Nearly every industry has its trends that seem to ebb and flow in and out of popularity as time goes on. In the world of commercial real estate, one of the more recent trends gaining popularity among developers has been the growth of so-called “mixed-use” properties.
The term means exactly what it sounds like, a property that has a mix of uses instead of just one like more traditional office or retail buildings do. The basic idea is that these properties offer people a place where they can work, live and shop within one building or development.
In the Fargo-Moorhead region, most mixed-use properties offer retail and/or office space on the main floor with residential living units on the second floor and above. Some projects include a single mixed-use building while others involve multiple buildings in a larger planned development project.
One of the more recent, high-profile mixed-use buildings in our metro is the Block 9 Tower (now named the RDO Building), which has a large mix of uses including retail, office, a hotel, restaurant, and private residential condos.
Both nationally and locally, these types of development are becoming more and more common. But why is that, and are they here to stay?
There are a few key reasons why we see this type of development gaining traction with developers. For one, land prices and building costs continue to increase in many urban areas, the Fargo-Moorhead region included. As development costs increase, developers need to find ways to ensure projects remain profitable. One can only raise rents so much or fill so much commercial space over a given timeframe, so by doing a mixed-use project they can increase the available rentable square footage (i.e. income) on a given piece of land with a more diverse set of leasable options.
There are also economies of scale during the construction and ongoing management of these properties that can help lower the overall cost on a per foot basis compared to stand-alone office or apartment buildings. Given these financial benefits, it should not be surprising to anyone then that on a pro-forma basis, mixed-use properties can look very attractive to investors.
As for what tenants of mixed-use properties like best, many will point to the “walkability” aspect of them that Millennials and even retirees are looking for. The ability to live, work and shop under one roof is attractive for a growing number of people in our economy.
Another often touted benefit of mixed-use for retail tenants is the idea of a built-in customer base. The foot traffic generated by multiple floors of living space above them can be a helpful boost in these days of increased online shopping and consumers’ unquenchable thirst for “I want it and I want it now” access to goods and services.
Is mixed-use here to stay?
There is no question that mixed-use has a place in our market and likely will for years (if not decades) to come. We have seen projects of this type do quite well and find success with both residential and commercial tenants, so we know success is achievable here. When the development and market are right for each other, the results can be very strong. However, it is important to note that not all mixed-use projects have been successful from day one.
Both locally and nationally, some of these developments have struggled to lease up for various reasons. In some cases that might have to do with the location not being ideal for businesses and/or apartment dwellers to locate there. In others we have seen the supply of competing single-use properties in the market has been so great that it has taken longer than expected to get to an adequate occupancy level for the commercial space of a mixed-use property.
To combat that, we have seen developers of mixed-use buildings offer significant incentives to attract tenants, such as above market fit-up allowances or upfront periods of free base rent. While incentives can help capture demand, they often fail to create demand and dark storefronts in some mixed-use buildings have unfortunately been present for years in extreme cases.
Mixed-use projects that have a good percentage of pre-leased space to one or more anchor tenants before construction begins is perhaps the greatest way to help buffer these types of issues. Getting that first domino to fall can sometimes be the hardest after all, so heading into a project with a large anchor already secured is ideal.
These real-world situations help illustrate that success in commercial real estate is never guaranteed. Developers and investors alike should spend time with area lenders, appraisers, and commercial real estate experts to understand the market before putting the next shovel in the ground.
While the popularity of mixed-use is not likely to go away any time soon, it is important to study not only those projects that have been a success, but also learn from those that have had their struggles.
Andy Westby is President & Managing Broker of Goldmark Commercial Real Estate Inc. in Fargo, N.D.