Selling Mixed Use Profitably

ThinkstockPhotos 492914418By Liz Holland

Mixed-use commercial property design is clearly in vogue across the country, but turning the vision of “Live, Work, Play” into reality isn’t easy. How does a developer maximize profitability and minimize road blocks? Through clear, constant communication and condensed timelines.

There’s an inherent push-pull with these types of projects from Boston to Chicago to Houston. Residential and office tenants want to see that first-floor retail hub they were promised in place on move-in day. But retailers and restaurants prefer to wait until loads of built-in shoppers are daily traffic before they commit.

Smart developers are pre-leasing new retail concepts while simultaneously lining up residential and commercial tenants. But that guaranteed profit play doesn’t always work with elongated timelines. We all watched as Neiman-Marcus thought a 250,000-square-foot three-story anchor spot in New York City’s Hudson Yards was a grand idea in 2014. Now, it only wants a third of the space and, according to the New York Post, the project’s developers have offered to buy the chain to salvage the deal and secure the property’s future.

Despite these setbacks, Hudson Yards is part of an undeniable shift to mixed use projects. Over 30 million sq. ft. of have been announced and opened since 2015 representing an investment of $700 billion – and that doesn’t include Hudson Yards, which bills itself as the largest private real estate investment in the history of the U.S. 

Simon Properties is taking a different approach as it aggressively transitions Houston’s Galleria mall into a mixed-use center. It transformed a Saks Fifth Ave. into 110,000 sq. ft. of retail and restaurant space and added two hotels and three office buildings – part of a $1B upgrade that’s expected to be completed in 2018. Santana Row in San Jose can already demand higher rents because people can see the development’s full potential. They’ve done a good job of isolating construction to make it vibrant now with a window to its future.

Westfield Corp. is counting on “experiences’ to court shoppers. This fall the developer unveiled a $1 billion mixed-use upgrade at Los Angeles’ Century City Mall to meet shoppers' need for “experiences.” It offers A-List parking perks and VIP services along with broader offerings to draw shoppers – everything from Eataly and other restaurants to concert space, a gym and a UCLA health clinic. It’s slated to open Dreamscape Immersive, a Virtual Reality entertainment center next year. 

One of the big hitches of “Live, Work, Play” development is the promise of mass transit accessibility. While transit-oriented design is considered the holy (g)rail of mixed use allure, tying a project’s vitality to state and local government funding tests the patience of developers, retailers and current and potential residents.

Chicago’s Block 37, which hosts an innovative mix of high-end movie theater, chains and boutiques along with a host of food options, has sputtering traffic, which can be blamed in no small part on the city nixing the transit hub below. But look abroad, and you can see how transit can give mixed use a big boost. The transportation infrastructure surrounding Festival Walk in Hong Kong has been critical to its success.

Developers have the best shot of getting it right when they create a stand-alone project that’s either pitched as a destination or accepts that retail is an amenity, not a driver. In Chicago suburb Arlington Heights, Abbell Associates invested in mixed use retail and entertainment by identifying an undermanaged existing property that was bank-owned. The site was renovated the site while new franchise concepts like Sola Salon and Salt Mine that weren’t already part of the heavily trafficked downtown area – right near the train station and mixed-use residential properties – were pre-sold.

Understanding that shoppers no longer want to drive in an endless loop from strip mall to grocery store to bank to health club to movie theater to home creates tremendous opportunity for those that can master the quirks and pitfalls of mixed-use development. Those that can capture its potential will build the next generation of Main Street.

Liz Holland is CEO of Abbell Associates in Chicago.

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