Developing a winning combination

Mixed-use projects are complex and difficult to finance, but developers and municipalities are finding success with a variety of development styles
August 11, 2010

Office and retail markets are taking a beating in most areas of the country. Commercial office vacancies are approaching record levels in many areas, and studies are showing that lifestyle changes are spoiling the public's appetite for the 1980s-style freestanding enclosed suburban mall.

At the same time, new urbanism, which advocates increased densities and the concentrated live-work-play environment, is taking hold in urban areas, as well as suburban and even greenfield developments, as a way for municipalities to combat sprawl and developers to maximize land costs. Developers in the robust residential market say homebuyers are attracted to developments that contain mixed-use components.

The confluence of these factors is driving commercial and residential developers and municipalities into the mixed-use arena — many for the first time — and requiring even closer collaboration among the Building Team members.

Opening just three weeks after 9/11, in September 2001, Paseo Colorado, a retail, restaurant, residential mixed-use development in the heart of Pasadena, Calif., along the city's famous Colorado Boulevard, is a classic example of the changing retail and residential marketplace and the complex planning and partnership structures that must be nurtured in order to build a successful mixed-use project.

"We couldn't have picked a more difficult time to open," says Ken Gillett, vice president of property management for Trizec Retail and Entertainment Group, Hollywood, Calif., which developed the retail and restaurant portion of the project. But thanks to intensive market research, and close working relationships the company (then known as Trizec-Hahn) forged with and Post Properties, the Atlanta-based residential developer, and other key members on the project, the property has prospered. The Trizec-Post team worked in unison with partners such as the Los Angeles offices of architects Ehrenkrantz Eckstut & Kuhn and RTKL, who designed the respective retail and residential portions of the project, city officials, who owned the existing underground parking structure on top of which the project was built, and Federated Department Stores, whose Macy's department store was the primary retail tenant on the site.

"The project was very difficult in that we worked with so many partners," says Gillett. "Picking your partners is important. Together, we were able to make the project appealing not only to residents, but to the retailers."

Return of an older way of life

"Mixed-use is clearly a trend," says Maureen McAvey, a senior resident fellow with the Urban Land Institute (ULI) in Washington, D.C. "It's fashionable and there is good logic to it."

But combining living, shopping and work space into one project or development is nothing new. It was a predominant method of development in the U.S. until after World War II. "Today's mixed-use developments are what old downtowns used to be; they're the way our grandparents lived, with apartments above the meat market," says McAvey.

After the war, developers began specializing in specific building sectors, such as residential or retail. Still today, many zoning and building codes segregate residential and commercial development.

Mixed use has never gone out of style in other countries, but in the U.S. Building Teams are relearning the process. "In China and other parts of the world, if you're a developer, you're a developer," says Tracy Funderburk, alliance manager for mixed-use design specialist Insight Alliance, Bellvue, Wash. "There are few mixed-use developers in the U.S."

Designers and developers say the public's desire for community is the motivation behind mixed-use projects. "These projects add character and life to a community and can give it a much homier feel," McAvey says.

"If you look at the statistics, the traditional suburban mall is losing market share," says David Graham, a principal with Minneapolis-based Elness Swenson Graham Architects (ESG). "People seem to be looking for something more interesting and that has a sense of place."

"Many of the best investment locations are emerging from 24/7 environments because of the appeal they have with employees and residents," says Mark Balaban, president of the Washington, D.C., office of Lowe Enterprises, a real estate development company headquartered in Los Angeles. "When they appeal to those segments, then they appeal to employers as well."

Designers and developers want in

The demand for mixed use is coaxing developers and designers to enter the market. Troy, Mich.-based Biltmore Properties Corp., a residential development company for 80 years, recently developed the second phase of its first mixed-use development, the Cherry Hill Village traditional neighborhood development (TND) in Canton Township, Mich. "For us, mixed use wasn't in the cards until five or 10 years ago," says vice president David Stollman. "We're finding it's what homebuyers really want. They're making buying decisions based on the quality of life."

 

Since designing the Harbor Town TND in Memphis, Tenn., in the early 1990s, locally based architecture firm Looney Ricks Kiss (LRK), like many other firms, has seen mixed use become a large part of its work. In fact, over the next two years the firm, which counts Cherry Hill Village among its projects, expects mixed use to be its core area of practice, says Lauren McCracken, marketing and strategies officer.

"I'm not sure we'd be in the same place if it weren't for the market trend that's being driven by people wanting a sense of place," says principal Frank Ricks.

"A project might be called a retail project, but often it incorporates a mixture of uses," says Bill Engle, a principal with Seattle-based architecture firm Callison. "That's why we've become a mixed-use specialist. That's also why we refer to some of our retail centers as 'lifestyle centers,' because they're a reflection of people's daily living."

Because so many of its projects were incorporating some aspect of mixed use, in 1999 Callison, together with Thompson Ventulett Stainback & Associates (TVS), formed Insight Alliance, a partnership created to focus specifically on the mixed-use market. In 2001, Wimberly Allison Tong & Goo (WATG), Newport Beach, Calif., joined the alliance.

While each of the alliance members performs residential work, their individual specialties — Callison in entertainment, TVS in convention centers, and WATG in hotels — work synergistically when vying for mixed-use projects.

"We were seeing more and more RFPs for mixed-use projects," says WATG director Bill Reed. "We felt we could compete more favorably with other firms this way."

Complex but necessary

Mixed-use developments are being developed in cities, suburbs, and rural areas. In urban areas, infills tend to be vertical, with retail, office, and residential stacked to maximize density. Urban redevelopments may be historic horizontal adaptive reuses of warehouses or utility plants. In first- and second-ring suburbs, broader, horizontal developments in the form of town centers and traditional neighborhood developments are flourishing. The trend is even carrying over into greenfield development. Developers are now working to seamlessly incorporate big box tenants into these projects.

Wherever they are located, mixed-use developments all share one thing — complexity. "We're the largest developer in Michigan, and we're the only mixed-use developer, because no one wants to get involved in it," says Biltmore Properties' Stollman. "It's a lot of work."

"They are complicated and they are expensive, but they are necessary," says Bob Cunningham, a principal with Told Development, Eden Prairie, Minn., whose firm recently completed phase one of its Excelsior & Grand at St. Louis Park town center development outside of Minneapolis. When complete the project will contain 660 housing units (for sale and rental), 75,000 sq. ft. of retail, and 45,000 sq. ft. of office space.

Challenges abound on mixed-use projects, says ULI's McAvey. Because of their complexity, planning — on the part of the Building Team and municipalities — is essential for the success of any mixed-use project. "The caveat is that they have to be done logically," she says. "You just can't plunk down these developments irrespective of what's going on in the district."

"The key is master planning," says Engle, whose Insight Alliance design team of Callison and WATG went through seven different scenarios to develop an optimal plan for its 625,000-sq.-ft. Anaheim GardenWalk retail, hotel, and entertainment mixed-use development, the first phase of which is under way in Anaheim, Calif.

The project has captured the attention of city officials and high-profile neighbors. The city recently spent $5 billion to redevelop Anaheim's city core. Disney's Disneyland and Disney's California Adventure theme parks sandwich the GardenWalk. Additionally, the Anaheim Convention Center is located kitty-corner from the project. "We've got everybody and their brother looking over our shoulder," says Bill Stone, senior vice president of Price Legacy, San Diego, the project's developer.

"Mixed use really begs for a good city plan from the local community, especially in first- and second-ring suburbs," says McAvey.

In conjunction with its architect ESG, the city of Richfield, Minn., worked with the community for 23 months to develop a 10- to 12-year master plan for the area of town known as the Lakes at Linda, of which ESG's Richfield Wood Lake Center town center was the first development. "Because it was the first development, it had to be good," says Bruce Palmborg, the city's director of community development. "It's served as a springboard to the bring other development into the community."

 
Public space is an important component of Richfield Wood Lake Center.


Though Richfield officials felt they had a good idea for what the town center needed, they relied on the market research provided by the developer, which in this case was a local bank, to verify the proper mix of retail and residential needed. "One of the things people don't consider enough is the true market for all the uses," says McAvey.




"You have to let the market tell you what to do," says Gary Dreher, a principal with Told Development, of any mixed-use project.

"Retail needs to be thought out carefully in terms of its market, who the tenants will be, and where the project is located," says McAvey.

The same thing goes for housing, she says. "Slapping 100 units of housing on top of another use won't work. You need to consider what segment of the market the housing will be geared toward and its location within the marketplace."

In the case of Paseo Colorado, Gillett says, "it was the right project for the market." Trizec operated Plaza Pasadena, a large enclosed regional retail mall that occupied the site from 1981 until it was redeveloped into Paseo Colorado. "We conducted a lot of market research," says Gillett. "We knew our customers very well."

As the 1990s progressed and Plaza Pasadena's popularity began to wane, Trizec began planning to redevelop the property. "We put our managers in place years before Paseo Colorado was opened and listened to what the market was looking for. That's how we grew our tenant mix."

Entitlements intrinsic to process

In cases where municipal zoning laws and building codes prohibit combining retail and residential, approvals from municipal officials must be sought for changes to entitlements.

Insight Alliance obtained additional entitlements for more retail for the GardenWalk, not an easy task in California because of environmental regulations. Developers also often purchase the air right entitlements over existing properties in order to build on top of existing or planned projects. Post Properties purchased the air rights above the retail portion of Paseo Colorado to build the project's 398 high-end apartments. In Bethesda, Md., Lowe Enterprises purchased the air rights above an existing parking garage for a planned 180-unit multifamily residential tower. The garage is on the site of the Air Rights Center, a recently redeveloped three-building retail and office complex in the heart of Bethesda's business district.



 
The developer of the Air Rights Center redevelopment in Bethesda, Md., turned the street-level retail component outward facing the street.

The prospect of additional revenues from property taxes or hotel room occupancy taxes and added amenities such as parking that may accompany mixed-use projects is attractive to most municipalities, so Building Teams often find officials accommodating. "We've found that cities are a lot more flexible and willing to negotiate than you might expect," says Insight Alliance's Funderburk. "But you have to be concerned with the city's needs as well. Let them know what's in it for them."

It's not done often enough, but Funderburk recommends Building Teams add a lawyer to the team early on. "They help stake out your strategy, in terms of leasing, governance issues, zoning, and ownership agreements."

Three musts for mixed use

Mixed-use projects should be flexible, expandable, and fundable, according to Funderburk. They need to be flexible in design should components change during the course of the project and so they can accommodate tenant changes once the project is completed. Expandability and fundability go hand in hand. Because obtaining financing for large projects can be difficult, developers often choose to build the projects in phases, starting with whichever component is most in demand.

Even though the GardenWalk is a multi-level project, Insight Alliance kept its components separate and structural elements independent, says Engle. "The goal is to achieve a graceful integration of components while maintaining structural separation," he says.

While Paseo Colorado looks to be a seamless development with two stories of retail and four stories of housing, because its retail portion was constructed of lighter structural materials, the residential portion above it was constructed atop a podium made of a thick concrete slab. While utilities for the residential units and exhausts for the restaurants run through both segments of the property, the structures themselves are separate.

Lessons apply across the board

Building Team members suggest selecting point persons to be responsible for interaction with other members of the Building Team when multiple developers or designers are involved.

Often, the general contractor is the main go-between on projects like these. Trizec's Gillett credits Charles Pankow Builders Ltd., Altadena, Calif., the general contractor for both the retail and residential on Paseo Colorado, for being the project's stabilizing force. "It made defining that line of demarcation a litter easier when it came to making things fit," says Gillett.

In many ways, mixed-use projects are a microcosm of all building types. Compressed construction schedules and increased participation among multiple parties are adding complexity to all building forms. In these uncertain economic times, Building Teams will have to improve their communication processes and plan and design their projects to be flexible to meet changing market demands.