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So, you want to be a mixed-use developer?

Stuart Zall
President, The Zall Co.

As the population grows and land gets more expensive to develop, mixed-use projects are going to be the means of new development in the future. The more sophisticated mixed-use developers target creating spaces that incorporate multiple elements within an area to activate an urban vibe. They take residential users and marry them with hip retail, cool office and service users; by putting these users all together, the whole is greater than the sum of the parts. Mixed-use developers have an opportunity to improve urban living, produce environmentally friendly spaces and bring fun back into the neighborhoods. Because these developments change the character of a city, more municipalities and building departments are taking an active role to positively influence the outcome. Many planning departments know exactly what they want and need to enhance their cities, while other are not as sure. Without proper planning and vetting, the outcome of a mixed-use project could end up costing more money and not satisfying the needs of the trade area.

When planning the retail portion of a mixed-use building, the developer must consider myriad possible tenant types. Currently restaurants, bars and entertain uses are in vogue. They will require adequately sized HVAC systems, gas lines, adequate electrical, exhaust duct system, large enough grease trap and sewer line capacity, proper signage, trash, loading, proper compliance for the Americans with Disabilities Act, and ample parking. A forward thinking developer will spend the money to ensure these systems are in place. Once the building is built, it will be nearly impossible or cost prohibitive to engineer any of these items required to future tenants.

Logan Schenk
Associate broker, The Zall Co.

Merchandise mix, critical mass of adjoining retailers and marketing are aspects that most mixed-use projects do not take into consideration. If you are a single office building with 10,000 to 15,000 square feet of retail, there is hardly the synergy or resource to market to the tenants. However, if there is a business improvement district – think Cherry Creek North – it can assess taxes and marketing fees in order to promote a shopping area and help it become dominant. A merchandise mix that is procuring the right tenant for the building and neighborhood is imperative to success of the project. If you have the wrong type of restaurant or maybe too many banks, the cool vibe could be at risk. Unfortunately, many developments are driven by return, and if the owner does not have patience to find the right tenant, it usually settles for credit and higher rents. This could be a real problem and ultimately suck the life out of a neighborhood. A developer can only dream of the best tenant mix in the book. Think multiple floors of the best office users (WeWork, Google, Amazon), a couple floors dedicated to high-end condos/apartments, and ground-floor retail filled with a glamourous restaurant (Rioja, Beauty & Essex) or other hot tenants (Drybar, Salt & Straw, Lululemon).

While there are many moving parts that go into creating a masterpiece of a mixed-use development, the overall idea is to create a symbiotic relationship between the tenants within the building. Retailers, office users and residential tenants will co-exist and benefit from one another in these projects. Ensuring that the little things such as the project adhering to the neighborhood’s needs, the building having proper build-outs for tenants and leasing space to income-producing tenants are a key factor into developing a beneficial asset.

Mixed-use projects will forever change the feel of a neighborhood. It is important that the stakeholders play an active role to determine the right tenants for the neighborhood. In addition, no one knows what the retailer or restaurant of the future is going to look like, but the builder needs to anticipate and have the flexibility to handle the change. Today parking is important, tomorrow it might be something else. Being nimble is paramount to success. Finally, these projects – if built right – will be around for over 100 years, the owner should try not to settle with income or a tenant for short-term gain while forfeiting upside. If developed with a little passion, a little bit of patient money and lot of luck, a mixed-use project can be enduring for ages. It will provide its dwellers with a great environment while providing its investors with a solid stream of income for many years to come.

Featured in CREJ’s August 2019 Retail Properties Quarterly

Edited by the Colorado Real Estate Journal staff.