JBG Smith To Take Office Buildings Out Of Commission As Huge Vacancies Loom
The National Landing area has been quickly developing around the newly opened Amazon HQ2 campus, but it isn't immune from the office market's pain, with more than 1M SF expected to become vacant by the end of next year.
The largest landlord in the area, JBG Smith, said in its second-quarter earnings report Tuesday that it has 1.8M SF of office leases in National Landing expiring through 2024 or on month-to-month status, and based on discussions, it expects to have a 33% retention rate, meaning tenants occupying 1.2M SF aren't expected to renew.
“New leasing and lease renewals have been slow and will likely continue to lag due to decision-making related to future office utilization, resulting in higher concessions and an increase in vacancy,” the report says.
Amazon accounts for over half of the square footage that JBG expects will be vacated. The e-commerce giant leases 1M SF across six buildings in the neighborhood, which it moved into on a short-term basis as its HQ2 buildings were being constructed. The company has 678K SF expiring by 2024, including 300K SF by the end of this year. It moved into its first two new office buildings at Metropolitan Square in May.
JBG Smith said that excluding Amazon, its retention rate through 2024 is expected to be around 50%, which is still below its long-term average of 70%.
The real estate investment trust is preparing to reposition two of the National Landing properties where Amazon is slated to vacate its full-building leases: the 12-story, 444K SF building at 1800 South Bell St. and the 11-story 2100 Crystal Drive.
The former is slated to remain office and retail, but JBG plans to expand its 2K SF of retail to 10K SF and its 181K SF of office to 245K SF, according to the earnings report. Synetic Theater, which had been on the ground floor for 15 years, announced last month that JBG asked it to vacate the building, the Washington Business Journal reported.
JBG has no update on what will become of 2100 Crystal Drive, according to a spokesperson for the company. The property is home to restaurants McCormick & Schmick's, Jaleo, Ted's Montana Grill, Highline and Good Stuff Eatery, according to the company’s website.
The company said in its letter to investors it plans to focus its office leasing efforts on buildings with "long-term viability" and will likely take additional office buildings out of commission.
"We expect to repurpose older, obsolete, and vacant buildings for redevelopment, conversion to multifamily, or another specialty use, ultimately reducing our competitive inventory in National Landing," the letter says.
JBG Smith owns 31 commercial buildings totaling 9.7M SF and 18 multifamily buildings totaling 6,756 units, and roughly two-thirds of its holdings are in National Landing. The REIT's stock price fell by 8.5% Wednesday following the earnings report.
