Operating Results
Federal Realty is a developer that keeps its mixed-use and neighborhood centers up-to-date with solid operations and leasing that’s second-to-none.
Randall Shearin

The Village at Shirlington in Arlington, Virginia, was one of Federal Realty’s first mixed-use developments. It continues to be one of its most successful centers today.

While mixed-use is commonplace today, one of the forerunners of the sector continues to develop high quality assets in the field. Federal Realty Investment Trust did its first mixed-use project in the early 1990s, and continues to develop mixed-use today. In addition, the company has never lost touch with its roots as an owner and operator of high quality retail centers; it has continued to acquire community and neighborhood centers and maximize their value throughout its history.

But Federal Realty is far more than a developer. The company prides itself on how well its existing centers continue to perform.

In order to see how Federal does this, Shopping Center Business recently visited with executives from Federal Realty at the company’s headquarters in Rockville, Maryland. While there, SCB toured a number of the company’s developments with Don Wood, president and CEO; John Tschiderer, vice president of development; and Andrew Blocher, senior vice president of capital markets and investor relations.

Creating Mixed-use

Congressional Plaza in Rockville, Maryland, not only serves as one of Federal’s flagship centers, but also as home to the company’s headquarters.

During our visit, Shopping Center Business took a tour of many of Federal Realty’s properties in the metro Washington, D.C., area, starting at the company’s headquarters, which is located behind the company’s Congressional Plaza in Rockville, Maryland. From the time of our first article on Federal Realty in October 1996 when Shopping Center Business pointed out Federal Realty’s first mixed-use projects, The Village at Shirlington and Bethesda Row, we have continually covered the company’s mixed-use centers. Over the years, Federal has developed numerous properties, including the grand-scale Santana Row project in San Jose, California.

Very close to its headquarters, Federal Realty has developed its latest mixed-use project. In 1997, the company had acquired an old neighborhood center on 10 acres of land in downtown Rockville. In 2002, it began dialogue with the City of Rockville to create a multi-story mixed-use project with office, civic, retail and multifamily uses.

“The city was looking to create its town center,” says Tschiderer. “There had been a 20-year history of difficult real estate investments by the city. It had been a long-term goal of the city to create a town center. We purchased the Magruder’s shopping center in order to get some leverage to get a mixed-use project built.”

Rockville Town Center has 180,000 square feet of retail, a 100,000-square-foot flagship library for the city of Rockville, 640 residential units and office space.

From Federal’s dialogue with the city came the condemnation of three properties, clearing the way for the company to begin construction. Federal Realty created a public-private partnership with the city and a residential developer. The city made an $80 million investment that was married with investments from Federal Realty and the residential developer. Federal created a master plan for the project with the city, involving business leaders and the surrounding neighborhoods. Now complete, Rockville Town Center has 180,000 square feet of retail, a 100,000-square-foot flagship library for the city of Rockville, 640 residential units and office space.

“Mixed-use developments are difficult,” says Wood. “They are fraught with so much more risk than an L-shaped strip shopping center. That risk comes from everything: how you put together the land, how you get it entitled, how you work with the community, city, county and state. It is hard for me to imagine how anybody doing this for the first or second time can be good at it. Because the costs are so high, the only way to make mixed-use town centers work is to have a market surrounding them with high population density, a high degree of affluence and significant barriers to entry. They don’t work in smaller communities.”

Federal Realty’s Pentagon Row project in Arlington, Virginia, mixes local, regional and national retail, as well as other uses.

Federal has concentrated its mixed-use practice in affluent, suburban areas. While the company works with the municipality to gain acceptance, it also makes sure it is tailoring the property to the community’s needs. At Pentagon Row, in Arlington, Virginia, for instance, Federal responded to the community by mixing local retailers in with national retailers. With Fashion Centre at Pentagon City mall nearby, the area was already inundated with national retail, and the community wanted more regional and local retailers and restaurants to create a sense of place. Federal also builds its properties from the perspective of a long-term owner and operator of property. As such, it can make changes to the properties as the surrounding community evolves over time.

“What has made us successful with our mixed-use projects is that our team understands the property type,” says Wood. “They understand that what we are really selling, when you cut through everything, is a very strong, growing income stream. We are building with a 30-year horizon.”

Building Additional Value

Bethesda Row continues to be one of the most admired mixed-use town center projects in the industry.

When Federal acquires a property it looks for centers that have adjacent parcels of land available. For instance, at Mount Vernon Plaza in Alexandria, Virginia, and Bethesda Row in Bethesda, Maryland, the company acquired adjacent land to capitalize on future development opportunities due to the additional value created at the existing centers.

“What we acquire as adjacent land, which could look unattractive now, could end up being 10 stories in the air with service retail on the bottom and multifamily on the top in a few years,” says Wood. “There is incredible opportunity in these adjacent properties.”

One of Federal’s talents has always been maximizing the value of its existing portfolio. While it may renovate or redevelop properties as opportunities present themselves, it is constantly changing the tenant mix in its portfolio. Adding new tenants that enhance sales across the center as other tenants leave is top of mind for the company’s leasing staff. In addition, the company always looks for development opportunities on existing properties. At Congressional Plaza in Rockville, Maryland, for instance, a pad site located in the front of the center with visibility to Rockville Pike was re-leased at a significant premium. Because of that one lease, the center is now worth $6 million more. To show the difference 5 years can make, when SCB last visited with Federal Realty in 2002, Congressional Plaza, which was fully leased, had net operating income of $6.9 million annually. Today, that center, which has had no renovations or redevelopment in that 5 years, has net operating income of $10 million. Federal is able to get the rent increases because the center is one of the most popular in the area.

“We are trying not to leave things on the table when looking at our portfolio,” says Wood. “Our leasing and development staff is trained to look for value where others might not see it.”

Further down Rockville Pike, Federal Realty also owns Federal Plaza. The center was last redeveloped in 1991. Like Congressional Plaza, it is one of the best performing community centers in the company’s portfolio. Through new leases over the last 5 years, the company has increased the net operating income of Federal Plaza by $1.3 million.

“How is this still happening?” asks Wood. “Because our constant focus is on remerchandising the center in response to changing community needs.”

Even at its community centers, Federal Realty has experimented with multi-use. At Congressional Plaza, an apartment building was added behind the center that generates top of market rents due to its location. The apartments are 100 percent leased, with rents starting at $1,800 for a one-bedroom unit.  This opportunity boasts the net operating income another $1.5 million.

Federal Realty is currently adding a ninth phase to its Bethesda Row project in Bethesda, Maryland.

“We saw a great location in back of the center,” says Wood. “Sure it is in the back of a shopping center, but if we can make it look and feel good, we have a place that has amenities that other apartment owners can’t get.”

Federal Realty has also continued to improve its successful Bethesda Row project as well. The mixed-use project in downtown Bethesda, Maryland, is currently adding a ninth phase, which includes additional residential and retail space featuring 180 unique apartment and loft homes and a mix of local, regional and national retailers and restaurants. Shopping Center Business first covered the project in 1996, when Phase I was just completed. New retailers, like Apple Store, J. McLaughlin, Blue Mercury and Le Creuset continue to join the project. Federal also continues to improve the operations of the center. It recently began an environmentally friendly way of disposing of cooking oil from the restaurants to create biodiesel fuel. While it’s a green method, it also creates a cost savings to the restaurants as well.

“This district has received national, if not international, acknowledgement from retailers and other developers,” says Tschiderer. “It requires a lot of collaborative effort between the city and us, to achieve this high degree of success.” 

Conceptual Redevelopment

When the opportunity is right, Federal Realty renovates and redevelops assets in its portfolio. The company recently completed the redevelopment of its Eastgate Shopping Center in Chapel Hill, North Carolina. The redevelopment features a new name, The Shops at Eastgate, a new grocery anchor, Trader Joe’s, re-merchandised small shop space, a façade renovation and site improvements which all contribute to repositioning the center in the marketplace.

One of the largest redevelopments for Federal Realty will be a multi-year process involving its Mid-Pike Plaza in Rockville, Maryland. For 30 years, Federal has operated the center on leased land. Federal recently acquired the land from the previous owner.  Federal is in the process of developing plans for a major mixed-use center at the site. Taking advantage of its recapture rights of the retail tenants in 2010, Federal has preliminary plans to create a vertical, mixed-use center on the property that will have six to seven buildings. “There is huge future opportunity at Mid-Pike Plaza,” says Wood, “the site has the potential to create over $150 million of value for the company over the next 10 years.”

Like Mid-Pike Plaza, Federal Realty has a number of projects in what it calls a “conceptual” phase; existing centers that it wants to completely redevelop or add significant new components to.

“The idea is to create a steady flow of redevelopment with a pipeline that is sustainable,” says Blocher. “We also want to have a consistent portfolio that performs better than our peers. We’re earning a great yield on our basis in these assets now, while many of them of are waiting for higher and better uses.”

Federal Realty developed the successful Santana Row project in San Jose, California, as an upscale town center.

Included on Federal’s list of future additional development is Santana Row, Federal’s project in San Jose, California. The project has the potential to add future phases of mixed-use development when the timing is right. At its Bala Cynwyd project in the Philadelphia suburb of Bala Cynwyd, Pennsylvania, Federal Realty plans to eventually redevelop 9 acres of the center into a transit-oriented mixed-use project or retail center. And, at its Assembly Square project in Somerville, Massachusetts, Federal Realty is in the entitlement process for a 42-acre mixed-use development to include retail, residential, office and hotel space.

Operations First

Federal has bolstered the staff of its offices in Philadelphia, Boston and California, adding strong and experienced development, leasing and management talent.

“If we are going to operate our centers differently, and look at opportunities that develop in the portfolio differently, we have to have people who really believe in what we are doing,” says Wood. “We need to have people who understand how to accomplish our goals. Our leasing people have to understand value and how it relates to our financial model. They can’t come here just because they want to work on a great mixed-use development.”

While Federal Realty is a strong developer, Wood stresses that the company is first an operator, then a developer.

“We are great operators of great assets,” he says. “That’s where re-leasing and merchandising comes in. We create a lot of growth just by appropriately operating our existing centers. We supplement that growth with development and acquisitions. Both of those are obviously huge pieces of our business, but primarily we are not a developer, we are owners and operators of great real estate first and foremost.”