For almost three decades, Rockville, Md.–based Federal Realty Investment Trust, a REIT specializing in the ownership, management, development, and redevelopment of retail assets, owned Mid Pike. The 24-acre shopping center, with a CVS Pharmacy, Bally Total Fitness, Quizno’s Subs, ?and other suburban staples, sits less than a quarter mile from the Red Line Metro subway stop ?in White Flint, Md. But last year, Federal got the property rezoned into what it hopes will be a top-notch mixed-use community with 1.7 million square fee of retail and more than 1,500 residential units. “The idea is to take the shopping center and turn it into a town center with very good urban, pedestrian-friendly blocks,” says Evan Goldman, vice president of development at Federal.
In hotter markets, like Washington, D.C., developers that are known for building office and retail are adding multifamily to their menu of options. In some cases, it’s not a new product type for them. In other instances, as with Washington-based Combined Properties and Houston-based Hines, multifamily is a new business for 2011.
As a result, some multifamily developers wonder if they’re getting crowded out. Office builders contend that isn’t the case. But there’s no doubt that everyone is trying to capture value from multifamily buildings.
“Everyone who is in the development industry is seeing that multifamily is the predominant opportunity,” says Greg Bonifield, a principal with Arlington, Va.–based developer Woodfield Investments. “They’re just getting more and more competition every day in the multifamily development world.”
Case-By-Case Basis
For Federal, the decision to redevelop wouldn’t have been feasible without some other sort of use. “It’s really a successful shopping center today,” says Goldman. “So we couldn’t justify tearing down that center and just building a retail town center without anything above it.”
With the strong rental market in the nation’s capital, rental certainly made sense. Though Federal owns about 1,000 units of multifamily, it doesn’t always build its own. Sometimes it works with partners. In two of its signature Arlington, Va., projects, it pulled in big names in multifamily development, using Atlanta-based REIT Post Properties at Pentagon Row and Greenbelt, Md.–based owner, manager, and builder Bozzuto Cos. at Shirlington Village. Even now, it’s partnering with Arlington, Va.–based REIT AvalonBay Communities at its Assembly Row mixed-use development in Somerville, Mass. The development is slated to include 1.7 million square feet of office space, 500,000 square feet of retail, 2,100 units of housing, a hotel, and a 340,000-square-foot IKEA furniture store, according to The Somerville Journal.
“While we think it’s a great property, it’s an unproven destination,” says Andrew Blocher, senior vice president and CFO at Federal. “In a situation like that, the risks associated with that put us in a position where we’re a lot more comfortable bringing in a residential partner.”
In Santana Row, in San Jose, Calif., Federal has more than 300 units of its own real estate coming on line. Right now, residential represents only about 4 or 5 percent of its rental income, but Blocher could see this number doubling as new projects come on line. The company only builds apartments where it’s already planning or has retail. Even then, the residential must fit into Federal’s risk appetite.
“It depends on the unique risks in opportunities that come along with specific residential development,” Blocher says. “Mid Pike is a great established residential environment in the D.C. area. Mid Pike shopping center has been there forever. We understand it’s a great infill location. As a result, we’re more willing to take on the residential exposure.”
Other Developers Move In
Hines started its multifamily program in January, bringing Alan Patton, president of The Morgan Group, a Houston-based multifamily developer, builder, and property manager, to lead the effort as senior vice president. “Over the next seven to 10 years, the multifamily space looks to be a really tremendous opportunity,” Patton says. “We have 2,200 people in the U.S. in all of the major cities. We’re trying to leverage off of our existing platform.”
What Retail Knows
Combining retail and multifamily may sound easy on the surface, but those in the business say there are nuances that need to be recognized to ensure success. Here are three:
Vent carefully: Having the restaurant downstairs is a huge draw for apartment residents. But they’re quickly turned off when the eatery’s odors start to creep into their units. “You have to plan the venting up front,” says Evan Goldman, vice president of development at Federal Realty Investment Trust.
Start early: Federal isn’t breaking ground on its Mid Pike project for a year, but it’s already lining up retailers. “That’s so we can start designing a building around what these retailers need because they’re each so unique,” Goldman says.
Know your market: Federal looks for areas with high incomes and barriers to entry. It then studies what retail that community needs. “It depends on what does that specific site need in order to differentiate itself,” says Andrew Blocher, senior vice president and CFO at Federal.
Hines, which has built condos in the past, also added outside multifamily people from other companies and plans to take a merchant-build model into 15 or 20 cities over the next three years. Right now, it has five deals in the pipeline and plans to add two or three more by mid-November. It also has the massive City Center project in Washington, D.C., where it partnered with Denver-based Archstone. But that sort of partnership may be a thing of the past. Ultimately, Patton thinks the company will be doing between 2,000 and 4,000 units per year. “This [apartment development] is not a temporary initiative,” Patton says.
Washington-based Combined Properties isn’t actively seeking apartment land yet but is converting two existing retail buildings in the D.C. area into multifamily buildings. More could follow.
“A couple of the sites we have are more attractive [for multifamily] because the areas have grown up around them,” says Marianne Lowenthal, EVP of development at the firm.
Sometimes, office developers do want to bring multifamily developers on board for the residential portion of their deal but, for one reason or another, it doesn’t work out. For instance, in 2007, Boston Properties had McLean, Va.–based apartment owner, manager, and builder Kettler on board for Square 54, a mixed-use property in Washington, D.C., but it was at the height of the Great Recession. The deal didn’t go through. “We were co-developers at Square 54 with Boston Properties,” says Bob Kettler, Kettler’s CEO. “We sold our interest to them because our partners didn’t want to go forward with land.”
The project, which is in lease this year, is a hit, according to Grant Montgomery, a vice president at Alexandria, Va., real estate consulting firm Delta Associates. “It’s leasing up at really high rents and absorption,” he says. “It’s one of the few projects delivering this year in D.C.”
That kind of success could only serve as impetus to bring more office developers into the market.
Multifamily Reaction
Now that the multifamily ship has righted, Kettler says he’s back out talking to office and retail developers about mixed-use projects. “They’re building mixed-used in intense areas where housing and employment and high-end retail and transit are co-existent,” he says. “If they have land or portfolio or parking lot, it frequently works to be part of a mixed-use project.”
In fact, Kettler estimates that mixed-use elements create a 5 percent premium in the value of the apartment. “One of the things we’ve come to realize in mixed-use is that the retail adds a lot more value than the other uses provide to the retail,” Blocher says.
Missing out on that type of value creation could be why some multifamily developers privately express concern that retail developers will push more fully in the apartment development space. And by doing development themselves, they’re taking away opportunities from multifamily developers.
“More people in the marketplace doing what you do is competition,” says one multifamily developer who didn’t want to be quoted for this story.
The retail view, though, is if they’re creating value with the restaurants, bars, entertainment, and retail, why not enjoy that value?
“If we create the lifestyle and the community, then we can capitalize on the value of the residential,” Goldman says.
Even if a company like Federal decides to build its own apartments, there’s still room for a pure apartment guy, eventually. Federal still uses apartment managers to run its apartments once they’re built.