As some commercial property sectors, most notably office buildings and retail properties, continue to face some challenges post-pandemic, one popular project type—mixed-use—is making a strong comeback. All types of investors, including EB-5 investors, private equity players and publicly-traded REITs, like getting on-board with mixed-use properties, many of which involve public-private developments, according to Chicago-based Lauro Ferroni, senior director of capital markets research with commercial real estate services firm JLL. Developers of mixed-use projects also often partner with additional LP investors, including high-net-worth individuals, institutional players, sovereign wealth funds and pension funds, he adds.
“The recognition of operational and economic efficiencies in owning entire mixed-use projects is increasingly leading investors to acquire multiple property sector components within mixed-use projects,” Ferroni says.
Mixed-use development came to increasing prominence during the past market cycle and a compelling outperformance narrative started to emerge. For example, mixed-use properties can benefit from accelerated lease-up periods and rent premiums compared to stand-alone properties in the same market, according to Ferroni.
For example, JLL research found that office rents at mixed-use developments tend to be on average 24.7 percent higher than those in the surrounding submarket. “Even compared to new construction and trophy peers, mixed-use assets can see pricing premiums when brought to market, with cap rates on average around 75 basis points lower than prime assets that are trading in the market overall,” says Ferroni.
As a result, mixed-use projects continue to proliferate, with a number of mega developments currently under construction across the country or expected to break ground this year.
For example, Philadelphia has two mixed-use mega developments underway. These include uCity Square and Navy Yard – Philadelphia. The first, uCity Square, will ultimately encompass nearly 10 million sq. ft., including 3 million sq. ft. of office and lab space and other uses to provide the workers at those facilities and their families with places to live, learn and play. The Navy Yard Philadelphia will include 3 million sq. ft. of commercial space and 3,000 residential units.
In Baltimore, Port Covington will revitalize 177 acres of land that encompass 45 city blocks in the city center to deliver 3.4 million sq. ft. commercial and residential development, with nearly 1 million sq. ft. scheduled for delivery this year.
Meanwhile, in Santa Clara, Calif., The Related Cos. is working on the $8 billion Related Santa Clara development. When completely, it will provide 9.2 million sq. ft. of commercial and residential uses on 240 acres of land adjacent to the new San Francisco 49ers Levi Stadium.
And in Chicago, the $6-billion Lincoln Yards mixed-use project, which won city approval and about $900 million in Tax Increment Financing (TIF) from the city in 2019, is finally getting underway on a 55-acre site along the Chicago River.
In Atlanta, Centennial Yards, a $5-billion mixed-use project on 40 acres in the city’s downtown that has been on hold since 2018, is finally getting underway too and will ultimately provide 10 million sq. ft. of office and retail space, more than 2,000 apartments, and 1,500 hotel rooms.
In Miami, Miami World Center, covering nearly 30 acres and 10 city blocks just north of the city’s Central Business District, will include a 600,000-sq.-ft. convention center with 80,000 sq. ft. of outdoor amenity spaces, an 1,800-room hotel, 1,000-plus residential units, and 765,000 sq. ft. of retail.
And in San Diego, Riverwalk, a 200-acre, transit-oriented development that is redeveloping a golf course in the Mission Valley District, will provide 1 million sq. ft. of office space, 150,000 sq. ft. of retail and 4,000 residential units.
What’s driving new development
There are several drivers underpinning a boom in mixed-use projects. One of the main ones is the interconnectivity of uses within a larger master plan, according to Washington, D.C.-based Nihar Shah, vice president of development at Perseus TDC, an affiliate of Transwestern Development Company. “Infill locations work in areas that have amenities already in place, but mixed-use developments create a new built environment in areas that were previously not developed or were underutilized.”
For example, Hudson Yards in Manhattan was built on a rail yard, The Wharf in D.C. was formerly home to fish markets, Related Santa Clara replaced a golf and BMX course and the Riverwalk is replacing a golf course.
The new uses usually become a win-win for both investors and cities, according to Shah, as they create more housing, retail and tax avenue. But in densely populate areas, a location near public transit is often critical to a mixed-use projects’ success.
However, the mix of uses at such projects is evolving. Benchmarking of more than 100 U.S.-based mixed-use developments by JLL researchers indicates that over the last couple of years project components have become more weighted toward multifamily, whereas in the past about 40 percent of such projects were dedicated to offices, 34 percent to multifamily and 13 percent to destination retail or other components, such as hotels, open/green space and cultural amenities.
“The relatively equal level of office and residential uses reduces volatility and provides stability over the course of a given cycle,” notes Ferroni, suggesting that the trend to a larger proportion of multifamily may be attributable to the outperformance of this asset class in recent years. Additionally, the amount of green space and outdoor amenities has increased as these amenities also drive leasing outperformance.
At some larger mixed-use projects, medical offices are also taking the place of traditional office space, according to Shah. Arts and cultural amenities are also very important in new mixed-use projects built in historically low traffic areas because “you need to provide an incentive for people to go there.”
Depending on the locations, alternative components such as hotels, grocery stores, parks or other outdoor space can be beneficial to a project’s success, Shah notes. For example, NoMa Cntr includes a full-service hotel with 235 keys because it’s located in a high-traffic tourist area in downtown D.C. “The additional 40,000 sq. ft. of retail will provide much-needed activation on the street level and offers amenities for all the residents in the NoMa neighborhood and beyond,” Sha adds.
Depending on the location, grocery stores may be included in mixed-use projects, but Shah says they need a large resident bases to be successful, “so you tend to see them more in urban and exurban areas rather than a mixed-use development in outer suburbs or that lean heavy on offices and hotels.”
Given the outperformance of grocery-anchored retail since the pandemic, “the foot traffic that the grocers generate drives visitations to these centers overall,” says Ferroni. He notes that where a grocery-anchored shopping center has excess land, investors may evaluate the viability of developing a multifamily rental component on the site to add vibrancy to the property and diversify their income streams.
In one such example, the aging Brodie Oaks Shopping Center in South Austin, which is anchored by a Sprouts Farmers Market, is undergoing a $1-billion redevelopment and expansion to create a mixed-used district on 36.7 acres of land that will include 1,600 residential units and 1.1 million sq. ft. of office space, restaurants, retail and a hotel, as well as 13.7 acres of open space.
However, any mixed-use project must be developed with a keen eye to what the built environment will feel like once it’s completed, according to Shah. Otherwise, the project can end up feeling sterile and fail to create a sense of place. “To make mixed-use developments feel authentic, you have to be aware of where you’re building and what that community needs.”