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Amazon to Pay $2 Below Average Asking Rent in Crystal City

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Amazon.com Inc. (NASDAQ: AMZN) will pay about $35 per square
foot in rent for its initial leased space in Crystal City, about $2
below average asking rents in the Arlington County submarket, its
future landlord disclosed Thursday.

JBG Smith Properties (NYSE: JBGS) revealed the net effective
rental rate and other financial details of the deal with Amazon in
an investor presentation filed with the Securities and Exchange
Commission
. In the disclosure, JBG Smith CEO Matt Kelly said
the Seattle-based company’s commitment to Crystal City and the
larger National Landing area — a newly branded combination of
Crystal City, Pentagon City and Potomac Yard — should yield
benefits far beyond the 537,000 square feet of office space Amazon
will lease from his Chevy Case-based real estate investment
trust.

“Amazon’s decision to locate its new headquarters in National
Landing is a watershed moment for our region and for JBG SMITH,”
Kelly wrote in his letter to shareholders. “It validates the
strength of our market’s labor pool, our existing infrastructure,
and our ability to accommodate growth. It also affirms the
locational strength of National Landing and our repositioning
strategy in the submarket.”

Amazon officially announced its plans for a split
headquarters
at National Landing and Long Island City a month
ago, and details have been trickling out in dribs and drabs since
then. Thursday’s filing was the most detailed information yet from
JBG Smith, which will be Amazon’s landlord and development partner
as the e-commerce and cloud computing company builds out its new
headquarters.

JBG Smith noted Amazon’s commitment to the area will trigger
about $4.3 billion in third-party investments in and around
National Landing. Amazon itself will invest about $2.5 billion,
including costs developing about 4.1 million square feet of office
space for a local workforce of between 25,000 employees and 37,850
employees. Local governments, the commonwealth, Virginia Tech and
George Mason University will invest another $1.8 billion on
infrastructure and education improvements, to include an innovation campus near Potomac Yard in
Alexandria.

Amazon’s net effective rental rate compares to a total average
asking rental rate of $37.02 per square foot, per JLL, and about
$36.27 for the type of older, Class B product that dominates
Crystal City. JBG Smith says the $35-per-square-foot also compares
to an average net effective rent of $34.20 for the leases it has
executed in its National Landing portfolio for the past five
quarters. JBG Smith anticipates Amazon’s leases along with “other
current leasing activity to accelerate the stabilization of the
office market in National Landing,” by boosting the leased
percentage of its operating office portfolio in the submarket by
about 3.5 percent. JBG Smith is the dominant office landlord in
Crystal City, where the vacancy rate hovers at just over 20
percent.

Drilling down further, JBG Smith plans to invest about $15
million to prep space at 241 18th St. S, where Amazon will lease
88,000 square feet, and 1800 S. Bell St., where it will lease
191,000 square feet as the space becomes available over the course
of 2019. Those are short-to-medium-term leases, however, as Amazon
will move out as the new space it develops in Pentagon City is
ready for its occupancy. JBG Smith plans a heavier investment of
roughly $80 million at 1770 Crystal Drive for Amazon, which will
lease all 258,000 square feet of the building’s office space once
it is available by the end of 2020.

As for the development sites, Amazon will pay in the
neighborhood of $294 million for JBG Smith’s PenPlace and parts of
Metropolitan Park, which works out to about $72 per foot for
development potential of up to 4.1 million square feet. Kelly, in
his letter to shareholders, said that’s comparable with other
shovel-ready land sites throughout close-in Arlington. What’s more,
he wrote it made more sense to sell the land to Amazon than try to
forge ahead with development in the future.

Amazon’s plans for the area will also accelerate JBG Smith’s own
plans for Crystal City, to include a major infusion of new retail
space in the near term. Amazon’s move to owned space will also
position the space it vacates at 1800 S. Bell and at other
properties in the area for future development.

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