JBG SMITH’s Matt Kelly on Placemaking and Striking the Right Balance Across Communities

Thanks for having me, Sarah. I appreciate it.

Placemaking is really all about capturing market share. We don't control demand, obviously, but how much of that demand we're able to capture, whether it be office or multifamily, is all about how attractive our places are. We like to invest in a concentrated way in neighborhoods where we can achieve scale and can change the environment for the better so that we can capture more than our fair share of demand. So it's all about striking the right balance between public space, retail, work space, living spaces, and anchor amenities that draw people, balancing that against some of the basic neighborhood necessities like grocery, hardware stores, things of that nature that people rely on every day wherever they live and work. So striking the right balance, the right merchandising mix of amenities, so that in the end, for whatever level of demand we experience from year to year, we're able to capture more than our fair share of it, so that hopefully over time it drives higher rents, higher rent growth, and greater tenant retention.

Yeah, I'm especially proud of our team's role in putting the whole deal together. That deal never would have come about but for our team. It was organic, it was not a formal process. We sourced the opportunity through a direct discussion with the team ownership, and then we shepherded it to formal agreement. Unfortunately, it wasn't able to overcome partisan politics and some of the special interests involved, and that's a real missed opportunity for Virginia and for our site. But you have to move on and look at the good that comes of it. I would describe the good as being two things in particular. One, it really showcased for the whole region the attractiveness and the viability of that important site that we own and control, and so we've had a lot of outreach from other users that are interested in coming in, so we'll see where that goes. And it also strengthened what was already a strong relationship, but it really did make it stronger, the relationship we have with local community groups, with the city of Alexandria in particular, in the management of the city. And I think it better aligned us around the desire to activate that land and to get it put into production sooner rather than later, and to work together to find ways to finance some of the infrastructure and some of the draw of amenities to the site.

Too early. Nothing concrete yet, but as you can imagine, there's been a lot of outreach. We're very heavily focused on entertainment uses and also updating our plans there for a post-COVID world. The site was entitled for a mix of office and residential. We believe that will skew more heavily residential. It's not to say there won't be any office, but also really needs to start with driving the right amenity anchor to the site. In addition to Virginia Tech having something with more of an entertainment angle to it, we think is important and would work well there.

2023 was a huge year for us, and the next 24 months will be equally so. HQ2, Amazon's second headquarters, opened last June. They called people formally back to the office at that time and really ramped up office attendance throughout the second half of last year. And while they didn't add to their ranks of employment during the year, they are still at that level of hiring that corresponds to the trajectory they agreed to with the state of Virginia to get their incentives. So they were very much ahead of pace last year. As everybody knows, it was a tough year for hiring in tech. Many companies shrank. Amazon kind of treaded water here locally, but we do expect them to continue to grow in the years ahead, and they remain a significant anchor. So opening HQ2 is really important. On Crystal Drive, our retail Main Street, we opened up what we call the Water Park. We opened up a restaurant called Sural, which we used to call Dining in the Park, two very outdoor-focused restaurant, food and beverage heavy retail uses that sit on Crystal Drive. We've gotten to a place now where by the end of this year, we will have almost tripled the amount of street retail in Crystal City in the broader submarket. And that's really significant when you think about driving lease-up of our new apartment buildings. We delivered the Grace and the Reva and started leasing those at the beginning of this year. Those are 808 units of luxury rental apartments, 300-foot tall two towers with important ground floor retail at the base. The new retail in those buildings will come online this year. That's part of that tripling of the amount of retail on the street. And the lease-up in those buildings has so far been ahead of pace, over and above any other project we delivered since 2017, since we were a public company. And that's a testament to the placemaking we've done in the neighborhood, but it's also a reflection of the relative supply shortage that we're starting to see in this market. And so we expect that to continue for some years to come because, as everybody knows, new starts have been dwindling. And then following on the heels of the Grace and the Reva will be the completion and lease-up of 2000 South Bell and 2001 South Bell, and that's about another 750 apartment units. So a huge year behind us and a huge couple of years ahead of us as these four residential towers come online and lease up, and as the remaining retail on Crystal Drive continues to deliver and open.

Yeah, the 3,000 unit goal was really significant. It was basically a vehicle that allowed us to creatively capitalize investment in housing preservation, and it really helps us deliver on what we think smart growth should be, which is basically not only new housing supply but also not leaving behind people who otherwise would want to live in a neighborhood and are a necessary part of the fabric of any neighborhood but just can't afford to. And so housing preservation is really important because it's far less expensive per unit than new housing construction. We learned during the pandemic that most of our essential workers earn less but should be able to live as close to where they work as everybody else, and this is a way to enable that so that you end up with neighborhoods that are not just for the rich, not just for the people who can afford the luxury apartments, but cater to income levels throughout the economic spectrum and therefore allow the people that do the different jobs that every neighborhood needs — the retail workers, the transit workers, the construction workers, the people that are a necessary part of every ecosystem in community. And what we find is that a lot of our renters at the higher end of the spectrum also want that. They don't want to feel as though they live in a gated community, ivory tower type locations. They want to feel like they are in a neighborhood that is mixed and that has some of everything.

Yeah, first of all, we disposed of almost every office asset that we own outside of National Landing prior to and throughout the pandemic. And National Landing we believe is special because it lives at the intersection of defense and technology. And some of the global insecurity that we've seen on display over the last few years, particularly with respect to the Middle East, with respect to Russia and Ukraine, and tensions with China, really point to continued growth in the defense sector. Like it or not, that's the reality of the world we live in, and National Landing benefits greatly from that demand tailwind. But National Landing is not immune to some of the pressures that have affected the office market nationally. And that really comes down to one simple fact, which is that we have too much office space and not enough demand to fill it. And so some of that office space will need to go away and be converted to other uses. And so we have a plan, and have done some of this already, to continue to shrink the denominator of office space in National Landing so that it remains healthy for the balance of demand that does exist, which has been strong. And to convert some of that shrinkage, some of the buildings that used to be office buildings, the oldest, most obsolete buildings, to convert those to multifamily and in some cases hospitality uses. We likely won't own and control the hospitality because that's not a part of our business, but certainly the multifamily we would. And that's an opportunity to deliver more housing to the neighborhood over time, but also to get to a place where we have a healthy office market that is at equilibrium faster. And ultimately, I think that's where many submarkets and many cities in the country will go. We have a large degree of control of a single submarket, which allows us to do it a lot faster, to move tenants out of buildings that are intended to be converted into other buildings that we own and control without having to do the dance that competing landlords might have to do, that gets only more complicated when you introduce lenders into the mix. And so being on both sides of it allows us to go a lot faster. Having development capabilities and the ability to execute some of that transition ourselves also allows us to go a lot faster. And that's what needs to happen to adjust to the new normal post-COVID.

When the company was created in 2017, we were about 80% office. And today, if you include our assets that are in lease-up and under construction, we are over 50% multifamily, and so less than half office. And the office is concentrated really around the Pentagon, that defense technology sector that I mentioned earlier. And so that's where we said we wanted to go, and we're just about there. Does that mean we will stop? Probably not, because I expect our growth going forward will be disproportionately multifamily versus office. It doesn't mean we won't pursue office opportunities ever again. We do have a couple of land sites that are great for build-to-suit, headquarters relocation type office uses, so there may be some of that. But most of our growth will be in multifamily. And when you look at fundamentals in this market on a relative basis, they've been pretty strong. On an absolute basis, they've been what I would describe as okay, with rental rate growth market-wide plus or minus 3%. That's better than what we see, which is negative nationally and negative in a lot of what were some of the hotter Sun Belt markets over the last handful of years. That's a function of oversupply. We just don't have that oversupply in the Washington metro area. And so what we see is a healthier market that's closer to equilibrium, where we've been able to maintain some level of rent growth where many other markets nationally are struggling with that. The forecast for the next couple of years looks even brighter because the supply pipeline is about as low as it's been since the financial crisis. And so we expect that we're going to see continued rent growth opportunities in the face of that supply shortage. Based on where interest rates are, based on where construction costs are, it's unlikely that the pipeline is going to pick up anytime soon, so we think that's easily a couple of years of favorability as it relates to supply and demand from the landlord's perspective.

We do a lot of things tech-related when it comes to sustainability. As we were the leader in the light for our sector last year, which we're very proud of, we use a lot of different real-time building monitoring systems that optimize energy efficiency. We have active indoor air quality monitoring, measuring all kinds of particulates and carbon monoxide and other things that are part of ongoing testing and reporting. We've been piloting something recently that's a fluid applied, it's a clear film applied to windows. It's called Nanotint, and it dries clear but it reduces solar heat gain. So something again, as the customer has wanted more air and light, we've been able to deliver it with bigger and bigger windows, but as we all know, that's one of the most inefficient types of skin on a building as it relates to heat retention. And so this is a way to address some of that. And then we're also looking at some of the carbon capture technology, which we've seen have promising results in newer projects. And so always piloting and testing things like that that can help move the needle from a sustainability standpoint. And we've talked a lot about from a technology perspective how we've integrated 5G connectivity and fiber, leased or owned fiber, in and around our submarkets to provide private cellular networking to our commercial tenants. That's been a huge draw. It's allowed us to attract tenants that otherwise wouldn't necessarily have prioritized our submarket. These are tenants that don't necessarily line up with that defense sector orientation, but were seeking something that they could showcase to their customers by using our high throughput bandwidth and wireless connectivity. And so by owning some of the 5G spectrum, we've been able to deliver that faster and more reliably through carrier partners that we have to some of our customers. That has actually tipped the scales in our favor when they're making space location decisions.

Well, as you know, everything is so political these days. And I think one of the things that Nareit does a great job of doing, but needs to continue to do, it's a constant, is to make it clear how REITs really do democratize real estate ownership. Real estate is otherwise an illiquid asset class that requires an enormous amount of capital, and so it's not accessible to the retail investor. Yes, REITs are a majority owned by large institutions, but a lot of those institutions represent ultimately private individuals and retail investors and the consumer. And making real estate accessible to them is very important. We're also on the forefront of environmental sustainability trends, and that's very important. That's going to be very important in fighting climate change. And then of course, we're in an uncertain environment as it relates to presidential election politics. And Nareit has to always be aware of and understanding all of the political issues at play on Capitol Hill. And the team there, I know, does a terrific job doing that. Certainly as it relates to housing, the business that makes up a majority of what we do, we have a national structural housing shortage of about 4 million housing units. By the end of the decade, some studies suggest it's going to become as big as 10 million housing units. So clearly we need to do more to incentivize housing production. And REITs again can be at the forefront of educating lawmakers and policy makers and people who make the decisions on the ground about stimulating housing supply. And that's going to be a very important ingredient in how we tackle the housing shortage that we have in the country. And I think Nareit can play a really important role in that dialogue.

I don't have a lot of free time. Most of the free time I do have, I spend with my family. I have four young kids, and as anybody with kids knows, if you want to be an involved parent, that pretty much takes up all of your free time. And so that's what I spend a lot of it doing. A lot of coaching and driving young people all over the place, dragging them to our latest investment or development, making them look at it for the 100th time. I am also involved in a couple of nonprofit boards. I'm currently the chair of the Smithsonian National Museum of Natural History, which is a beloved local institution here in Washington. But I love the time that I get to spend with the scientists and the team there that share our nation's collection of natural history objects and the millions of visitors that come for free to the DC metro area every year. That's an important side gig of mine. And then of course, whenever we travel anywhere, I'm always dragging my family around looking at latest real estate projects and developments in other places, which I think I find more interesting than any of the rest of my family members. But that's probably the way it's supposed to be.

That's right. That's right.

I just think the last four years have been pretty challenging with pandemic and inflationary pressures and interest rates, global conflict, now a presidential election that who knows what will happen. I think the next few years are going to be pretty exciting in our industry. We finally, I think, can shake off the lingering effects of the pandemic and enter into some kind of a new normal phase as it relates to interest rates and growth, and hopefully get to the end of the year without too much drama in the political sphere. I'm optimistic that we will. And maybe it's front of mind because I'm in Washington, it's a quote that is attributed to Winston Churchill, although I don't think he said it, but people think that he said that Americans always do the right thing only after exhausting all the alternatives. So I hope that where we land at the end of the year is the right thing for the country, whatever that is, and that we get there without too much drama.

Thank you very much. Thank you for having me.