As national retail chains pull back growth strategies amid same-store sales figures that are the worst in decades, mixed-use projects that had been in the works for years are suddenly being thrown into disarray. Retail, once the main ingredient in the mixed-use recipe, is becoming a garnish. The most creative builders are not bolting from the kitchen, however. In some cases, builders are concocting new mixed-use combinations. Developers and architects are tossing new uses—a pinch of health services here, a dash of education there—into the mixing bowl to create a new model that, if successful, could prove to strengthen the mixed-use movement for the better.
For developers, the challenge is to bring in the right tenants in a timely way to bolster occupancies. The titanic shifts in the economy are having clear effects on the retail development business. A pipeline that was bursting at the seams 18 months ago is now down to a trickle. But some mixed-use projects were so far along that it was too late to stop. Instead, architects and developers have had to go back to the drawing board and figure out how to salvage the projects. They have had to look to other types of tenants to help drive traffic and create the volume of all-day traffic vital to making mixed-use environments successful.
That’s proving not to be such a bad thing. Many so-called mixed-use projects that retail developers have built in recent years were not truly mixed-use, in the strictest sense of the term. The Urban Land Institute defines mixed-use as “projects that have three or more significant revenue-producing uses; significant functional and physical integration of the different uses; and conform to a coherent plan.” But some developers have pawned off residential towers with first-floor retail as mixed-use. In other cases, multi-phased projects where residential, retail and other uses are built next to each other in distinct zones have been termed mixed-use. It’s become clear that these projects are merely retail centers with ancillary uses tacked on. They are not actually integrated projects.
The success of the retailers at those projects is becoming the make-or-break factor. All uses are not created equal in these settings and the success of one is not dependent on the success of the others. True mixed-use centers, experts argue, are projects that have a life of their own and where the success or failure is shared because of the integrated nature of the projects.
The most successful mixed-use projects provide retail that serves residents and workers on site throughout the day while at the same time serving as a draw to a wider trade area. There should be a constant flow to and from the site for much of the day and not just during morning and evening rushes. Achieving this flow requires a true mix of uses that draws traffic at different times and for different reasons.
Key connections to mass transit don’t hurt either. And an integral piece to this all—developers are finding—is bringing in uses that are not conventionally considered one of the main commercial real estate food groups (office, industrial, retail, multifamily and hospitality).
In short, what developers and retailers are quickly learning in this climate is that the old strategies don’t work in this new economy. The key to success is deeper diversification while also being as creative as possible in terms of lease terms and financing and bringing in nontraditional tenants. Moreover, making sure the project is original and truly tied to the existing community is crucial.
Cookie-cutter mixed-use projects that appear to have dropped from the sky with no connections to the existing urban fabric are not succeeding. Ones that are more integrated are performing better.
For example, at Blackhawk/Halsted, a 225,000-square-foot mixed-use facility in Chicago’s Clybourn Corridor, Towne & Country Pediatrics recently moved into the site, joining Advocate Health Centers, Pine Dental, Associated Allergists and Northwestern Memorial Physicians Group.
For REI, the outdoor lifestyle retail anchor on the site, medical services at the facility create a steady stream of traffic, and business, says Michael Drew, cofounder of Chicago-based Structured Development LLC, adding his retail tenant is “doing exceptionally well” as a result. “Having Towne & Country in the mix is attractive to other tenants,” Drew says.
The British School, another tenant, has 600 students, and offers REI an additional pool of potential business. Drew says parents drop off their kids at school or for an appointment at the doctor, and then end up shopping at REI. “Between all of these, we have created a more synergistic mixed-use center,” Drew says.
There are other examples of the new mixed-use twist. Michelle Seifert, associate vice president of the Retail Services Group at Grubb & Ellis|Commercial Florida in Tampa says the firm is currently working on a mixed-use project where more than 50 percent of the project is targeted to medical and office uses.
Meanwhile, Ross Halle, vice president of architecture and town planning at Avalon Park Group, says his firm has looked to community and civic organizations to fill space at centers the firm is developing. “Because a mixed-use environment is more diverse, it is more accepting to a variety of users that are not purely retail,” Halle explains. “This mix of retailers, civic organizations, and service establishments creates a healthier economic situation that can adapt to the changing needs of the market. The different uses also create more vitality throughout the day rather than just at some peak evening or weekend hours.”
To be sure, simply trying to further diversify uses in a center isn’t a cure-all for every development. Furthermore, there remain opportunities, even in today’s tough climate, to proceed with more traditional mixed-use projects. For example, Houston is proving to be more resilient than other markets.
“Office leases, restaurants and residential continue to be strong in the Houston market,” says Jonathan Brinsden, executive vice president and COO of Houston-based Midway Cos. Traditional retail is under more pressure, Brinsden says, but the relative strengths in other uses means the company hasn’t had to completely rework the massive CityCentre project that the company has under development.
CityCentre is a 1.8-million-square-foot, mixed-use project set for completion in September. About 400,000 square feet is carved out for upscale retail, restaurants and entertainment. There will be a fitness facility, office space, 370 multifamily residential units and 250 urban lofts as well as brownstones, penthouse-style condos and hotel rooms.
The COO acknowledges that Midway has altered its strategy as a result of the macroeconomic climate. And this is opening doors for new types of tenants, such as a culinary school. But it hasn’t gone so far as to consider medical or educational uses. That’s “not an option for us at CityCentre,” Brinsden says. The target market demographics for the center, he says, simply don’t make it a good candidate for those kinds of unconventional mixed-use tenants.
Trouble finding tenants
This newfound creativity on the part of mixed-use builders seems like a progressive step. In part, however, it’s born out of necessity stemming from the shrinking pool of potential conventional commercial real estate tenants. And arguably no segment has slowed down as much as retail in the current economic quagmire.
“It’s more challenging to find tenants right now,” Seifert says. Retail sales have fallen off. ICSC expects same-store sales to be cumulatively negative through the first six months of 2009 on the heels of the first-ever drop in same-store sales during a holiday shopping season. As a result, retailers are scrapping expansion plans, closing stores and, in the most dire cases, filing for Chapter 11 bankruptcy protection or deciding to liquidate entirely. An informal count by Retail Traffic indicates that announcements to date from retailers shutting stores, liquidating or filing for bankruptcy could affect up to 2,910 stores. For comparison, in all of 2008, about 6,100 chain stores were closed, according to data from ICSC.
“There certainly are less individuals or businesses looking to relocate, expand or start a new company in the current economy,” Halle says. “So yes, it makes filling the space a bit more challenging.”
There is a bright spot to this. Brad Freel, chairman and CEO of Midway Cos., says this presents a special opportunity for regional retailers who can differentiate themselves from larger, more homogeneous chains. “Personally, I like the regional guys because they do bring in something unique,” Freel adds.
When retailers are willing to sign on the dotted line, however, they are asking for large incentives. Halle said the amount of incentives and concessions being given today “are much greater than any time in recent history.” Halle did not reveal the specifics, but says retailers are looking for generous terms, including free rent and shorter lease periods. Existing tenants too are asking for help, looking to restructure leases.
That’s just one problem for retailers, however. Retailers that rely on franchisees for expansion face an additional hurdle in that it’s become difficult to line up financing to allow the opening of new units. Seifert says financing for these types of users is “practically nonexistent and if they are not well capitalized, it’s hard to make the deal work.” As a result, Seifert says the firm is “listening to the tenants and are empathetic to their situations. If you can’t be creative and see the potential for the future, then now is not the time for you to build. And in this environment being ‘creative’ has taken on a brand new meaning.”
Bigger is better
Barry Rosenberg, president of Columbus, Ohio–based Steiner + Associates, has a different take on the mixed-use market. In the current shakeout, retailers are gravitating to larger projects, regardless of whether they are mixed-use or not, rather than smaller centers. He says retailers are looking to be part of large clusters of retailers—projects that contain 800,000 square feet or more.
“The 100,000- to 200,000-square-foot open-air center—unless it is an extremely strong in-fill site—is not working,” Rosenberg says. “Retailers want to be a part of well-anchored 800,000- to 1,000,000-square-foot retail centers. As for the office and residential within our mixed-used projects, we are having strong success with both of these components. Clearly people want to live and work as part of these mixed-use developments and this part of our centers continues to be very strong.”
Consumers are being drawn to dense developments in this climate. They are reducing shopping trips. They also want convenience and to “shop local,” as Drew puts it. As a result, mixed-use centers that offer this mix are performing better today. Further, retail environments that are sustainable and create a sense of community—places that consumers have formed some kind of connection with—are faring better. And city planners, for their part, see mixed-use as a good fit for higher-density, pedestrian- and public transportation–friendly development, Drew says.
“Consequently, mixed-use projects are very attractive to both seniors and young families with children,” Halle says. Children can walk to school, music and sports practice, and seniors can go to the bank, hair salon and get groceries without having to get into a car. “Due to the senior and young demographic in these areas there is a need and market for a broad spectrum of medical services. These services continue to expand as the area continues to mature. These factors are resulting in a benefit for these projects.”
That’s why developers remain committed to these projects despite the recent hiccups. John Crossman, president of Orlando-based Crossman & Co., agrees that filling in the retailing component of a mixed-use site has been a challenge of late, but it doesn’t mean it’s impossible. “It is back to basics—cold calling, research, working a ton of hours,” Crossman says.
And ultimately, it just makes more sense given broader demographic trends. Incorporating medical uses, in fact, is more than just a good temporary solution. It also will serve a long-term need as more than 70 million baby boomers continue to age and require greater medical care.
“It goes to the trend of providing easy access to services for the customer,” Crossman says. “What defines the average American consumer is that they are busy. Part of the change of our society from malls to mixed-use is that consumers are busy and want more simple lives.”
Some analysts see a fundamental and permanent shift in consumer spending habits as a direct result of the recession. So, for certain retailers, settling into a mixed-use site can be beneficial. The failure of national brands like Circuit City and Linens n’ Things reveal the oversupply of mass-produced items in the marketplace, Halle argues. “As these anchors fail, so will the retail centers they are in and so will the smaller stores who depended on them for traffic,” he says. But because mixed-use isn’t reliant on single large tenants as anchors, such properties could be more sustainable over the long run and not succeed or fail based on the fortunes of a single retailer. This ability to diversify and adjust to changing market demands will be important for success and something a mixed-use development has to offer.
From a design perspective, architects are looking back at pre–World War II era communities for inspiration. Neil Kuhns, director of design at MCG Architecture’s Irvine, Calif., office, says the popularity of mixed-use centers represents a return to a “more livable model for community planning and lifestyle.”
“What we call ‘mixed-use’ was the way that everybody lived until master-planned, use-segregated communities became popular,” Kuhns says. As a result, the way developers and architects should approach projects should reflect the ambiance, sense of community and sense of place offered by more established communities. “The difference is that the newer projects must be designed to accommodate a larger, more diverse population,” he says.
Ease of use, convenience and safety offered by enclosed malls isn’t what shoppers are after any longer. Instead, design should be appropriate to the region and needs of the project.
The uncertainty surrounding the economy makes it hard to know for sure how mixed-use centers will evolve. Analysts and economists see a slow recovery, perhaps beginning later on this year—at the earliest.
Nevertheless, sociologists see people yearning for community and working toward building stronger ones via gardens and creating civic groups. “The interest in mixed-use will naturally grow with the changing economic and psychological needs of our society, including a renewed need for a sense of community,” Kuhns says.