When shares of Chevy Chase, Maryland-based real estate investment trust JBG Smith (JBGS) opened for trading this week, they jumped as much as 7% on the news that Amazon (AMZN) was closing in on naming Northern Virginia as the home of its second headquarters dubbed “HQ2.”
When The Wall Street Journal later reported that Amazon had plans to split HQ2 among two cities, shares of JBG Smith almost immediately gave back a bit of its gains.
Suffice it to say the REIT, which is a top landlord in Amazon’s target location of Arlington’s Crystal City neighborhood and boasts a mixed-use portfolio of over 20 million square feet, has benefited from the buzz surrounding the HQ2 contest. JBG Smith shares hit an all-time high of $40.23 on Monday and have outperformed the vast majority of companies in Bloomberg’s REIT index. The stock is up 14% on the year compared to a 3% decline posted by the overall group.
All that has transpired without an official announcement from Amazon, which has technically yet to crown a city or cities as the HQ2 winner. That begs the question: Does JBG Smith still have room to run and is it a solid bet?
Stifel Nicolaus Managing Director John Guinee, who upgraded his rating on JBG Smith to Hold from Sell in October amidst a rising likelihood of Amazon settling on Northern Virginia, told Yahoo Finance he’s standing by his $37 price target until more concrete details emerge.
“The devil is in the details,” he said. “Obviously if it goes to Crystal City there is almost guaranteed to be significant economic concessions from the Commonwealth of Virginia … and perhaps JBG Smith [if it leases office space to Amazon.] What sort of concessions that come out won’t surface for a few quarters so you won’t really know.”
Among the details Guinee will be watching when a final deal is announced are agreed upon rental rates, which might reveal how well Amazon used its leverage in its search for a home. Amazon CEO Jeff Bezos has said HQ2 will add 50,000 employees and about $5 billion over two decades to the municipality that becomes the second home behind Amazon’s Seattle headquarters.
“What I remind people is that Amazon is the largest lessee of industrial space in the world, so they are really good at extracting concessions from municipalities or landlords,” Guinee said, adding that while an influx of 50,000 or 25,000 employees will certainly be a boost to JBG Smith’s market, it might not move the needle as much as people think.
And then, there are still the troubles of the overall D.C. real estate market and JBG Smith-specific issues to consider.
“The D.C. market is one of the worst major office markets in the country,” Guinee said, citing very little landlord pricing leverage. That has played a role in why Guinee also labels JBG Smith as having some of the weakest leasing fundamentals among the REITs he covers, pointing to high leasing costs and declining rents. Office rent in Washington D.C. averaged about $9,400 per workstation a year, compared to $15,931 and $16,205 in New York and San Fransisco, respectively, according to a 2017 Cushman & Wakefield report.
With JBG Smith stock up nearly 7% this past week, those points may have been overlooked as the excitement of Crystal City reportedly being on Amazon’s short list dominates headlines.
The company is expected to make a final decision by the end of the year, with a New York Times report indicating that New York and Crystal City will be the HQ2 split winners.
Zack Guzman is a senior writer and on-air reporter covering entrepreneurship, startups, and breaking news at Yahoo Finance. Follow him on Twitter @zGuz.