COVER STORY, NOVEMBER 2009

GROWING PAINS
The changing face of mixed-use development.
Jon Ross

Two years ago, mixed-use projects were sprouting up across the Southeast in major cities and small towns alike. The textbook development template fused together residential with retail real estate, creating a space where residents could eat and play where they lived. Now, the development books are being rewritten and the standard definition of mixed-use, while not changing entirely, is being viewed through the dim light of the recession. Simply put, the money for condo developments wedded to retail isn’t there anymore, and neither are the tenants. 

“Mixed-use projects will not have all the components they used to have, only because the lenders who are willing to lend money won’t cover all the different categories of mixed use,” says Michael S. Rodgers of law firm Seyfarth Shaw’s Atlanta office. “That’s where the problem is going to be in the future, the ability for the various components of these large-scale urban projects to obtain financing in order to cover each aspect of the mixed-use.”

Larger projects that require multiple lenders can still be completed, but developers may need to start looking for civic help as well. “Looking forward, there will be a need for significant public incentives to help ensure that these projects are economically feasible,” says James Downs of Charlotte, North Carolina-based Crosland. “We believe that in the future, entitlements will be harder to obtain without innovative planning that incorporates a mix of uses.” Retail and condos are fading into the background in favor of vast developments with office space, health care services and other demanded necessities.

Risk also plays a large part in the future of mixed-use projects. Lenders, tenants and development partners may not be willing to lend a hand to a project filled with non-performing property types. “As with debt for any commercial development in today’s environment, lenders are focused on in-place leases and high coverage ratios,” Downs says. “They view mixed-use projects as having more risk because they’re typically larger, more expensive and, by their nature, harder to phase.”

Finance and risk may be large hurdles to the traditional idea of a mixed-use space, but Rodgers thinks the property type is here to stay for one simple reason: zoning. In cities, zoning codes may promote a mixed-use ideal. “The zoning codes and the planning departments now have had enough time dealing with new urbanism concepts that they really want to push mixed-use, and they’re going to zone for it so that a developer is going to be somewhat compelled to do something on the ground floor,” Rodgers says. 

For some developers, these zoning codes force them to create a mixed-use space where a much simpler development was planned. This has the effect of forcing multifamily developers to think in a retail world, and some developers don’t relish this new opportunity. While it’s not much of an undertaking to put a few retail spaces in a development that’s primarily given over to apartments or condos — placing a bank or a coffee shop on the ground floor as a marketing strategy — it’s much more difficult to mold a thoughtful mixed-use space without the proper tools.

“If you’re dealing in an area where [mixed-use] is not required … the only reason it was done was because the developer perceived it as some sort of marketing tool. Developers were buying into this whole live, work, play theme,” Rodgers says. “You’re going to see some developers who experimented with it that are going to say, ‘That’s not our core business, and if we’re not obligated to do it, we’re just not going to do it.’ I see others saying, ‘The only way we’re going to do it is if we partner with a retail developer.’”

Even with financial uncertainty and the overall volatility of the commercial real estate markets, a few developers are moving forward with mixed-use projects. In Abingdon, Maryland, Ward Properties has started Boulevard at Box Hill, a 700,000-square-foot development featuring retail space and office space. The retail space will feature a movie theater and a Wegman’s grocery store. In Murfreesboro, Tennessee, Swanson Development is working on Gateway Village, which will feature 80,000 square feet of apartment complexes and a mix of office, retail and restaurant space.

As of right now, many large projects that were in the planning stages before the recession have been put on hold. This trend is likely to spread into the ensuing years, but mixed-use development, when it starts up  again, will be more focused than in years past.

“There are certainly very few mixed-use developments under construction in the nation today,” Downs says, “and there are certainly fewer that will be entering into the development stage within the next couple of years.”

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