PRINT THIS STORY:

CHANGE TEXT SIZE:

Federal taking it to the streets in San Jose

By John Dube

A strip center in San Jose, Calif., is being razed to make way for the 40-acre Santana Row.

Federal Realty, Rockville, Md., has started work on its largest street-based development ever — a sprawling mixed-use development in San Jose, Calif., that is expected to draw national and local retailers alike.

But size is not the only unusual aspect of Santana Row, the name given the $600 million, privately funded project. Though striving for a downtown look and feel, Federal Realty's "urban village" will be built from the ground up in a location that is several miles from San Jose's downtown. The company is tearing down an aging San Jose strip center — Town & Country Village — at Stevens Creek and Winchester Boulevards to make way for the 40-acre development, which will combine 575,000 square feet of retail space with 1,200 residential units.

"Our job is to spot retail trends and then help provide the kind of place that customers want to shop in, in a location where customers want to shop," said Steven Guttman, president and CEO of Federal Realty. "We're in a return to a Main Street shopping kind of spirit, a return to what we had before."

With many U.S. retailers turning to the country's downtowns for expansion, Federal Realty Investment Trust has focused for much of the '90s on the revitalization of Main Street shopping districts (SCT, January).

"There's still a place for shopping malls, but I think shoppers today would very much prefer the experience of a great shopping street," Guttman said. "That said, I really don't think there are many to be found."

There are not many streets like Beverly Hills' Rodeo Drive or Chicago's Magnificent Mile. But Federal Realty thinks it has it figured out.

"To create the street experience from scratch is definitely a challenge, but we feel we're up to the challenge," said Guttman.

That confidence comes from Federal Realty's 38 years of experience in retail development and management. The company's real estate portfolio contains more than 120 retail properties consisting of neighborhood and community shopping centers and Main Street retail properties located in metropolitan markets across the United States — such as Bethesda Row in Bethesda, Md., and Third Street Promenade in Santa Monica, Calif.

That experience has translated into 32 consecutive years of increased dividends for shareholders, including a record performance last year that brought a 10% increase in funds from operations.

So, Federal Realty is not second-guessing its strategy now.

"We're looking for areas that have a limited supply but a clear demand," said Ron Kaplan, the company's chief investment officer. "We think San Jose fits that to a tee. San Jose is a very dense community that is underserved by retailing. So, from our standpoint, we have the chance to create something really long-lasting in the community that fills a need."

What Santana Row has going for it right out of the gate is a location in the heart of Silicon Valley with some extremely desirable demographics. Within a 10-mile radius, more than 100,000 households have an income exceeding $100,000; by 2002, the average household wealth within the same radius is projected to be almost $200,000. Santa Clara County, home to 1.7 million people, ranks No. 1 in California in retail sales per household — and spending is expected to grow 21% by 2002.

"San Jose represents a significant opportunity for a project with a four-block long street," said John Hannigan, managing director of the project for Federal Realty. "This project is bigger than anything else we've ever done, but we acquired this property knowing it's a great location, the best we could find in California, probably in the country."

So optimistic are Federal Realty executives about the potential for growth in this market that they are unconcerned about Westfield America's 1.1 million-square-foot gross leasable area Valley Fair Shopping Center next door, one of the country's top-producing malls.

The two shopping complexes are substantially different, according to Nate Fishkin, Federal Realty's director of street retail. Fishkin describes Valley Fair as a successful but straightforward shopping mall with the typical mall tenants, while most Santana Row tenants will be more commonly found in street stores rather than malls.

"I think we'll have the slightly edgier and more creative retailer that will appeal to more sophisticated shoppers," said Fishkin. "Our strategy is to go for a real mix of retailers that includes service tenants, local and regional retailers, together with some national retailers. That will really make this place different and special."

So far, however, Federal has not named any of its tenants. The development plans include a premium, 200-room hotel; an eight-screen movie theater; between 15 and 20 diverse restaurants; neighborhood services such as a grocery store, dry cleaners, shoe repair and a barbershop; small parks, gardens, plazas and courtyards; cafes; and a children's play yard.

The plans include the possibility of three or four anchor stores — Federal Realty says it is talking to some major retailers but none are signed up yet — but the company downplays the significance of those national chains in its strategy. More important to the personality of the development, executives say, will be the blending of local and regional stores, which will include art shops, ethnic restaurants, a furniture store and various local boutique stores.

With its open plazas and courtyards, and a little entertainment mixed in, Santana Row is designed to appeal to shoppers as a destination for socialization and amusement in addition to shopping.

"We're trying to create an experience, a fun place to go, whether it's for people-watching or just for walking around," said Kaplan. "We want people to feel like they're part of a downtown while they're here."

"There's no question that we think this will be a destination for people on the weekends," said Fishkin. "We think people will come from as far as Monterey or Carmel to shop and forego the trip to San Francisco."

Of course, it won't hurt having 1,200 new residential units next to the retail complex, comprising a mixture of townhouses, lofts, apartments and luxury apartments.

But the housing portion of the project is not needed to ensure success of the retail component, according to Hannigan. Federal Realty decided to add a residential component after being impressed by the acute demand for additional housing in the San Jose area, even though the firm has not built homes before.

"It's a little more expensive than doing the retail component alone or the housing alone," said Hannig an. "But we think the synergy and value created by the combination of the two make it worth the extra cost. It's a significant opportunity for us."

The project was scheduled to get under way this spring with the demolition of the strip center. Grading of the site will start during the summer, and the retail development is expected to open for business in 2002.

"This is not just a one-shot deal for us; our strategy is to create great streets of retail, and it's a niche we intend to be the best at," said Hannigan. "We're creating a shopping environment that is unparalleled in the San Francisco Bay area and, really, in the United States."