Developer JBG Smith went all in on Amazon’s second headquarters in Arlington, Virginia. Now it’s left wondering what the e-commerce giant will do.

The percentage of JBG Smith’s real estate holdings located in the neighborhood surrounding what’s been dubbed HQ2 has increased from 43% to 70% since November 2018, when it was named Amazon’s official development partner, according to earnings reports.

But now, JBG Smith and its fellow developers are being forced to hold their breath. On March 3, Amazon announced it was putting a pause on development at HQ2, halting construction with less than half of its planned office campus completed.

The move shows that the timeline of even the biggest anticipated real estate projects in the United States can still be altered by turbulence in the economy and a remote-working trend now three years into the COVID-19 pandemic. Any reduction in scope related to office space at HQ2 is likely to come with a cost for real estate firms seeking to capitalize on the project and for local municipalities that have offered big tax incentives.

Amazon’s suspension delays groundbreaking on PenPlace, the second phase of HQ2 expected to comprise 2.8 million square feet of office space, for an indefinite period.

“It really is a shift, not a cancellation,” Amazon spokesperson Rachael Lighty told CoStar News, adding the Seattle firm’s promised $2.5 billion investment still stands. “No decisions have been made either way around the space for PenPlace. We’re just really taking a pause to evaluate how employees are using space moving forward.”

Before halting work in Virginia, Amazon stopped other major developments in Bellevue, Washington, and Nashville, Tennessee, citing similar reasons. The delays reflect a larger pullback in the tech sector, which has resulted in several paused or called-off developments, as well as major workforce reductions, including Amazon’s 18,000 layoffs.

Several hours after Amazon’s announcement, JBG Smith released its own statement, confirming the first phase of HQ2 remains on track.

“We continue to work with Amazon to advance plans for PenPlace and look forward to helping Amazon realize its complete vision for HQ2,” JBG Smith CEO Matt Kelly said in a statement.

The company declined to provide comment to CoStar News beyond its statement, but in a Securities and Exchange Commission filing earlier this year, it disclosed that a delay in HQ2’s construction could have a material adverse impact on its financial performance.

Along with JBG Smith, a stream of developers has flocked to the area, with at least 12 projects already completed or under construction. In 2018, these developers envisioned the Northern Virginia neighborhood — now known as National Landing — to be fueled by an influx of top white-collar office jobs. Apartments, retail and parks were primarily designed to serve young, well-paid workers.

Other developers that have invested in National Landing since 2018 include Kimco Realty, LCOR and MRP Realty. While JBG Smith is by far the largest developer in the neighborhood, others have begun work on significant projects, most of which are residential or mixed-use.

“Our target customer, as you would expect a lot of properties are going after, are the Amazon employees, those making $100,000 to $150,000 per year,” said Andrew Cretal, senior vice president at ZOM Living. The company is developing a 491-unit apartment project called Hazel & Azure at National Landing, which is set to open in the summer of 2024.

But the office utopia envisioned five years ago now suffers from rising inflation and interest rates and an influx of remote and hybrid work policies that’s left offices in the region at half their pre-pandemic occupancy levels. Arlington is located in a metropolitan area that’s ranked as having the highest rate of remote work in the country, with more than a third of its workers at home, according to the Economic Innovation Group, a bipartisan public policy organization. Adding 5 million square feet of new office space in National Landing threatens to exacerbate conditions, brokers and real estate executives have said.

Amazon's decision to pause now is “a wise business decision because businesses should adjust their plans as the factors that were driving those plans change,” said Michael Farren, a senior research fellow of economics at the Mercatus Center at George Mason University. “While this decision, in the short run, may look like an economic negative for National Landing, in the long run and at a larger scale, it’s a better decision for the overall U.S. economy.”

A new use for the site could have a better economic outcome than a 2 million-square-foot office without enough in-office employees to fill it, Farren said.

Despite the delay on PenPlace, Amazon is still vowing to bring 25,000 new workers to the region, and it’s ahead of schedule with 8,000 employees already hired. The company also announced it would require employees to start coming in at least three days a week starting in May, the month before HQ2’s first phase, Metropolitan Park, is set to open.

At 2.1 million square feet, the two-tower Metropolitan Park office complex has the capacity to hold 14,000 workers. As it implements its new hybrid work policy, Amazon will be able to study the working patterns of those employees and decide whether it needs 3 million more square feet of office space based on that information, Lighty said.

The pause in development and ensuing evaluation of space needs allow Amazon to reconsider its options and potentially reimagine what National Landing would look like.

“What if Amazon just continued to build those towers and they stood vacant for years?” Farren said. “What Amazon could do instead is take the space where it would have built those towers and sell it off to someone else who can make better use of it.”

JBG Smith already sold the PenPlace site to Amazon for $198 million in May 2022, but it holds a large number of other office assets in National Landing, which are starting to weigh heavy on the company’s balance sheet.

A year-end earnings report showed JBG Smith’s income from commercial real estate, which primarily consists of offices, decreased by $13 million from 2021 to 2022, while its income from apartments increased by almost $7 million.

These figures represent a “long-term strategy to transition to majority multifamily with its office concentration in National Landing,” Bud Perrone, a spokesperson for JBG Smith, said in an email to CoStar News.

Amazon leases a large portion of JBG Smith’s National Landing offices, but 387,000 square feet of those leases are set to expire in 2023, with Amazon planning to vacate at least 78% of that space. JBG Smith is counting on the defense sector and other surrounding developments, including Virginia Tech’s $1 billion innovation campus in the southern part of National Landing, to help attract tenants.

The apartment sector in greater Washington, D.C., has weathered the pandemic better than offices, a positive sign for the roughly 2,330 units currently under construction, per CoStar data.

“Our interest was piqued more so when Amazon announced that they were bringing their HQ to Arlington,” Cretal from ZOM Living said. “We were partway down the road with entitlements when the pandemic hit, so we were caught midway.”

The size and scope of Hazel & Azure have remained largely unchanged from those early days, but the developer has added more areas for coworking and remote working inside the apartments’ common spaces.

The risk for apartment and retail developers in National Landing, however, is what’s known in economic development circles as leakage, Farren said.

Leakage is the idea that a region — such as Northern Virginia — that’s expecting an economic development boom from a specific project will see some amount of that financial gain spill out into surrounding areas, in this instance to D.C. and Maryland. Even though the city of Arlington and the state of Virginia are the ones providing subsidies to Amazon, D.C. and Maryland are likely to benefit to some degree from having HQ2 next door.

But if many of Amazon’s workers are commuting to the Arlington office on a hybrid schedule, whether that’s three days a week or less, there could be slower economic growth in National Landing if workers feel less compelled to live near the office, Farren said.

“Just because the Amazon HQ doesn’t necessarily attract 25,000 workers to Arlington specifically doesn’t mean that it might not attract a similar number of Amazon workers to the larger commuting region,” he said.

So, while Amazon’s overall impact in the region’s multifamily sector is seen as a likely net positive, the transformation of National Landing itself could be less, analysts say.

That portends significant implications not only for the developers who have invested in the neighborhood but also for the state and local governments that have offered incentives upwards of $700 million. Arlington County Board Chair Christian Dorsey said in an interview with CoStar News and in a recent news conference that he remains bullish about National Landing’s future, though he said he expects to see a pivot toward residential and away from office development.