Federal Realty turns off main street

The real estate investment trust announces a shift back to focusing on conventional suburban retail properties, citing the greater risks and need for patience inherent in urban, mixed-use projects. Under the leadership of chief ex- ecutive Steven Guttman, Federal Realty has been a pioneer in the development of pedestrian-oriented, mixed-use retail projects. The company’s portfolio includes Pentagon Row in Arlington, Virginia; Bethesda Row in Bethesda, Maryland, and the mall redevelopment Santana Row currently under construction in San Jose, California. Federal Realty’s commitment to these properties does not appear to be in jeopardy, but the company will no longer pursue similar opportunities. The change in business plan coincides with Guttman’s announcement that he will retire by March 2003. His last year at Federal Realty will be devoted to getting Santana Row up and running, Guttman says. He is expected to stay on as chairman of the board when Donald Wood takes over as chief executive officer. As publicly traded companies, real estate investment trusts (REITs) typically stay with conservative, low-risk investments that generate a steady cash flow. Shareholder demand for short-term returns makes it difficult for REITs to develop capital-intensive, mixed-use projects. However, since 1994, when Federal Realty established the Street Retail Inc. subsidiary, the company has demonstrated a willingness to take on those risks, and its confidence in main street retail set an example for other large-scale developers. The new business plan sends a different message. Guttman told shareholders in mid-March: “As much as I believe in the viability and success of these developments, I also realize that it has become very clear that ground-up, large-scale developments such as these have vastly different risk/reward characteristics from our core operating portfolio. Specifically, they require more patient capital.” The company will now focus on investing in what it calls “ neighborhood and community shopping center properties, either through acquisition or redevelopment. This marks a return to the approach that made Federal Realty one of the most successful REITs in the nation with $1.8 billion in assets. The change in strategy has caused concern in Atlanta, where Federal Realty has yet to begin its 300,000 sq. ft. retail portion of Lindbergh Station, the mixed-use, transit-oriented development in Buckhead. Federal Realty told the Atlanta Journal-Constitution that it plans to go ahead with the planned development, scheduled to begin construction in the fall of 2003. “We have every hope and expectation that Federal will stay with Lindbergh Center,” says Chuck Konas a senior project manager with master developer Carter & Associates. A broader concern is that Federal Realty’s about-face will have a ripple effect, scaring other developers away from mixed-use, urban retail projects. But privately-owned development companies with different investment priorities will not necessarily face the same dilemmas as Federal Realty. The company may have strayed too far outside its expertise, observers note. Federal Realty’s experiment with building and developing main street retail began with the comparatively small and uncomplicated Bethesda Row, according to John Gosling of RTKL, which designed Pentagon Row. That project, a full-scale “lifestyle” center with 300,000 square feet of retail and 500 apartments, proved more challenging, and Santana Row is even more ambitious. “If you are essentially a retail developer like Federal, the multiple land uses, the lack of guaranteed income, and the many variables take some getting used to,” Gosling says. “ [Federal’s change of direction] is a bit of a setback,” he adds, “but the lesson is that we have to be smarter about educating clients. Once you make the commitment to this kind of project, you’d better know the business,” both the retail and residential side of it. “It all has to do with the implementation and management, not the design,” Gosling says.