JBG SMITH CEO W. Matthew Kelly on the Amazon HQ2 Developer’s Big 2020
‘We believe the supply/demand fundamentals for multifamily will outperform office in the years to come.’
JBG Smith (JBGS) is the developer behind one of the most prominent projects on the East Coast: The 150-acre, mixed-use complex in Northern Virginia called National Landing, which includes Amazon’s more than 4 million-square-foot second headquarters and a $1 billion innovation campus for Virginia Tech.
The Bethesda, Md.-based real estate investment trust has advanced different aspects of National Landing the past several months, even as the firm refocused its core business on multifamily — not the easiest balancing act in a year like this.
“It goes without saying that very little of 2020 has gone as planned,” W. Matthew Kelly, JBG SMITH’s chief executive officer, told Commercial Observer. “I couldn’t be prouder of our team or more confident in our strategic direction than I am today.”
While its current portfolio is nearly 70 percent office, 75 percent of its 5.6 million-square-foot, near-term development pipeline consists of multifamily projects in the National Landing, Ballpark, and Union Market/NoMa/H Street submarkets of Washington, D.C.
“Projects like 1900 Crystal Drive, along with Amazon’s under-construction headquarters campus, and new retail we recently completed along Crystal Drive, are essential to our overall repositioning of the submarket and will enable us to create a thriving, 18-hour environment within National Landing, where people can walk from their home to their office, as well as their favorite restaurants and amenities,” Kelly said.
In an exclusive interview with Commercial Observer, Kelly spoke about the unusual year, JBG SMITH’s rising interest in multifamily development, and all that’s happening at National Landing.
Commercial Observer: How would you characterize what the company experienced in 2020?
W. Matthew Kelly: Our on-site management teams have done an amazing job keeping all of our assets running efficiently and smoothly throughout the pandemic, while, at the same time, adjusting to constantly changing protocols and procedures. Those of us who have been able to perform our roles remotely have remained highly productive and connected over the past nine months.
That said, I think we are all past ready for a return to in-person work, collaboration and togetherness. Our company culture is incredibly strong, and as well as everyone has adapted, we are at our best when we are able to collaborate and create together. It’s hard to innovate on Zoom, and it’s much harder to recreate spontaneity and creativity while working remotely. Finally, onboarding new members of the team and having sensitive conversations are vastly inferior in a virtual format.
What impact did the pandemic have on business?
Like everyone in the real estate industry, JBG SMITH has not been immune to the impacts COVID-19 is having on the larger economy. However, we are poised to exit this period on very solid footing and with ample opportunities to continue on our growth trajectory.
We have a strong balance sheet and almost $2 billion of liquidity. While retail collections are understandably down, they represent a relatively small percentage of our portfolio. We are still collecting more than 98 percent of rent on our office and residential leases, and these levels have remained relatively constant throughout the pandemic.
What is happening with your properties under construction?
We made steady progress on our under-construction assets and near-term development pipeline, especially in National Landing. We will have eight assets in stabilization over the next 24 months that we expect by the end of that period will deliver an incremental $65 million of annualized [net operating income], representing an approximately 20 percent increase in NOI over our latest Q3 reported numbers.
Our repositioning of National Landing has also proceeded during this time with the delivery of over 100,000 square feet of new retail on Crystal Drive that will form the heart of our new main street in the submarket.
Amazon’s headquarters buildings have remained under construction throughout the pandemic, and we recently welcomed Amazon employees into the fully renovated office building at 1770 Crystal Drive. We also secured all the necessary approvals for 1900 Crystal Drive (approximately 800 new apartment units in the submarket) and the first phase of Virginia Tech’s $1 billion Innovation Campus.
Tell me about how your strategy has shifted JBG’s portfolio to a majority of multifamily and why that decision was made.
We see the current environment as conducive to a successful transition to a majority multifamily portfolio, which has been our goal since we became a public company in 2017. We believe the supply/demand fundamentals for multifamily will outperform office in the years to come, driving greater net effective rent growth over time with lower capital needs.
We believe the office market in National Landing, however, will be the exception and continue to perform well as Amazon and Virginia Tech continue to grow their presence there.
What areas are you looking most closely at and why? I understand the National Landing, NoMa and Ballpark neighborhoods are up high on your list.
We prioritize expected future rental rate growth above all else. This growth tends to occur in emerging neighborhoods with strong demand drivers and either existing amenities or the ability for us to create or upgrade what’s already there.
As developers with particular skill in placemaking, we can be most effective where we can achieve scale concentration and move the needle with our expertise. By creating highly walkable neighborhoods defined by inviting open spaces and public art, along with an array of cultural, entertainment and shopping options, we can target and create the sort of urban environments that outperform over time. National Landing, the Ballpark and Union Market/NoMa/H Street corridors best exemplify these traits right now.
Talk about your activity in making National Landing a go-to destination for tech companies through investments in connectivity.
I am very excited about our late-summer acquisition of seven blocks of broadband spectrum stretching across Arlington County and the city of Alexandria, which the [Federal Communications Commission] had put up for auction. While this was the furthest from a traditional real estate transaction, and the dollars are relatively small, we saw it as a golden opportunity to control the rollout of a ubiquitous 5G network in National Landing by working with the right partners and service providers who are committed to making us home to one of the first such networks in the country.
Our scale ownership of a majority of the built environment in this submarket is an equally critical ingredient that we already control. The acquisition puts us one giant step closer to ensuring that our customers — the people that live, work, and play in National Landing — have the connectivity tools they need to innovate in an increasingly digital economy.
What’s the latest update on 1900 Crystal Drive and why is this an important development? What is the appeal?
Earlier this year, Arlington County fully approved our plans for 1900 Crystal Drive, which call for approximately 800 residential units and 40,000 square feet of street-level retail across two, new mixed-use buildings. In addition to a private rooftop and green spaces for residents, the development will feature a retail-anchored shared street and a central park. We are targeting early 2021 for the potential start of construction.
How optimistic are you that the D.C. market can weather a downturn?
With each economic downturn over the past 30 years, the D.C. metro area has proven to be more resilient than other gateway markets. It certainly appears that 2021 will continue that trend. For example, during the last recession, JLL data showed that our market saw office rent declines of only eight percent compared to more than a 16 percent average across Boston, San Francisco and New York.
Of course, no region is immune to the economic impacts of COVID-19, but D.C. benefits uniquely from its high concentration of tech sector companies like Amazon and government agencies, both of which are currently in high demand and all of which remain committed to in-person collaborative work from the office once safe.
Looking ahead to 2021, what are your thoughts on how JBG’s strategy will evolve? What are your goals?
JBG SMITH is well-positioned to take advantage of the significant tailwinds from Amazon’s new headquarters, the Virginia Tech Innovation Campus, and our connectivity investments in National Landing. We further believe that our active portfolio-recycling efforts, substantial development pipeline, and potential acquisition opportunities will enable us to continue our shift toward multifamily, particularly in high-growth submarkets.
We have ample liquidity and balance sheet capacity, and we believe that the historical recession resilience of the Washington, D.C., metro market, coupled with the continued expansion of the tech sector in our local economy, will enable us to deliver significant long-term growth and success.