You couldn't walk more than 10 steps at the ICSC Spring Convention in Las Vegas, last May, without tripping over a mixed-use project proposal. Yes, folks have been talking about this for a couple years now. But when Simon Property Group, the largest retail real estate owner in the country, is talking up building apartments, office space, hotels — and even self-storage, then you know the trend has fully arrived.
Simon has launched a $1 billion “asset intensification” program aimed at squeezing more dollars out of its existing land holdings. There is talk of putting high-rise apartments atop (or in place of) anchor space. Its recent $72 million St. Johns Town Center in Jacksonville, Fla., included the first hotel at a Simon Property since the 1980s. The Indianapolis-based company has also noticed a lot of land at the back of its parcels where self-storage centers could fit quite nicely.
The leap today is that mixed-use is now pervasive in the retail real estate world with nearly every developer from Simon at the top down to the smallest strip center REITs talking about such projects.
Of course, there's also still some debate on what truly constitutes mixed-use. Does it simply mean adding another layer — say some apartments or second-story office space — to any development? Or does it have to be bigger than that?
Robert Stark, CEO of Ohio-based Stark Enterprises and developer of the $420 million, 1.6 million-square-foot Crocker Park in Westfield, Ohio, described it: “true mixed-use density as a development that creates walkable multi-level, live-work-play neighborhood loaded with stimulating and engaging pedestrian-level detail creates ‘experience,’ the core of exciting urban living. A lifestyle center with some apartments above the stores wouldn't necessarily fit that definition.” (See Stark's Expert Analysis on the importance of mixed-use to the survival of retail developers on page 57.)
Developers are also engaged in a debate over the best way to put these projects together. On one hand mixed-use is forcing retail firms to form alliances with other commercial developers.
But on the other, it's leading some companies to conclude that they should broaden their internal capabilities so they don't always have to rely on others. That's a big change for the industry.
Through A Separate Lens
Up to now, the few diversified developers — Cousins Properties, Forest City Enterprises and Vornado Realty Trust, for example — were often viewed through a separate lens from the majority of companies that specialized. Or else, they stayed private, like Struever Bros. Eccles & Rouse Inc., which has been content to quietly rebuild much of the Baltimore waterfront and other areas outside Maryland, from residential to office to retail, on its own. Its latest venture is a $50 million redevelopment of Heritage Harbor along the waterfront in Providence, R.I., with offices, retail and residential.
You don't have to convince Joel Murphy, president of Cousins Properties' retail division. “In the beginning of REITs, there were a few things the industry viewed as taboo,” says Murphy. “But we did them gleefully.” For decades, Cousins has developed office, industrial and retail buildings, including the Avenue lifestyle centers.
Analysts chided diversified developers for not focusing on a core property type. New Plan Excel Realty Trust, for example, in recent years finished a makeover that saw it dump all of its garden apartments and outlet centers to focus entirely on community and neighborhood shopping centers. And Federal Realty Trust was roundly (and deservedly) slammed for its massive flameout at Santana Row, which even led to the ouster of then-CEO Steven Guttman.
Vornado Rules
But today there is no developer hotter than Vornado, largely because of its entrepreneurship and ability to switch between property types. Companies long-known for being the kings of one property type are bridging out. In a prelude to its talk of spanning to other commercial real estate sectors, for example, Simon Property Group, the regional mall behemoth, bought up companies specializing in community center development and outlet centers.
Similarly, Kimco Realty Corp. is buying car dealerships in Canada through a joint venture partnership with Capital Automotive REIT, adding apartments to a few strip centers and taking part in a massive military base redevelopment.
A Phoenix Arises
Oh yeah, and Santana Row? Today the $455 million San Jose, Calif. albatross, which suffered from horrific cost overruns and a devastating fire right before its planned opening, has retail and restaurant space that is more than 90 percent leased and pulling in $600 per square foot. Its 255 apartments are 98 percent leased.
In all, the project has reached its initial yield projections. And the company recently made the choice to convert the apartments to condos and add new phases to the development.
“On the retail side, you're seeing mall developers looking to add apartments or multi-family components to existing malls or lifestyle centers,” says Lou Taylor with Deutsche Bank in New York. “But we don't expect office developers to become retail developers.” Taylor added that he is not ruling out the possibility of other types of cross-format mergers.
In a possible bellwether deal, Cousins recently acquired Atlanta-based Gellerstedt Group, a privately-held niche player that builds multi-family urban units. Gellerstedt also specializes in construction management and build-to-suit services in Atlanta. The deal will enable Cousins to tackle residential as well. Previously, Cousins and Gellerstedt chairman and CEO Larry Gellerstedt III had worked in joint ventures.
For example, Cousin's partnered with Gellerstedt's former company, Beers Construction Co., to jointly develop a 117-unit condo complex in Atlanta's Midtown section, when Cousins acquired the company.
“We wanted to bring that expertise in-house,” Murphy said. “Now we can do any kind of residential.”
“It makes sense for Cousins to have all the arrows in their quiver to develop mixed-use properties,” says analyst Cedrick Lachance with California-based Green Street Advisors. “Cousins knows how to apply the development recipe.”
Cousins will develop its newest mixed-use project — Terminus — in the heart of Atlanta's trendy Buckhead neighborhood with about 600,000 square feet of office space, 75,000 square feet of retail and 60,000 square feet of residential. In the transaction, which closed in June, the company picked up an in-town tract of land.
“Finally, after 50 years of humiliation and defeat at he hands of suburban sprawl, urban centers can provide something the suburbs cannot: true mixed-use density in authentic and compelling ratios of mixed-use [apartments and office] over retail — ratios of 10-to-1, 15-to-1, 20-to-1 and beyond,” Stark says.
Other developers, too, are looking to redefine their niches.
Sembler Co., a power center titan in the Southeast, is one such company.
“In a few years, people won't just call us a retail developer,” said Jeff Fuqua, development division president with Sembler Co. in Atlanta. “We'll be called a mixed-use developer.”
For years, the St. Petersburg, Fla.-based company focused on developing power and grocery-anchored shopping centers. Now its attention is on mixed-use and developing its own residential atop its retail in several projects in Florida and Atlanta.
Going It Alone
“We usually bring in developers and make them partners,” Fuqua said. “But we wanted to give it a try and learn it. We've gotten very good and we are going to do our own.”
In Sembler's Edgewood Retail District, a mixed-use venture close to completion several miles from downtown Atlanta, the company hired consultants to help develop plans for 32 condo units atop stores, while it honed its expertise.
The project, with 600,000 square feet of retail, is among the first where Sembler dabbled in building its own apartments.
But the company still brings in partners on larger projects, including Perimeter Place near Perimeter Mall, which includes a high-rise condo with 220 residential units and a six-story apartment complex that houses retail on the bottom floor, Fuqua said.
“Lincoln Properties is building our retail space and we are reimbursing them,” Fuqua said. “We own the rights below for the retail. Deals are very complicated, but we're rewriting deals to protect retailers.”
As David Marks of Marketplace Advisors in Maitland, Fla. puts it: “There seems to be a real synergy. As sophisticated developers learn from their partners, we see them getting into different types of land use.”
But that remains at the cutting edge. For now, partnership is the way most developers are handling it, finding homebuilders and commercial developers to build the non-retail space.
And that's the way it should be, according to Bethesda, Md.-based Federal Realty Investment Trust. Though Santana Row has worked out in the end, Federal Realty is not shy to talk about what it has learned.
“Some people mistakenly said we were unlucky with respect to the time,” says Don Wood, president and CEO of Federal Realty. “But it would have been more prudent to lay off some of that risk.”
Today, the 700,000-square-foot, $500 million project, an urban redevelopment with 66 stores, 18 restaurants, five spas, a hotel and residences, is viewed as the company's most ambitious, and a blueprint for the firm's future.
In the end, however, the risks, and how they were overcome, taught Federal Realty “a ton,” says Wood. For instance, as the company plans more mixed-use projects in the future, it will mitigate risks with joint ventures and public-private partnerships.
Federal Realty's latest project is a mixed-use development at the site of an old mall, Assembly Square, and adjacent power center with Bed Bath & Beyond, TJ Maxx, Sports Authority and other tenants just outside Boston, in Somerville, Mass.
Several months ago, the company acquired the 330,000-square-foot enclosed mall and power center for $100 million with plans to assemble 50 surrounding acres.
Wood says while the company works on plans, it's bringing in a 7 percent return on the property from rents at the power center. Federal Realty is talking to residential and, potential office partners for the project.
Joint ventures aren't without their own problems. For one thing, they add new layers to deals. Michael Beyard, a senior fellow with Urban Land Institute, a Washington, D.C.-based nonprofit research and educational organization, says joint ventures bring in ownership questions, operational and finance issues, environmental conundrums, and even parking problems.
“It adds to the complexity of deals,” Beyard says. “For instance, how do you finance a condo deal if retail is underneath?”
In cases where retailers require specific prototypes, design issues can result when condos or rental units are built above. Parking is another problem.
Collaboration
Some analysts think consolidation won't be as big a trend as joint ventures.
“I'm hearing more developers are going to partnerships,” says analyst Merrie Frankel with Moody's Investors Services, a provider of credit-risk management solutions in New York City.
But most say the line between retail developers and other types of developers will nonetheless continue to blur. “It might solve some of the difficult dilemmas that arise out of joint ventures,” says Beyard.