Retail centers are blossoming into communities with the addition of homes, offices and other uses
By Joe Gose
Seeking ways to draw more consumers to their stores, restaurants and entertainment spots, retail landlords are increasingly adding other property types to their shopping centers. Large and small developers alike are pursuing mixed-use projects at ground-up locations and at existing centers and malls, whether they are ripe for redevelopment or solid performers being positioned for continued growth in a tumultuous and competitive retail climate.
In many cases, retail center owners team up with developers that have expertise in other uses, or they will sell off the property or the air rights to them. In the mix now are apartments, condominiums, offices, hotels, medical facilities and even housing for seniors.
“Mixed-use means something different to everybody — you can add a level of office above retail, and people might call it mixed-use,” said Chris Weilminster, president of the mixed-use division of Federal Realty Investment Trust, a Rockville, Md.–based retail landlord that has been introducing other uses across its portfolio. “But it depends on what the needs of the community are. You can’t just throw mixed-use into an environment that’s not going to benefit the community.”
Among other developments, Federal Realty expects to invest as much as $207 million in the second phase of its Pike & Rose project, in North Bethesda, Md., adding on a 177-room Canopy by Hilton hotel, 99 condominiums, 272 luxury apartments, 216,000 square feet of retail space and some outdoor public spaces. New tenants include an REI outdoors gear store and a Porsche dealership.
Demand for mixed-use continues to grow some 20 years after New Urbanism practitioners began trumpeting the concept as smart development.
“Mixed-use is desired by almost all constituents,” said Drew Alexander, president and CEO of Houston-based Weingarten Realty Investors, which is pursuing mixed-use after having begun to pare back its portfolio of suburban retail centers in 2011. “It’s what the market wants, it’s what the cities want, and tenants like it and consumers like it. There are only a few examples where stacked retail works, so if you want to add density, you’re typically mixing uses.”
In West Seattle, Weingarten formed a joint venture with Miami-based homebuilder Lennar to develop 389 apartments on five stories at The Whittaker, above a nearly $31 million, 65,000-square-foot shopping center now under construction. In Houston the firm teamed up with Hanover Co. and Ziegler Cooper Architects to construct a $150 million, 300-unit luxury rental tower atop 10,000 square feet of restaurant space next to its venerable River Oaks Shopping Center.
Weingarten is also investing some $316 million on two planned, Harris Teeter–anchored retail centers in suburban Washington, D.C., that will be topped with apartments. Further, Weingarten is exploring adding apartment, office, town home, senior housing and hospitality uses at its 170,000-square-foot Cambrian Park Plaza shopping center, in San Jose, Calif. But some uses are trickier than others, Alexander cautions. “Residential helps draw people to shopping centers and is a little bit more predictable and stable business than offices or hotels,” he said. “If you miss pricing apartment rents in the first round, you can reprice them the next year. If you miss it on office, you’ve missed it for a few years.”
Butler Enterprises is adding residential space to its Butler Town Center property, in Gainesville, Fla. Anchoring the project will be a Whole Foods store, a Regal cinema and a food hall. In April Butler announced that two luxury apartment developments totaling some 200 units will open in the fall of 2018 along with the retail district. Also in April, Jacksonville, Fla.–based Regency Centers said it had begun developing Mellody Farm, in Vernon Hills, Ill., a 270,000-square-foot shopping center anchored by Whole Foods, Nordstrom Rack and REI. Focus Development and Atlantic Realty Partners are developing 260 luxury apartments at the project.
Meanwhile, Horsham, Pa.–based BET Investments considered the beleaguered 1.1 million-square-foot Granite Run Mall, in suburban Philadelphia, a good mixed-use opportunity when the company acquired it from the lender in 2013 for $24 million. The developer demolished some 800,000 square feet to make way for an 820,000-square-foot outdoor retail project oriented toward restaurants and entertainment. The Promenade at Granite Run, as the project is called, is scheduled to open in about a year. Plans call for about 400 apartments, which should attract residents who want an urban experience without dealing with downtown Philadelphia congestion, says Michael Markman, president of BET Investments. (Bruce Toll, a co-founder of Horsham-based homebuilding giant Toll Bros., is the principal of BET Investments.) In addition, the Children’s Hospital of Philadelphia ended up leasing some 7,000 square feet for pediatric offices. “The hospital was looking for a high-profile location frequented by their audience: mothers and children,” he said. “So if more women are coming to the project and making it their routine, they’re more likely to stay and shop. It’s a harmonious use.”
Westfield Corp., which has targeted a handful of California malls for makeovers that will add residences, offices and hotels. These range from the near-wholesale demolition and redevelopment of Westfield Promenade, in Woodland Hills, Calif., to the expansion of Westfield UTC, in San Diego.
In Orem, Utah, Salt Lake City–based Woodbury Corp. recently completed the first phase of a $500 million renovation of the 1970s-era University Mall, which is being expanded into a mixed-use development spanning some 130 acres. Woodbury has renamed the project University Place and has so far added a 150,000-square-foot office building, nearly 500 apartments and some green space to about 1 million square feet of existing retail space.
Similarly, Santa Monica, Calif.–based mall REIT Macerich is embarking on a luxury-wing upgrade at its 1.8 million square foot Scottsdale (Ariz.) Fashion Square, where sales per square foot were off last year by some $18 from the previous year, to $727 per square foot. Following the redo will be the addition of offices, residences and a hotel. During the company’s fourth-quarter 2016 earnings call in February, COO Robert Perlmutter told analysts that the project provided the opportunity to expand luxury retailers and entertainment and restaurant offerings, and to bring a captive audience to the property. “This is a site that can justify densification,” he declared. In particular, he added, the company owns some offices in Phoenix that have experienced “some fairly significant rental rate growth over the last couple of years and [that] have been a good contributor to the shopping centers.”
North American Properties joined Stormont Hospitality Group and the city of Alpharetta, Ga., to develop a $112 million, 325-room hotel with a 47,000-square-foot conference center, scheduled to open early next year. The conference center represents a further push to bring bodies to the shops and restaurants at the 86-acre Avalon mixed-use neighborhood, says Mark Toro, an Atlanta-based partner at North American Properties.
“Every one of these uses brings energy at various times of the day — we call it the ‘energy curve,’” he said. “If you’re a homeowner, you’re walking the dog at 6 a.m. If you’re an office worker, you’re there at lunchtime. If you’re a hotel visitor or resident, you’re there to shop and dine in the evening.”
GREAT PLACES TO WORK
Mixed-use projects have become increasingly popular among business corporations, which view them as a recruiting tool as they compete for young workers in search of an urban environment to live in — or at least, an environment that offers restaurants and other amenities.
One of the most recent demonstrations of this current corporate mind-set was evident at Federal Realty Investment Trust’s signature Santana Row development, in San Jose, Calif. Late last year big-data analytics firm Splunk occupied an entire 234,500-square-foot speculative office building at the 1.7 million square foot project, which includes retail, residences and a hotel. Also last year Federal Realty began building a larger office structure at Santana Row, also on a speculative basis.
“We did a ton of research and talked to every top office broker in the market to understand the supply-and-demand factors in Silicon Valley,” said Chris Weilminster, a Federal Realty executive vice president and also president of the firm’s mixed-use division. “We understood how important having an amenity-rich environment right at the doorstep is to office users today.”
In Plantation, Fla., several corporations have expressed interest in occupying a vacant, 160,000-square-foot office building as part of the $350 million future Plantation Walk mixed-use development, says John Dowd, vice president of retail development for Encore Capital Management, a Boca Raton, Fla.–based real estate investment firm. Encore Capital is developing this project on the site of the 660,000-square-foot Fashion Mall, which closed 11 years ago and became the target of a failed redevelopment effort. Encore Capital bought the property in a bankruptcy auction, along with the office building, in 2015 for $37.7 million. The firm completed razing the mall this year and is building 200,000 square feet of lifestyle retail oriented toward entertainment and restaurants, including a probable 30,000-square-foot food hall, plus 700 luxury apartments. A 260-room Sheraton hotel under separate ownership operates at the site.
“We’ve had a lot of office tenants come to us and say, ‘Wow, a full-service hotel, restaurants and apartments — we’d like to be part of that kind of environment,’” said Dowd. “It’s great for their employees and for business people coming to visit the company.”
In Alpharetta, Ga., North American Properties has all but wrapped up the 1.2 million-square-foot second phase of its 86-acre Avalon neighborhood, in effect doubling the size of the $1 billion project, which contains single-family homes, condos, apartments, offices, retail space, and public parks and event space. A 227,000-square-foot office building jointly in Avalon developed by Hines and Cousins Properties was 95 percent occupied before it opened, according to Mark Toro, an Atlanta-based partner with North American Properties.
“Competition for talent between office users is fierce today,” Toro observed. “If I’m going to recruit and retain the best and brightest workers, I can no longer be in a suburban office park.”
IT AIN’T EASY
Developers undertaking mixed-use projects face obstacles they never encounter when building traditional retail centers. These challenges may lie inside or outside the projects themselves — whether balancing vastly different uses, say, or allaying the concerns of municipal officials. Or consider the need to address the potential disturbance of late-night noise from bars and movie theaters (which arguably comprise the most critical elements of these developments): This requires significant design and legal expertise. Residential contracts must inform renters that they are living in an urban environment that has the potential to be noisy.
The failure to foresee some challenges can cause problems midway through construction, says David Glover, a principal at architecture and design firm Gensler. He is currently working to find a noise- and vibration-dampening solution at a project under way where a developer had wanted to install a music venue between the offices directly above and the retail directly below. The developer wrongly assumed that the tenant would pay for soundproofing, Glover says. “The landlord kicked it down the road so long that now we’re having to deal with it,” he said. “Mitigating sound pollution and vibration is very expensive to do.”
Projects often require cooling systems around trash areas to prevent restaurant refuse odors from wafting through the property, particularly as food-and-beverage operators take up growing amounts of space, says Glover.
From a more fundamental perspective, while the potential of increased traffic appeals to shopping center owners thinking to add apartments, offices and other nonretail property types to their shopping centers, these various uses must be able to stand on their own, says Lisa Stoddard, a CBRE executive president based in Washington, D.C. “A developer might say, ‘I’m going to have 500 people living on top of retail,’” she said. “But that does not a trade area make — you have to take into account what is surrounding the project in the trade area itself.”
What is more, many municipalities are pushing for mixed-use projects but often lack the expertise to recognize where they would succeed. In the San Francisco Bay Area, for example, jurisdictions want apartment developments to include ground-floor retail, says John Cumbelich, founder and CEO of the Walnut Creek, Calif.–based John Cumbelich & Associates retail brokerage. But much of the retail space is vacant, while the housing market is so strong that developers and lenders hardly worry about empty storefronts.
“The litmus test is, who is campaigning for mixed-use? Is it government bureaucrats that don’t have any skin in the game?” said Cumbelich. Further, he argues, with some exceptions, mixed-use works best in urban environments that already enjoy density.
Proponents do point out, however, that if done right, mixed-use properties act as main-street destinations for the surrounding neighborhoods.
“Most projects we see today are mixed-use and being developed in what are still premier locations,” said John Lambert, retail market lead for JLL in Florida, who is working with Boca Raton, Fla.–based Encore Capital Management on the Plantation [Fla.] Walk mixed-use project. “It’s a mixed-use world.
Reproduced by permission of SCT, a publication of the International Council of Shopping Centers
