Mixed Use: A Mixed Bag
By Bruce Leonard and John Cumbelich
While mixed-use development is an aspirational goal for many communities and real estate professionals, the recipe for mixed-use success has been notoriously difficult to pin down. More accurately, while the recipe is straightforward enough, the execution is incredibly complex. From economic conditions to market context, and tenancy questions to timeless fundamentals, mixed-use success is heavily dependent upon variables that inherently resist a formulaic approach and solution.
When and where is mixed-use development a good fit? How important is the retail factor in the mixed-use equation, and what constitutes the “right” kind of street-level retail? Why is mixing uses so difficult to pull off, and what distinguishes the success stories from the failures?
Mixed-use opportunities
In the run-up to the last recession in the late 2000s, Wall Street prompted more than a few retailers to grow simply for the sake of growing. It became clear in the wake of the recession that many of those national brands had significantly over-expanded, leaving them with portfolios burdened with marginal locations with underperforming sales volumes. As a result, retail expansions have slowed while retail vacancies skyrocketed.
With retail development in flux as this industry-wide recalibration is taking place, there are more opportunities for redevelopment and strategic repositioning of both projects and retail brands. Many new brands—primarily dining and entertainment concepts—have begun to establish themselves as prime candidates for inclusion in high-quality mixed-use projects. With customer interest in the live/work/play lifestyle renewed, developers are adjusting to operating in denser environments where mixed-use is often more than a luxury—it is a necessity.
The demographic mandate
The transition from Baby Boomers to Millennials has also prompted a rekindled interest in mixed-use development. The Boomers have not been just a large and influential demographic, but a relatively monolithic one. Millennials, on the other hand, are the hot new demographic on the scene and are much more diverse in their preferences and spending habits. They tend to spend more discretionary income on food, dining and entertainment, and less on things. They prioritize experiences over stuff.
The retail difference-maker
In an increasingly robust multifamily residential marketplace, high quality finishes and high-end amenities have become nearly ubiquitous. For many mixed-use developers, retail is fast-becoming the differentiator: a deciding factor that can help with residential leasing and tenant attraction/retention. Consequently, the ability of street-level retail to represent the aspirations of the tenants who live or work above has become enormously important. Retail co-tenancy has typically been a horizontal relationship, but today mixed-use co-tenancy needs to be looked at as a largely vertical phenomenon. Integrating a full-service grocer at the base of two 30-story residential towers may make perfect sense, with both components benefitting from and strengthening the other. These synergies and the added value that the “right” retail component can bring to vertical density are enormous—significant enough that some property owners are willing to compromise on rents in order to secure a difference-making retail tenant.
A mixed bag
When done right, high-quality mixed-use environments can outperform more conventional competitors by a factor of 3:1 or more. The dirty little secret of mixed-use development, however, is that for some developers (and in some markets), there are far more mixed-use failures than successes. Unfortunately, getting a solid retail tenant mix (which is the primary focus for many developers) is just one small piece of a huge puzzle, and is no guarantee of long-term success.
Too many mixed-use projects are greenlit solely based on strong residential growth, or because of civic pressure from municipal leaders pushing for what they perceive to be the “next big thing.” The fact that developers are able to pitch and execute ivory tower concepts, absent any kind of boots-on-the-ground, supply-and-demand realities has a lot to do with how many poorly planned and executed mixed-use projects languish. If the residential market in question is strong enough, some developers may not even worry about the retail component: it can become an afterthought—which is a problem.
It is not just poorly-thought-through retail that can doom a mixed-use project. There are several common Dos and Don’ts of which commercial real estate professionals should remind themselves when planning, building, leasing or managing a mixed-use project:
Do…
Start at the bottom
First floor retail is critical to the longevity of a mixed-use development. Tenants secured on the first floor can and do influence vacancy and rent rates on the floors above—whether that is residential, office space, or some other use.
Get the right mix
Getting the retail right can be a real challenge. The industry supply of quality anchor tenants is shrinking, and not all retail is a good fit for mixed-use. Dining and entertainment works well, as do higher-end retailers that tend to be less reliant on the raw volume of customers.
Prioritize synergy over size
The world’s most successful mixed-use environments developed organically and by necessity. Developers would be wise to take a lesson from that, and to refrain from forcing an ambitious mixed-use template on every project. You do not have to “go large” to benefit from the synergies that flow from quality retail and vertical density. A modest downtown redevelopment with second-story office space above retail may be a strong performer, while a massive multistory complex could struggle.
Do not…
Neglect the fundamentals
If the planning vision is decoupled from leasing realities, the project is in trouble from the beginning. Mixed-use will not succeed absent universal retail “basics,” such as the importance of convenience, access, visibility, parking, pedestrian traffic counts and signage—as well as big-picture considerations like demographics and social, community and economic contexts.
Force the issue
Perhaps the biggest lesson for developers and community decision-makers is that mixed-use is an extremely market-dependent development category. Markets and opportunities that lack the fundamentals referenced above should be avoided. A growing appreciation for great shopping, dining and entertainment destinations is a big part of what makes mixed-use so effective—but those environments will never be able to fulfill their potential if the larger context for the project does not support a mixed-use solution.
Without question, mixed-use developments can transform entire communities—for better or worse. Taking a strategic approach to planning these complex developments, and understanding the close working relationship of retail with other uses is critical to the initial success, longevity and vitality of every mixed-use project.
Co-authored by Streetsense Managing Principal and Master Planner Bruce Leonard and John Cumbelich & Associates Founder John Cumbelich. Streetsense and John Cumbelich & Associates are X Team International partners. Bruce can