USQ Developer Research: San Jose

The fourth and final day of the Union Square Due Diligence Trip found the delegation in San Jose, California. We were excited for the sunny skies, but even more excited to see what Federal Realty and National Development had in store for us.

Upon entering Santana Row, there was a clear vibrancy to the development. People were walking everywhere, with sidewalk cafes and restaurants packed to the brim. The creative use of space along the island through the center of Santana Row drew crowds of people of all ages – there was a wine bar, frozen yogurt shop and various seating arrangements that encouraged people to sit outside. There is even a chess playing area, where young children gathered around to play with the life-size (well, life-size to the children!) chess figurines.

After seeing the development first-hand, we sat down with the Federal team to probe further and ask a few questions. Here are a few things that we learned:

Santana Row used to be an old Town and Country shopping center. Federal Realty purchased the property, which lies a few miles outside of downtown San Jose, because of its location to nearby retail, including a productive mall across the street. There was a great opportunity to build off existing retail – through adding additional retail, restaurants, and residential – in order to generate the critical mass necessary for subsequent office developments to thrive.

When Federal first opened Santana Row, they didn’t quite understand the market. Federal candidly recognized a key mistake: they were designing Santana Row from a distance (from Maryland) without fully understanding the local market. When Santana Row first opened, it included very high-end retail (think: Rodeo Drive), which San Jose residents, despite having very high household incomes, did not value. Federal learned from this and adjusted in two ways: first, they revamped the complex to include stores at a more approachable price point; and second, they opened an office in San Jose to put boots on the ground in order to really understand the local market and integrate into the local community. Learning from this, the Federal team now has staff in each of their major markets.

Their approach to office development at Santana Row resulted in part due to the failure of second-floor retail. When they couldn’t lease second floor retail to anyone, they converted the space to office (non-traditional office spaces, not class-A). This office space was approachable to San Jose startup companies, and many have thrived in the Santana Row development. Three have even gone public since moving to Santana Row. The success of the office space, supported by the surrounding amenities, has enabled Federal to build additional, more traditional office space that is drawing larger commercial tenants. Federal expects to have 1.4 million square feet of commercial space at the completion of Santana Row, broken down as follows: 439,000 square feet retail; 122,500 square feet restaurant; and 845,000 square feet office.

At no point did Federal need to utilize the power of eminent domain to obtain property for Santana Row. Where the team did not purchase land directly through private sale, they’ve found alternative solutions. For instance, where Federal plans to build Santana West, a large commercial component to Santana Row, Federal has negotiated with three separate families to secure 99-year ground leases in order to make the project successful without obtaining actual ownership of the property. A similar approach could be used in Union Square, they say.

One of the most impressive things about Federal Realty and National Development was their frankness and candor when asked challenging questions. The team has been willing to admit when they’ve made mistakes and explained to the Due Diligence team how they’ve learned from those mistakes. While the type of development at Santana Row is likely not what we would expect in Union Square (Federal admitted that the Bethesda Row project is much more similar to Union Square for its urban location and infill component), there are a lot of lessons to take from the San Jose development that are applicable to Union Square, especially as it relates to growing the commercial tax base.

The Due Diligence team wrapped up its trip in San Jose and headed back to Boston. Next on the agenda is to meet with the Abbey Group and tour a couple of its projects here locally. Be sure to follow along as we keep you informed about the process!

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