s still a benefit to me even if they’re shrinking overall. I want to capture that demand and be realistic about it, and that’s why we designed it that way.”

He also said tenants are prioritizing convenient food and beverage offerings, so JBG is devoting portions of its first floor to a grab-and-go market and coffee shop and a cocktail and wine bar. 

Rather than lease these spaces to a retail tenant, JBG Smith is bringing on an operator with a management and profit-sharing agreement that can offer food, coffee, wine and cocktails. It hasn’t yet announced the name of the operator. 

These spaces will be open to the public, but the management agreement also allows JBG to offer catering services from the operator for the building’s tenants to use in the meeting spaces and in their offices. 

On the second and third floors, the building has tenant spaces of around 26K SF that JBG Smith is looking to lease, and it is making those spaces more attractive with a series of improvements. The REIT is installing new floor-to-ceiling windows that look down into the lobby and out to the exterior plaza, and it is building outdoor terraces. 

Most of the outdoor space will be available to all tenants, while small portions will be private to the tenants that take space on those floors. 

JBG Smith decided to focus its investments on these lower-floor amenities and not pursue a full reskinning of the building’s facade because it wanted to keep the building relatively affordable to tenants rather than try to compete in the trophy segment of the market, Regan-Levine said. 

The building’s rents have historically been in the mid-$40 per SF range, he said, and after this repositioning it will be in the mid-to-upper $50 per SF range. The renovated second and third-floor spaces that were previously the least desirable options will now have slightly higher premiums than some of the middle-floor spaces. 

The landlord also expects that offering these amenities to its nearby office buildings will allow it to command slightly higher rents in those buildings and draw more tenant interest that will help it fill vacant spaces, Regan-Levine said. 

“That has financial value for us, and that’s how we think about underwriting this. It’s going to generate direct revenue, and it’s going to benefit in terms of that leasing uplift, but we don’t have to go to the point where we’re building a new building and demanding new construction rents,” he said. 

The average occupancy across JBG Smith’s office portfolio, including 17 buildings in National Landing and five elsewhere in the D.C. area, was 83.5% at the end of the first quarter, according to its latest earnings report. It has three buildings in National Landing with occupancy below 70%, including 2011 Crystal, and two others with occupancy below 80%. 

“It’s really hard to do this if you only have one building,” he added. “$40M in the context of a building is a massive investment, but if I look at it in the context of 6M SF of office, it’s really not that big of an investment.”