Second-tier markets

Small Cities Mix It Up

Secondary markets blend ideas from successful mixed-use developments.

A convergence of factors has propelled mixed-use developments into the commercial real estate spotlight in recent years. Rising land prices and the desire to rein in sprawl have made greater density more attractive. Higher gas prices have increased the appeal of living and working in the same pedestrian-friendly area, particularly among empty-nest baby boomers and young adults. Mixed-use has become popular both in urban areas, where land is scarce, and in suburbs, where communities are looking for alternatives to subdivisions and strip malls.

"It's one of those trends that has been with us but it's now starting to mature," says Stephen Blank, an Urban Land Institute senior fellow in finance in Washington, D.C. "In a lot of communities, people are saying, 'We want to have a vibrant town center.' So you're starting to see development of [mixed-use] properties that allow for greater densities and greater height."

But a hot concept doesn't ensure automatic success. Mixed-use developments present mixed challenges and command careful planning, creativity, and savvy marketing skills. To get these projects out of the ground, commercial real estate professionals must achieve a delicate balance of hard factual data, such as supporting demographic studies and financing costs, and intangibles, such as creating a sense of community and improving residents' quality of life.

Photo caption: Five years in planning, High Street Williamsburg, a mixed-use project that broke ground this fall in Williamsburg, Va., will include 500 apartments, town homes, and condominiums, 250,000 sf of retail and restaurants, and a theater.
Photo credit: Roseland Property Co.

Finding the Fit

Commercial real estate professionals who have worked on successful mixed-use developments emphasize that each one needs to be approached differently. Good market analysis is essential, but projects also must fit their respective communities, both functionally and architecturally.

"Mixed-use is not a cookie-cutter deal," says Jim Tucker, CCIM, senior investment adviser with Sperry Van Ness in Williamsburg, Va. "It has to be something that responds to what the community already is."

Tucker's five-year experience illustrates his point. He provided brokerage services for a city-owned property. City officials wanted a mixed-use project on the property but one that would mesh with Williamsburg's historical heritage, the College of William and Mary, and the area's tourist destination profile. A previous deal received a negative public reaction and fell through; this time, the city took a more methodical approach. "They decided to go through a process in which the city first agreed on [the project's] vision and then solicited the marketplace's participation," Tucker says.

The process included working with a community focus group as well as studying similar projects, consulting with dozens of architects and planners, and ultimately assembling a 700-page marketing package. The project broke ground this fall. Included in the plan are 500 apartments, town homes, and condominiums and 250,000 square feet of retail, restaurants, and a theater.

In Norman, Okla., mixed-use is a relatively new concept that requires brokers to educate local officials and residents. The city bought a 7.8-acre site containing a dilapidated U.S. Department of Housing and Urban Development-backed apartment building for $10. Judy J. Hatfield, CCIM, principal of Equity Commercial Realty LLC in Norman, proposed a mixed-use vision that turned out to be a promising fit for the new-growth area of town. Now she is the leasing agent for East Village, which will contain 96 condos and loft apartments, 43 town homes, and 9,000 sf of retail.

"The type of mixed-use development we did was heavily influenced by the fact that the University of Oklahoma is a mile away - walking distance for students and staff," Hatfield says. Residential growth also is booming on Norman's east side and the area is ready for more retail and services. She put together a marketing plan that attracted three potential development groups. "We sat down with the city council and showed them the pluses and minuses of each bid," she says. "We didn't have to pick the one with the highest [sales] price - we wanted to pick the one that would have the highest degree of success. We wanted to make something positive happen quickly. We were so lucky that the bid we picked was also the highest price, so it was a home run."

Don't Try This Alone

Hatfield worked with a banker, an architect, and a construction contractor to determine the best use for the East Village site, demonstrating one of the basic tenets of mixed-use development: the team approach.

"If you don't have a lot of experience doing mixed-use development, partner with somebody," says Courtney D. Pogue, CCIM, of the Waterworks Group, in Chicago. "I've seen developers fail who didn't have the capacity from the financial or the experience standpoint. You've got to form a good team and that comes from having a good plan in place before you approach the project."

Before Tucker responded to Williamsburg's brokerage request for proposals, he put together a team that included a political consultant, a multidisciplinary engineering company, an architect with strong credentials for designing local historic properties, and a title company. "I proposed a team to the city, rather than just a brokerage relationship," he says. "It's always dangerous when you don't answer [the RFP] exactly the way they ask for it. We took a huge risk, but it was effective."

"You need market analysis, strong design, and good marketing and branding - plus you have to be able to analyze it from a traditional development standpoint," says Kathleen Rose, CCIM, president of Rose & Associates Southeast in Davidson, N.C. In-depth market analysis is essential, not only to determine if each of the mixes works alone, but also to see if they work together, she says. And location is a major factor. "If it's a suburban development, [its success] depends on what's located around it. However, the center of a central business district is different since a lot [of development] is already there."

Calculating a strong property mix for a project is a balancing act. Rose and partners currently are developing South Main Square in Davidson, a community of 8,000 about 15 miles outside Charlotte. A mixed-use rehab project, the development includes residential, office, retail, art galleries, and restaurants. "The mix is based on the market and the community. That's where the market analysis comes in - doing demographic studies, understanding the market and the competition," she says.

Many of Pogue's projects involve redevelopment of inner-city areas, and re-introducing retail into locations that have been neglected. This lends itself to mixed-use developments, he says. "These sites can't support a stand-alone big box because of their unique shape and structure. Also, land is pricier, so you have to build something with more density with a commercial component on the bottom and residential on top," he says.

The right mix for such developments depends on the site, Pogue says. If it's located on a major street, it may support a higher density of retail, but greater parking density also must be included. Less-trafficked locations may put more emphasis on residential.

Pogue has worked on the development of the State Street corridor on Chicago's South Side, the centerpiece of which is the Illinois Institute of Technology's 250,000-sf University Technology Park, combining research centers and offices. Across State Street, Park Boulevard, which includes 1,300 housing units and 25,000 sf of retail, is being constructed.

In redeveloping such areas, the residential drives the retail, he says. "If you're going to put in 1,300 residential units, you need some type of retail to support the residents. Some sites can't support stand-alone retail; therefore, it's more economical to make it mixed-use."

On the Money

Educating appraisers and lenders also is part of the process, particularly in a new market. "One of the problems is how to get an appraiser to appraise it," Hatfield says. In Norman, "They didn't have any comparables since there hadn't been anything like this in the market. They had to go to other markets and look at similar projects to assist in appraising the property. You can appraise the land, but how do you appraise the new concept?"

The project eventually got bank financing, which Hatfield attributes to the project's concept, its backers, owner/developer Hunter Miller, and country singer Toby Keith - a Norman resident and an investor in the project. "We were not new to the lender," she says. "It was a new concept, but the players in it were participants that made great things happen and always kept the community in their rearview mirror."

In larger markets such as Chicago, developers may have more financing options. A number of projects Pogue worked on were built in tax increment financing districts; others have used apartment zone bonds or community development block grants. "Now we're seeing a lot of development using mortgage tax credits for the commercial component only, on a stand-alone basis," he adds.

However, "[mixed-use] is still sometimes difficult to explain [to lenders]. When you're dealing with [retail and multifamily] mixed-use, you're really looking at two different projects. So the best way is to separate the two projects and then approach the lending institutions. It makes for a cleaner transaction in some cases," Pogue says. "Condo sales are pretty [straightforward], whereas some of the retail components are still speculative," he says. "Some retailers are going back into communities where they haven't been in 30 years," he adds, so persuasive market research on the retail side may take longer.

But, Pogue says, lenders still are looking for some certainty in the developments. "A lot of my clients begin to market aggressively as soon as they identify the site. In fact, many do it simultaneously while working with local officials in the land assembly process. Most would not build on spec. The days of building on spec in urban mixed-use development are over - [lenders] want some type of guarantee. The money is out there, but people are pulling back and definitely want to see something much more concrete."

ULI's Blank agrees that money still is available. "The financing market is very vibrant," he says. "Offshore banks are very competitive. Large national banks, the securitized market - there's a lot of capital available. You need to go to the appropriate sources, but it's not like there's a lack of sources."

The common-sense rules of seeking financing apply, he adds. "Have a complete business plan, financial analysis, and market study. Analyze all the comparable projects and have that information available. You're trying to give the lender a studied presentation with market data to support it. Look at the risks involved, the multiple uses, the multiple absorption patterns, the difficulties of construction, and the timing of various phases of the project. And be very frank in terms of assessing how the market will accept the project," he says.

Developers also must be particularly careful when planning for construction costs due to the length of time mixed-use projects require, cautions Scott Goodman, a partner at Global Retail Development Group in Scottsdale, Ariz. "When you're budgeting, be very careful to plug in numbers that are conservative," he says.

Hatfield can relate: After Hurricane Katrina, building costs jumped 30 percent in her area. Fortunately, "We really didn't set pricing until we were certain of locked in costs," she says.


Large-scale Atlantic Station in Atlanta serves as a model for smaller mixed-use developments.
photo credit: Atlantic Station LLC

Gaining Friends and Influencing People

While many towns are immediately receptive to mixed-use projects, several commercial real estate pros stress the importance of gaining community support, particularly since mixed-use developments can raise ire among residents. "The best way to approach it is to engage the public sooner rather than later and use it as an opportunity to educate them about the value of the projects," Rose says.

When Tucker won the Williamsburg project listing agreement, the mayor asked him to postpone marketing the property for six months. In the interim, the city assembled a focus group of some 30 representatives from the Colonial Williamsburg Foundation, the College of William and Mary, and the city council, as well as businesspeople and neighborhood groups. The focus group created a vision for the property's use, "so that when we found a developer, we could express our vision, they could respond, and we could make a deal," Tucker says.

The group worked diligently for six months, studying successful projects, reviewing design concepts, and discussing what it wanted in the project. Eventually the group drafted a concise resolution of its vision, which was "handed to every developer that we solicited," Tucker says. The entire report of the group's activities also was given to potential developers. "Before we interviewed them, they had to prove to us that they'd read it," he adds.

Hatfield strongly concurs. "Don't be afraid to have a vision and make sure your stakeholders have buy-in," she says. "We tried to think of how [the project] affected everybody before we started and we talked to people in the area at predevelopment meetings. We made sure they understood that we weren't going to do something that would hurt their property values. We tried to keep everyone's interests in mind."

"If you have a small market that has never experienced mixed-use, they may say, 'It doesn't work because we haven't done that here before,'" Rose says. "It's going to take marketing and education to get them to understand that it does work and you can do it." Design workshops and charettes can be very helpful in these cases, she adds.

And while cities may be generally supportive of a project, details such as zoning variances, parking requirements, and height restrictions require sharp negotiation skills. For example, during development planning for High Street Williamsburg, the city was eager to include plenty of public space in the project - something the developer, who wanted to maximize the gross leasable space, was less enthusiastic about, Tucker says. After much negotiation, "compromise did occur. The city got the public spaces it wanted because the developer knows those spaces are going to contribute to the energy that will help make the retail work. But it was a process," Tucker says.

Negotiating parking also took some work. Ultimately, the city agreed to take part of the proceeds from the sale and construct an on-site municipal parking garage, which will generate parking income for the city. "The city stepped up to the parking issue because many [on the planning committee] had weighed in on it and said that's where the city should be putting its dollars," Tucker says. Fortunately, "One of the things the city has pioneered is parking decks that are visually low impact and are integrated with landscaping."

Parking for mixed-use can be tricky Pogue says. "If you have a residential component, most cities require a 1:1 [parking ratio]; retail wants four spaces for every 1,000 sf. Developers look for a subsidy for that and there's often a public/private partnership for garages."

Many towns are enacting zoning ordinances and regulations that have more flexibility, Rose observes. "The flip side is that sometimes there's so much flexibility, you don't know what the rules are, and it tends to be very subjective. So there's a balance between the two and you've got to understand the politics of the situation."

Making the Sale

Marketing the final project to tenants and buyers also requires "a talented marketing and advertising firm that understands how to position real estate projects, because you have to brand and market this as a whole community," Rose advises.

Part of the marketing also requires courting the businesses that are a good fit for the project. In Hatfield's case, the developers discussed the type of tenant they wanted on the project's most prominent corner. "We didn't want a gas station, no matter what they paid," she says. "We turned down fast-food players because we didn't think they added value to the project." Instead, they approached CVS Pharmacy. "We explained the requirement to have architectural integrity, and they agreed. This had a huge impact on our development."

East Village's developers also produced an ongoing stream of press releases and worked with local media as the project moved along. "We emphasized how positive the city had been on the process," she adds. Once the design was finalized, the developers erected a billboard on the site, showing off the look of the buildings.

The mix of uses "can be very helpful for our leasing team to show perspective tenants," Goodman says. "We can tell them that there's going to be a multifamily development behind this project and there's going to be 30,000 sf of office condos - they're the people who are going to eat at your restaurant or get their hair cut. It's a benefit."

And it's not really so different from an old-fashioned concept. "That's how our downtowns started - as mixed-use developments," Rose says. "That's your model; that's what works. When we abandoned the downtowns and central cities to go out and pull all the uses apart, they started falling apart. They're disconnected and hard to get to and people are not socially committed to them. So the best model is really your favorite, wonderful city."

Sarah Hoban

Sarah Hoban is a business writer based in Chicago.

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