REQUIRED READING: Have Mixed-Use Developments And Lifestyle Centers Peaked?


Among many developers that have historically spread their focus across many different commercial real estate sectors, a clear preferred type of development has emerged nationwide: mixed-use properties and lifestyle centers featuring a major retail component.

Whether a site is slated for ground-up development or rehabilitation of existing buildings, ‘It seems that we're having more situations where we're working on mixed-use sites,’ observes Tony Martin, a partner at Columbus, Ohio-based development company and real estate services firm Casto.

The company is currently in the final stages of entitlement for a mixed-use project in Morrisville, N.C., that will include townhomes and office space alongside its substantial retail piece.

In addition, Martin says, a current joint venture project in the Chicago area will transform what he terms an ‘obsolete’ mall into a pedestrian-focused, open-air lifestyle center integrating office, residential and hotel components with the existing anchor tenants.

Frank Zaccanelli, co-managing partner of Scala Real Estate Partners, says that although his firm will only proceed with projects that make sound economic sense and have strong fundamentals -particularly in the midst of a market dislocation – three urban mixed-use projects have recently passed those criteria and are now in the due-diligence stage.

This trend may reflect shifting priorities on the residential side. ‘When you take a look at the relative newcomer to the home market – the young professional – they're not looking as much anymore for the white picket fence out in the suburbs,’ Zaccanelli explains.

Instead, this population seeks a fusion of working space, living space and entertainment space – particularly in urban infill markets undergoing significant growth. Dallas, Houston, Phoenix and San Diego in particular have surged, he adds.

Within the individual markets, proximity to housing developments and large concentrations of white-collar workers has also become an increasingly important factor for siting a mixed-use development, says Michael Jaffe, president of The Jaffe Cos. Integrated or nearby offices may, for example, produce a vital segment of the restaurant component's daytime clientele.

Neighboring attractions can further boost a center's profile and potential. The Arboretum, a South Barrington, Ill., lifestyle center slated to open this fall, is located across the street from a large arena and thus expected to benefit from an ‘importation of people to the area beyond the normal shopping patterns,’ he says.

Sheer volume of traffic, however, will be no guarantee of success, adds Jim Fielder, vice president of acquisitions and marketing at Troy, Mich.-based Robert B. Aikens & Associates. He reminds developers that a variety of community factors – especially psychographic variables – must be considered to ensure the product's features are appropriately matched to consumers' interests.

To some degree, the emergence of a clear set of qualities that a viable lifestyle center will include has streamlined the planning and financing stages for developers that are cognizant of others' keys to success – and failures – within this type of development.

‘All these things were nightmares in the financial world four or five years ago. Now, just because of the number of these things that have been built and certainly proposed, there's a lot more understanding of how the center's put together,’ notes Fielder.

Increasing caution
However, although lifestyle centers and mixed-use developments have thus far continued their recent run of popularity, questions abound on exactly what is the maximum mixed-use saturation in the U.S. – and whether that level has already been reached or exceeded.

Some industry executives doubt that the market can sustain such high volume of this product type much longer, particularly as financing difficulties retain their grip on the broader markets.

The effects of conduit lenders' mass withdrawal – and remaining financiers' general tendencies toward what many call normalized transaction structures – are likely to resonate for developers that did not already receive financing in the days of easy money. More required equity from the developer is the dominant theme in deals assembled in recent months, as is developer reputation.

Further, according to Fielder, even active and willing lenders that may have initially given the green light to a prospective lifestyle center or mixed-use development are now more likely to hesitate or revise earlier standards for this development type in particular.

‘The whole deal is going to get reviewed a little closer as things tighten up, because at the end of the day, the margin for error as it relates to building lifestyle centers has gotten, over time, more narrow than it was several years ago,’ he explains.

The expected result is an increasingly distinct separation at the outset between the winners and losers. ‘If you fall into that 'winner' category, you're okay. If you don't, it's a struggle,’ Jaffe states. This division applies to the step of securing financing as well as the process of attracting tenants in what has become a challenging leasing climate in many markets.

But on the flip side, ‘The deals that get done, in some ways – provided that they're considered in that A-level category – sometimes end up having slightly more attractiveness because there are so few deals nationally for retailers to even consider," he adds.

Retail's role

Identifying a winner project in the crowded field of mixed-use developments and lifestyle centers usually also includes careful consideration of the larger market in which the project is to be situated. Savvy developers and their partners are constantly aware of regional variations in such factors as job growth, consumer spending and construction pricing.

‘Ultimately, everyone who has been in the real estate business for any amount of time realizes that the national statistics are pretty unimportant when it really gets down to underwriting specific submarkets,’ Zaccanelli remarks, though he acknowledges that project qualities will always play a vital role as well.

Because these types of developments tend to heavily feature retail elements, the retail sector's trends and associated challenges often carry the most influence over determining appropriate locations and timing of mixed-use projects or lifestyle centers.

Nationwide, retailers have become more selective in their project involvement as tenants, and consumer spending remains uncertain. Although affluent customers will generally be less vulnerable to housing market fallout and rising costs of energy, healthcare and other necessities, middle-class consumers have taken a hit and curtailed spending, Jaffe notes.

Despite some signs of unusual consumer resilience, ‘This whole subprime contagion is very, very pervasive and very serious,’ he warns. ‘Until the credit markets really price risk and stabilize, it's going to be tough – and resonate all the way to the consumer.’

Consequently, power center development, which tends to be driven by new housing starts, has largely stalled in many areas. Jaffe predicts that many stores now appearing on developers' power center site maps will ultimately not complete the deal.

But in general, ‘I don't think, for the long term, that people are ready to jump ship,’ stresses Fielder. He notes that many tenants are large companies whose revenue, growth projections and fulfillment of stockholder promises are dependent on a simple need to build a certain number of stores.

Would-be tenants nevertheless will be likely to take a more careful look now at competitive overlap from neighboring businesses and the maximum profitability of any given individual store opportunity.

Thus, long-term tenant relationships have, in some cases, become as important as long-term lender relationships for reaching mutual goals and producing a fully leased, profitable center.

Selecting the market
In this climate, the perennial question of whether a primary market should always be favored for development over a smaller – but possibly promising – market carries increased weight. According to Jaffe, many developers who ‘pushed the bat’ and developed in a secondary or tertiary market are now struggling because they lack the bargaining power of someone in a major metropolitan area.

Others have found that primary markets are not necessarily the better bet. In the retail sector and beyond, smaller markets can offer many profitable opportunities, maintains Martin, whose firm is currently developing several power centers in the central Ohio region.

Regardless of the region, market or project qualities, waiting until conditions improve may be the safest course of action – not only with mixed-use projects, but potentially with other developments as well.

‘If you have the ability to continue to sit on your projects and warehouse your projects until the market gets better, I think that is certainly a premium today,’ says Zaccanelli. ‘If you don't have the ability because you have to develop to keep your entitlement – or if, economically, the structure requires you to develop in this market – you need to have a really good, strong partner.’

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