Federal Realty's Don Wood On Pausing New Development And Planning For Retail's Recovery

Federal Realty Investment Trust completed a new office building this summer and has more than $600M in ongoing construction projects, but it is hitting the brakes on starting any new development. 

Don Wood, CEO of the North Bethesda-based REIT with a $5B market capitalization, told Bisnow the uncertainty the pandemic has created for the retail and office leasing market has led him to hit the pause button on new groundbreakings.

"We have put a hold on new projects until we have some more clarity as to where we're going," Wood said. "It's the uncertainty of the length of the pandemic, the uncertainty of the decision-makers not only for retail, but for office and residential tenants effectively, and when there's more clarity, we'll have more clarity as to how to get going."

Wood sat down with Bisnow Thursday in the company's newly delivered 909 Rose office building at Pike & Rose, where Federal Realty moved its headquarters last month. The 11-story, 212K SF office building has landed one full-floor tenant in addition to Federal itself, and Wood hopes to lure a tenant to occupy all of the top four floors. 

The developer has projects already underway in Miami, San Jose, Darien, Connecticut, and Somerville, Massachusetts, that total more than $600M in investment, Wood said, and will proceed with construction. It will also continue to pursue shopping center renovations and tenant build-outs, but he said it will not move forward with new ground-up development until at least next year.

"Let's see a vaccine, let's see the behavior of people, importantly let's see the decision-makers who are now looking at a post-COVID world, let's see them start signing deals," Wood said. "That gives me a lot of clarity in terms of where we go next."

Wood said he saw a shift in August when tenants started worrying less about their day-to-day survival and began thinking more about their future plans. He said tenants are now having more discussions about long-term leases, as they understand it can take more than a year to open a new store or office, but he is still waiting for those talks to turn into signed deals.

"There's a lag between those conversations, the leases being done, designing your space, building out your space and then occupying and starting to pay rent, which is why these next few months are so important not only to our industry, but most industries, as Americans get their head around living with this and understanding what it might feel like on the other side," Wood said. 

The next few months will also be a pivotal time for retail, Wood said, because restaurants will have to navigate how to adapt their outdoor dining to the cold weather. He said he thought retail was oversupplied nationally before the pandemic, and the current crisis is accelerating retail closures.

Wood said Federal Realty is now bringing in about 80% of its rent collections, a number that has gradually increased since the spring. He said the company has made deals to help tenants get through the pandemic, but only in instances where the landlord thinks the retailer is well-positioned for the long term.

"Particularly tenants who were strong coming into this we want to make sure we remain partners, and that's how we view it is a partnership on the other side of this, we'll cut a deal for that interim period of time," Wood said. "A tenant who was struggling before this who's not likely to make it to the other side, our focus instead turns to new tenants that can come in and take over for that space."

"Certainly we will lose retailers," Wood said. "The key is not about losing retailers that were weak coming into this. The key is replacing them with the strong companies that will come out of this, and there are many."

Wood said the most active retail tenants he sees on the market are grocers and drugstores, and he also sees a surprising amount of activity from restaurants.

Federal Realty last month signed a deal with the founders of fast-casual chain Cava to open a full-service Greek restaurant in the 909 Rose building. The 3,600 SF deal for Melina — the restaurant was named after the chef's daughter — was fully negotiated and closed during the pandemic.

The landlord also signed a deal, announced Thursday, with Stellina Pizzeria at the Village at Shirlington development. Stellina's first location was in D.C.'s Union Market neighborhood. Napoli Pasta Bar, a restaurant with its first location in Columbia Heights, announced yesterday it plans to open a new location at Federal Realty's Pentagon Row in Arlington. 

Wood said he sees a pattern beginning to emerge of downtown restaurant owners expressing more interest in the suburbs. 

"I'm a bit surprised by the number of conversations we're having, not just in D.C. but throughout the country, with central business district operators that are looking at alternatives in the first-ring suburbs," Wood said. "Whether they turn into deals or not, or how many of them do, is yet to be seen."

Wood said this shift to the suburbs is not only because the pandemic has reduced activity in office-heavy downtown areas, but because this summer's protest demonstrations, which in some instances led to property damage, have made downtowns less appealing.

"If you go too close-in, boy with all the challenges in the inner cities right now, there is a big question as to who comes back to work, when they come back to work, do suburban people go into inner cities for dinners," Wood said. "All of those uncertainties sitting there right now do play to the advantage of the first-ring suburbs."

Federal Realty's portfolio is heavily concentrated in the suburbs, with major projects such as Bethesda Row and Pike & Rose in Montgomery County, Assembly Row in the Boston area and Santana Row in San Jose. He said he thinks properties in close-in suburbs are positioned to benefit from new demand coming out of the crisis. 

"I think the biggest difference you'll see is those first-ring suburbs, which can be the Goldilocks: not too far in, not too far out in terms of locations, will be the winners here," Wood said.