Among the many topics we explored at IREM’s recent fall conference in San Diego was how to optimize mixed-use retail. Outsiders might take for granted the site of first-floor shopping or other amenities in an office or multifamily building, understandably overlooking the complexity of making that highly complex mix of tenants work.
In fact, creating successful mixed-use projects is a highly complex and nuanced initiative. For one, retailers are a different breed of animal than any other tenant property management will work with, and as a result there’s more interaction with the retail tenant than with the typical resident or office tenant. One reason is sheer economics and the fact that there’s a percentage rent clause in the lease agreement, meaning that there’s an additional rent percentage based on any increased sales the retailer makes. So there’s an incentive for the landlord or manager to be involved in the marketing of the retail space.
But there are other reasons why retail tenants are a different breed. Anjee Solanki, national director of U.S. retail services for Colliers International, was a panelist at our mixed-use session in San Diego, moderated by John Salustri, of Salustri Content Solutions. Anjee pointed out that, “Retailers are very focused on customer experience. They’ll walk into a space and ask about the ceiling height, the level of the floor, the column spacing and what’s the co-tenancy look like. But their number one concern in mixed use is: ‘Who’s going to be above me?’ And that’s simply because any loss of sales can set them back.”
Nick Herndandez, managing director of retail for Transwestern, added a note about the congestion problem: “We dealt with the traffic issues. One restaurant we leased to is doing 70 percent more volume than the highest-volume restaurant in the city of Houston. Things like that that you can’t see in advance and you have to work it out on the fly.”
But it is critical in the dual effort to increase retail revenue, not to forget the other tenants, who still need—and deserve—to experience best practices in tenant relations. Benjamin Underwood, vice president of residential at Saul Centers, brought that point to the audience: “You also have to be conscious of the tenants that live above these retailers. As a resident you want to live close to those retailers you want to frequent, but it comes with challenges, a smell or the noise of the bar. Certainly, the retailers need to get what they need, but we need to keep the others happy as well.”
Clearly, there’s a balancing act that the property manager has to master. “Communication is key and making sure everyone is well connected,” advises Solanki. “Make sure people understand there are nuances to each group. There are always challenges, but if you can be proactive, sharing information upfront and being transparent, you’ll eliminate some of that risk.”
Which means, of course, that the management of a mixed-use asset is not simply a discussion of ROI. That might be what drives the interaction. But in a greater sense, this is where the retail and the residential or commercial tenant are all alike. A good, professional property manager knows that ROI comes from good tenant relations, which result in tenant retention. That is the critical ingredient in all of the interactions taking place in a successfully managed mixed-use building.
As Underwood said, “We’re all in the business of ROI. Beyond that, it’s a matter of putting together a mix of uses that creates buzz, that makes people want to shop there, to live there. If you can make these uses co-exist appropriately, you will find residents who stay longer and retailers who do better. It’s a matter of getting the details right.”
Chris Mellen serves 2016 president of the Institute of Real Estate Management. He has more than 30 years of experience in property management. Mellen is also vice president of property management for the Boston-based Simon Companies, supervising the day-to-day operations of all properties in the firm’s portfolio.