➤ Mixed-use properties with retail, residential and office components are increasingly popular among developers and consumers, but such properties will — and should — have a different look and feel in every market, if they are to be successful.
➤ Coworking has a real value proposition, but a landlord should be cautious about those players it chooses to do business with and should carefully manage exposure.
Federal Realty Treasurer
and CFO Dan Guglielmone
Source: Federal Realty
Dan Guglielmone is treasurer and CFO at Federal Realty Investment Trust, a real estate investment trust that specializes in shopping centers in coastal U.S. states. S&P Global Market Intelligence caught up with the executive at the International Council of Shopping Centers' annual RECon event in Las Vegas to get his views on the conference's major themes. The following is an edited transcript of that conversation.
S&P Global Market Intelligence: There has been a lot of talk — at this conference, and at your recent investor day — about the rise of mixed-use commercial real estate and its importance in retail today. Let's start there.
Guglielmone: Mixed-use has always been a part of our strategy, and I would say we have great opportunities today in that arena at established locations like Santana Row in San Jose, Calif., and Assembly Row in Somerville, Mass. Right now, mixed-use represents about a third of our portfolio, and I would expect it to grow a bit. Our mixed-use is a bit different than others' definition of it. We don't think building an apartment building behind a center constitutes mixed-use, really. It's a more nuanced, finely tuned balance of work, live and play.
We'll be buying and expanding in other areas as well. [President and CEO] Don [Wood] has always prioritized balance. We won't go all-in on any one product type, and that includes mixed-use. The reason we think we've been so successful with mixed-use is precisely because we've built up a high-quality, stable core portfolio that generates about $600 million of EBITDA a year, that in turn provides us with a cost of capital that allows us to invest in our mixed-use properties.
Many of the multi-use projects being developed include at least some office space, and there's a lot of buzz around coworking at this event, and the new concepts emerging in that field. Could you talk about your appetite for risk related to office investment, given where we are in the economic cycle?
Our strategy around office tenants at retail properties, generally, is opportunistic but cautious. It depends on the market. We're very, very thoughtful in terms of credit, in terms of exposure and tenant mix.
At Santana Row, our largest tenant starting next year will be a Silicon Valley-based data company called Splunk. At Assembly Row, Partners Healthcare came in and built an 800,000-square-foot headquarters, where they consolidated 18 regional offices. PUMA North America is relocating its headquarters from the Somerville suburbs to our new Phase III, 300,000-square-foot space at Assembly Row.
The theme of our investor day was "1 + 1 + 1 = 4." We believe that when you create the retail environment at the base, people who live there and work there will pay you more because of the amenity base you've created. The model is also self-reinforcing. Now you've got a steady supply of day- and night-time traffic, and you can build a real and sustainable retail environment.
Retail landlords talk a lot today also about community and community-building, which sounds like what you're describing.
Mixed-use isn't really scalable. An individual property needs to serve an individual community's wants and needs. At Santana Row, the community demanded a casual and relaxed place to gather, which meant bringing in a significant number of restaurants. At Pike & Rose, a different theme emerged; it's environmentally conscious, with a strong entertainment and event component. Assembly Row, which we'd planned originally to make more luxury-oriented, turned out, in the aftermath of the recession, to be more value-oriented, so it has more outlets.
We also like to tie in the history of a community where we can. The sense of place we want to create really is going to be different at every center.
How focused are you on coworking? And do you think there are risks exposing yourself to the business model at this juncture?
We have coworking tenants that anchor our centers, but you need to be very careful with them. We think about credit, we think about exposure. Typically we wouldn't do a 300,000-square-foot deal with a coworking player, but maybe a 40,000- or 50,000-square-foot one. I don't think we're ready to have a coworking tenant be a top-five tenant at this point.
There's certainly a value proposition with coworking. Corporate users also like the flexibility, and they can bring a vibe to a center. But in general, the business model makes sense in some markets, and not so much in others.
Experiential retail has been another big theme here. Since everyone seems to have a different interpretation of it, can you describe what "experience" means at a Federal Realty center?
We actually have a 20-plus-year history of creating experiences, and we don't feel a need to change what we've been doing. "Experience" in our view emerges from a confluence of the particular mix of tenants and the attention paid to the particular community in the design of the center. Something like a movie theater can be an important offering, but experience elements will be different at each center.
Don't get me wrong — we've made some mistakes along the way. We have some mixed-use communities where, for example, we don't own the upstairs level. We realized later it was a mistake to relinquish control of that space. But hopefully you learn from your mistakes and don't make as many of them.