Two of Washington’s top developers, JBG Cos and Vornado/Charles E. Smith, proposed a $8.4 billion merger on Monday that would concentrate an unprecedented amount of local real estate holdings under a single roof.

When the deal closes in the second quarter of next year, the new publicly traded firm, JBG Smith, is estimated to become Washington’s largest landlord to the federal government and will include 50 office properties totaling 11.8 million square feet and 18 residential buildings with 4,451 units.

With the deal, two of the area’s largest and most influential developers will double down on their efforts to find profits in a market that some investors view warily because of federal cutbacks and congressional gridlock.

Chevy Chase-based JBG was already the region’s largest developer before inking the deal, owning the rights to 44.6 million square feet of existing and planned developments in the region, including large chunks of U Street, Potomac Yard in Alexandria and the Twinbrook section of Rockville. A large portion of its funding comes from investments by Ivy League and university endowments.

Just months ago, JBG proposed spending $8.4 billion to acquire 3.3 million square feet of New York real estate, an opportunity to expand outside the Washington market where office rents and values in the outer suburbs have sputtered in recent years.

But that deal fell through. Instead, through its merger, JBG would get all of Vornado Realty Trust’s Washington properties, a total of 16.2 million square feet, including more than half of an entire neighborhood, Crystal City, that has been decimated by shifts and cuts in government office space.

Both JBG and Vornado/Charles E. Smith — which is the name of Vornado Realty Trust’s Washington outfit — had been so intent on a deal that they began speaking about teaming up as long as two years ago. Vornado’s Washington unit had been considered a drag on the stock price of Vornado Realty Trust, a $19 billion New York real estate firm.

Vornado Realty Trust’s board has already approved the deal. The company’s Washington portfolio grew out of an empire built by local developer Charles E. Smith from 1946 until its acquisition by Vornado in 2002.

Matt Kelly, JBG managing partner, will be chief executive and a board member of JBG Smith while Michael Glosserman, another JBG partner, will join the board. Mitchell N. Schear, president of Vornado/Charles E. Smith, will be a member of the board and executive committee.

Kelly said in an interview that once the deal to move into New York fell through, discussions with Vornado moved “very quickly” and that the new company constituted a “true powerhouse of a business by bringing together the two largest, most respected real estate teams in our market.”

He said Vornado’s 26 Crystal City buildings, many of which emptied as a result of the Pentagon’s Base Closure and Realignment Commission (BRAC) changes, offered a chance for JBG to put its “placemaking” talents to work.

“Crystal City is a terrific opportunity in our view in large part because it represents a chance to dramatically invigorate the place, to do a lot of the things that Mitchell and his team have already been doing and to really continue those and do them in scale,” Kelly said.

Analysts of the Washington commercial real estate market continue to express skepticism about rent growth, particularly in the outer suburbs. Landlords are providing “astronomical” discounts to tenants, according to a recent report from services firm Savills Studley.

“These conditions allow prospective tenants to be patient when considering making changes to their real estate situation,” researchers wrote.

Schear has been working aggressively to reposition vacant Crystal City buildings as residential buildings, including a new 165,000-square-foot outpost for WeWork, the co-working company.

After considering a number of other ways to merge or spin off Vornado/Charles E. Smith, Schear said he was confident this was the best approach. JBG is not acquiring another series of Vornado properties, the Skyline City office complex, that has been battered by rising vacancy.

“We really turned every stone and we have looked at numerable possibilities and combinations,” he said. 

When it comes to federal government dealings, Kelly said the deal “will give us much more flexibility in what we can offer.”

Schear echoed that, saying JBG Smith “will have even more resources in the tool shed to bring to that process.”


Follow Jonathan O’Connell on Twitter: @oconnellpostbiz