Federal Realty Investment Trust shares lessons learned from developing office space in urban-style mixed-use projects.
WHEN FEDERAL REALTY Investment Trust broke ground on Santana Row in 2000, it set out on a bold mission to transform a drab suburban shopping center in San Jose, California, into a retail, entertainment and residential district boasting a robust urban character. Two years later, just after a huge fire destroyed part of the emerging project, restaurants and apartments as well as local and luxury retailers opened. A hotel, movie theater and condominiums were on the horizon. It appeared that the company was on its way to achieving its vision but for one hitch: Some 50,000 square feet of second-floor retail space had failed to elicit interest.
It turned out to be a worthwhile hiccup.
Federal Realty revamped the space and filled it with office users, and it wasn't long before the office tenants began talking about how much they loved working at Santana Row, with its amenities and public spaces just a short stroll away. The developer originally hadn't envisioned including offices in the project, but it retooled its plans to make room for more daytime users and opened a 65,000-square-foot office building amid the Great Recession in 2009. Despite the tough times, tenants filled it.
Confident that office demand for mixed-use locations would keep increasing, Federal Realty incorporated office buildings into the first phase of its next two major projects. At Assembly Row, on a former brownfield site in Somerville, Massachusetts, the developer speculatively built and opened a 100,000-square-foot office building in early 2015 alongside restaurants, outlet stores, a 12-screen AMC Theatres, a Legoland Discovery Center and a riverfront park. Two additional city blocks under construction in late 2016 will more than double the number of residences at Assembly Row, from 448 to approximately 1,017, while adding an Autograph Collection hotel and more street-level retail space — plus more than 800,000 square feet of additional office space.
Federal Realty constructed 80,000 square feet of offices at Pike & Rose in North Bethesda, Maryland, a former strip shopping center surrounded by acres of parking. The mixed-use development began opening in 2014 and currently features 493 rental residential units, restaurants, shops and an eight-screen iPic Theaters. Its second phase will nearly double its size. New luxury apartments and condos, the premiere of Canopy by Hilton and additional street-level retail space will unfold in 2017 and 2018.
The office buildings at all three of these developments are fully occupied and, in Federal Realty's view, the message could not be clearer: Office users are rejecting traditional suburban offices long on cubicles and surface parking but short on conveniences, except for the occasional nondescript deli. Mirroring a paradigm shift that has fueled housing demand in "live, work, play" environments to enhance quality of life, corporations are seeking urban-like campuses where associates can walk to a cafe, movie, clothier or gym, or have a dinner with out-of-town clients staying at a hotel down the block. Robust internet connectivity that turns common area "living rooms" into ancillary workspace during and after business hours is a must.
SmartBear, an international software company, occupies the entire top floor of 450 Artisan Way at Assembly Row in Somerville, Massachusetts. Having relocated from a northern suburb, SmartBear is now closer to where today's talent lives, has access to transit one block away and provides its 130+ employees with a range of amenities directly below their offices.
"Workers today want to be in places where they feel good and that provide them quality services," says Montgomery County Councilmember Roger Berliner, who worked alongside other officials and developers on a broad redevelopment plan that laid the groundwork for Pike & Rose. "So these projects are really the future of commercial as well as residential development."
Demand supports that prediction. Partners HealthCare, Massachusetts' largest private employer, recently began consolidating 4,500 Boston area workers into an 800,000-square-foot building at Assembly Row. At Santana Row, Federal Realty is completing a 234,500 square-foot building, which it began speculatively, that big data analytics company Splunk will occupy in January 2017.
At both Assembly Row and Santana Row, office buildings are designed to knit into the fabric of the location, opening up to the street and incorporating restaurants, retail and entertainment uses and amenities like banking and fitness at their foundations. Plazas and open spaces are critical elements that allow the office experience to blend seamlessly into public spaces. They are purposefully not designed to be single-use buildings; the shared uses, with retail space and other amenities at the ground level, enhance the office worker experience.
Locating in mixed-used developments owned and controlled by a single landlord provides companies with consistent surroundings. Perhaps most importantly, employers increasingly view these properties as "urban/suburban" corporate campuses that can give them a recruiting edge. That's particularly true in the San Jose, Boston and Washington markets, where corporations fiercely compete for workers in technology, finance and other fields that require high levels of knowledge and skill.
While very few corporate behemoths like Google, Apple and Amazon can afford to build multi-billion dollar campuses chock full of amenities, other companies are still battling for the same workers, observes Ben Coffin, an executive vice president with JLL and an Assembly Row office leasing agent. "Companies competing for that type of talent have to use every advantage, and office space is a major recruiting tool. So for companies that can't afford [a pricey Boston-area submarket like] Kendall Square, locations like Assembly Row are fantastic alternatives."
A Proven Product
The increasing development and popularity of urban-style mixed-use projects have paralleled an emphasis on reining in sprawl by creating dense, pedestrian-friendly communities where residents can connect with their neighbors in nearby cafes or common areas without driving.
Similarly, from the perspective of office users, mixed-use developments provide employees with more opportunities to physically engage with one another, encouraging "constructive collisions" that lead to collaboration and new ideas. Those interactions have traditionally been associated with workers escaping their isolated cubicles and gathering at the water cooler. But in mixed-use developments, they may also take place on an office building's rooftop or upper-floor terrace garden, or in one of several outdoor spaces surrounding the building. (Some of those spaces may be reserved for tenants, while others are shared by the public.) Splunk's new headquarters at 500 Santana Row, for example, will include top-floor outdoor terraces. Federal Realty also plans to build rooftop gathering places and open collaborative spaces for future office development at Santana Row.
To a large degree, millennial workers are driving the evolution in how employers think about office location and design. Born roughly between 1980 and the early years of the new century, millennials favor working and living in places where restaurants, entertainment and other conveniences are within walking distance or a short commute, according to the "2015 Community & Transportation Preferences Survey" conducted by the National Association of Realtors and the Transportation Research and Education Center at Portland State University.
In fact, 40 percent or more of millennials in the Boston, San Francisco and Washington areas ranked the proximity to work as the second most important reason they live in those cities, according to "Millennials & Mobility," a survey released by the American Public Transportation Association in 2013.
Living out those preferences, millennials have flocked to downtowns over the last several years. But as they mature, marry and have kids, they are migrating out of the urban core to take advantage of schools and parks in established inner-ring suburban neighborhoods. They still want an urban vibe and amenities, however, and they're finding them in nearby mixed-use developments in the suburbs.
Conversely, as millennials continue to move out of CBDs, employers that locate in suburban mixed-use projects will be closer to where their workers and potential recruits live. Some employees may even rent apartments in adjacent buildings. In fact, the office tenants that occupy 450 Artisan Way in Assembly Row largely moved from suburban office parks or similar locations and were willing to pay a little more rent in return for proximity to their workforce and talent pool.
Splunk Inc. is the newest addition to the Santana Row campus, occupying 234,000 square feet of office space at 500 Santana Row in San Jose, California. The company's new Silicon Valley office is located just steps away from health and wellness, entertainment, retail, dining and business amenities.
Splunk anticipates that many of its employees will relocate to Santana Row from its San Francisco headquarters, says Ken Tinsley, a spokesperson with the firm. But it also expects that the location will "provide a differentiating work experience and will create a substantial draw of new employees from South and East Bay communities," he adds.
Along with plans to expand retail, entertainment, housing and lodging in its mixed-use projects, Federal Realty has the ability to add more than 2 million square feet of office space across these three properties, the bulk of which is slated for Assembly Row and Pike & Rose. One of the challenges that any developer faces when incorporating offices into mixed-use settings is making sure that the product fits the market while complementing the neighborhood.
At Santana Row, for example, Federal Realty used a concrete frame rather than steel to build Splunk's future six-story headquarters. Along with details such as unfinished ceilings, the structure matches the industrial look and atmosphere that tech tenants have gravitated toward in San Francisco's South of Market Street submarket. The concrete frame also facilitated the construction of large floor plates of nearly 40,000 square feet with high ceilings that create lighter and more airy space, a definite office requirement for tech companies as well as a growing number of other firms that want an open environment.
Because suburban office tenants have had few choices outside traditional office parks or corridors, it's not unusual for some to hesitate when mulling a move into a mixed-use environment. Splunk was apprehensive about the idea until it familiarized itself with Santana Row, Tinsley says. "It became evident very early that 500 Santana was an excellent balance of Class A space and first-class amenities, which together would provide our employees with a rich work/life experience."
Potential tenants also frequently voice concerns about whether they'll have enough parking. Those worries typically dissipate once they envision the potential for reserved garage parking during the day. Office leases are structured in various ways to handle parking. For example, the lease may include a specific number of parking spaces, consisting of a portion or the entirety of a garage. It could include an agreed upon parking rate, up to a certain number of spaces. Or parking may not be included at all. The answer to the question, "How is parking handled in a mixed-use environment?" is always "all of the above."
Typically, any tenant-designated parking spaces are located in one area of the garage associated with that tenant's building. They are reserved for office use on workdays. Non-office tenant parking is permitted outside of workday hours and throughout the weekend, when the retail demand peaks. This creates great synergy and co-use between work and play. Similarly, presenting well-designed traffic flow that allows workers to easily enter and leave a shared garage also alleviates office tenant apprehension.
Proximity to mass transit, where available, is only growing in importance among suburban office employers as a recruitment tool. Recognizing that, Federal Realty contributed $15 million to a station for the Massachusetts Bay Transportation Authority (the "T") at Assembly Row, and Pike & Rose sits one block from a stop on a Washington Metropolitan Area Transit Authority Metrorail line.
Public transportation is so critical that Partners Healthcare may have passed on moving to Assembly Row without it, suggests Joseph Flaherty, a managing director with JLL, who also represents the property. "All the amenities Federal Realty is putting in are what cool young office workers are looking for: restaurants, bars, entertainment, a riverfront park and health clubs. But the key was that it built the T stop directly on the site."
As young office workers seek mixed-use projects in inner-ring suburbs, these clusters will become their new urban playgrounds and, possibly, job sites. But these developments will also act as bridges that link the suburbs to city centers, which will allow employers to tap talent still living downtown as well as in the suburbs. Assembly Row is a mere three miles from downtown Boston, for example, while Pike & Rose is about five miles from downtown Bethesda, Maryland, and 14 miles from downtown Washington.
As developers survey the evolving mixed-use landscape and think about the future of office buildings in these projects, they'll likely have to contend with the challenges that today's trends are creating. The amount of office space allocated per employee is expected to slide to only 151 square feet in 2017, a nearly 33 percent drop from 2010. On the other hand, the growing desire for larger floor plates—some as big as 50,000 square feet—and wide-open environments filled with natural light are leading designers to create more meeting spaces outside a building's walls as well as inside.
Mixed-use developments at their essence are designed to accommodate those trends by offering office users parks, common areas and other public spaces where associates can meet and collaborate. They do this all while feeding off the energy of a genuine urban street just steps away.