Amazon's decision to select Arlington, Virginia for one of its new headquarters will have a gradual and profound impact on the region’s office sector. Arlington and Long Island City, Queens, NY, will join Seattle as the company’s three headquarters in North America. Nashville, Tennessee will be home to the company’s new operations center.
A Major Investment
Amazon is re-branding a government-focused office submarket in Crystal City as National Landing. It includes a portion of Pentagon City and a part of Potomac Yard. The company will utilize 4 million square feet of office space, with the opportunity to expand that to 8 million square feet. In exchange for the investment, local government has pledged tax incentives of $573 million and Virginia plans to invest $195 million in infrastructure in the neighborhood.
Amazon will add 25,000 jobs to the region over the next ten years and it should be no problem for the area to handle the employment growth. An analysis by Transwestern and Sage Policy Group, Inc. notes that “the Washington metro area routinely adds more than twice that many jobs in a given year.”
Office Space Absorbed
Crystal City will see much of its office space absorbed, but given that Amazon is aiming to make its presence a fixture over 10 years, it should be a relatively smooth transition, according to Elizabeth Norton, managing research director for the Mid-Atlantic region at Transwestern.
“We anticipate that rents will rise as space tightens,” Norton said. The analysis found that rents could likely grow by 4%-5% annually as space becomes absorbed.
To accommodate the growth, more space will need to be constructed. There is 2.2 million square feet of available office space in the Crystal City/Pentagon City submarket as of the third quarter. The overall vacancy rate could drop to 7.2% by the end of Amazon’s build out, according to the report. Currently, the vacancy rate is 15.5%.
Crystal City is not the only place that will benefit. There will be a spillover effect into neighboring areas, such as the Rosslyn-Clarendon-Ballston Corridor. In this region, the office vacancy could fall to 16.1% by the end of Amazon’s third phase of move in – down from 20.3% today. This could trigger rent increases by 2%-3%, according to the analysis.
Even though some experts have estimated the effect on various aspects of real estate related to this announcement, many properties may be subjected to significantly different rates of change in assessed values and real estate taxes.
As office properties in the Crystal City submarket experience increased absorption and rents rise, higher assessed values are sure to follow. The best way to minimize property tax liability is to seek professional property tax representation and when appropriate, appeal any assessment that doesn't take into account the specific challenges the property faces in a changing market.