Mixed-use properties can enrich the lives of residents and bring important amenities to a neighborhood. However, these projects come with another level of complexity.
They’ve become even tougher to develop during the COVID-19 pandemic when few new stores and restaurants are opening and existing ones are shutting their doors. Lenders have also become more cautious about financing and underwriting the commercial portion of a project.
Four experienced developers—Christiana Foglio, founder and CEO of Community Investment Strategies; Charlton Hamer, senior vice president of Habitat Affordable Group; Matt Schwartz, co-CEO of The Domain Cos.; and Jenny Wu, director of development at Jonathan Rose Cos.—share their insights into mixed-use developments.
In general, what’s the right mix of housing and commercial space? Is there a secret sauce?
Schwartz: Practically, we’re thinking about balancing risk, capitalization, and operating efficiency with the overall objective of creating a vibrant community. We spend a lot of time thinking about how each use works together and how to create mutually beneficial relationships. We want to create enough space for uses that bring excitement and energy like a great food and beverage concept. We want to allocate space to uses focused on wellness like varied fitness concepts and provide basic services and conveniences like salons or pharmacies. Ultimately, we’re trying to envision the experience of living in this community … somewhere to grab a great cup of coffee in the morning for your walk to work, take an exercise class after getting home, and then grab dinner at your favorite restaurant (with friends you met at an event in the resident lounge of course).
Wu: There is no magic number for the mix of housing and commercial space—it is neighborhood and street specific. Mixed-use development is often strategically located in transit-oriented, walkable neighborhoods where commercial tenants can be woven into the fabric of the existing community. Our Community of Opportunity philosophy is that housing should have easy access to schools, jobs, health care, healthy food, open space, and the commercial tenants should be more of an amenity for the residents. We strive to find the right commercial tenants for our buildings that help build upon that idea, and making sure they have the right setting to be successful.
Foglio: With the residential component, we believe 50% affordable and 50% market-rate can work in strong rental markets. In weaker markets, we believe the traditional set-asides of up to 20% affordable hold.
For the commercial component, the space is limited to the ground floor. In our Galloway Township, New Jersey, property, we have 10,000 square feet of commercial space on the ground floor and 100 residential units. But due to the impact of COVID-19 in the retail sector, we are not planning any mixed-use at this time.
Share a best practice for developing a mixed-development project or leasing the commercial space:
Wu: When designing, making sure the dimensions of the space are appropriate for the use intended, and considerations are made for storage, trash, loading, ceiling height, and column spacings. A poorly designed commercial space makes leasing much harder.
Schwartz: Flexibility. Retail tenants typically come to the table with certain requirements to make deals feasible for them. Being flexible with leases including term length, options, rent, payment structure, etc., provides a greater chance of getting a deal done that works for both landlord and tenant.
Foglio: We have traditionally targeted the commercial component to be tenant-oriented services. In particular, for our age-restricted communities, we search for physicians, pharmacies, salons, delis, and other locally owned small businesses
Hamer: Find local partners. People who are indigenous to the community and who truly understand the dynamics of the community will be the most committed to the success of the project. As affordable housing developers we can scour the city and we can look at a number of aspects and data. We can tell you the area median income in a particular community, but as far as retail use and retail need, developers must get to the community level and find out where the gap is and what services are needed most.
For our 43 Green mixed-income, mixed-use development in Chicago’s Grand Boulevard neighborhood, Habitat teamed with P3 Markets as a joint-venture partner. The P3 team lives and works in the community and therefore is able to provide the local level insight that will help drive the success of the project.
What’s an interesting tenant in one of your mixed-use properties?
Schwartz: One of our downtown New Orleans properties—The Beacon at South Market—is also home to Zeus’ Place, which offers pet grooming, walking, day care, and boarding services. This is a great example of our retailers complementing our residents’ needs. It helps us attract pet owners to the community and creates a steady stream of business for Zeus’.
Wu: We believe access to quality education is instrumental in creating a Community of Opportunity, and we've partnered with highly regarded charter schools in New York City to construct school space within two of our projects. We partnered with DREAM Charter School to co-locate a school, a public park, and 88 units of affordable housing on a site in East Harlem that opened in 2015. At our Sendero Verde project, which is currently under construction, Harlem Children Zone will operate a charter school in the podium of one of the buildings.
Hamer: The first phase of Ogden Commons will feature space for Sinai Health Systems, where it will be able to offer an array of needed outpatient services for the North Lawndale community. Sinai Chicago is the leading health care system providing holistic, people-centered care to Chicago’s West and Southwest Side.
How are mixed-used developments changing?
Schwartz: We’re very focused on health and wellness, both in terms of design and in tenant selection for the retail spaces. A 500-square-foot gym with some treadmills just doesn’t cut it anymore. Amenities have always been important, but we’re really thinking about how people use those spaces in this environment. Of course, you want a place people can get together to watch a movie or a game, but it’s equally important to provide spaces that are practical for people to work from home, study, or just relax outside of their apartment. Finally, while we’ve always been invested heavily in sustainable and green design, we haven’t always seen direct recognition of its value from tenants. We’re starting to see that change.
Foglio: Due to COVID-19, there will be less retail. Even before COVID-19, the retail sector was weak, but the pandemic has jeopardized what we will know as mixed-use for the foreseeable future.
Have you had trouble leasing commercial space during COVID-19?
Schwartz: Retail leasing has certainly changed and presented new challenges during the pandemic. Keeping spaces and communities active and vibrant require some creativity from owners in the near term. We’re working closely with our retailers, in some cases getting more involved in operations and spending more time focusing on how we can facilitate support from our residents. Our primary focus remains multifamily, but our experience operating hospitality, restaurant, and co-working spaces has been instrumental in navigating this environment.
Wu: Yes, there has been less interest in new commercial spaces during the pandemic especially when so many small businesses are struggling.
How is the retail/commercial portion of a mixed-use project usually financed, and are you seeing any new funding strategies emerge?
Schwartz: We’re in the community development business, but we take a holistic view of what that means, never limiting our strategy to one product or approach. We’ve been able to identify lenders and investors that share a similar view of what’s necessary to create a transformative project and to succeed over the long term. Flexible capital providers are essential to success in mixed-use—you have to be able to get creative and think outside the box.
Foglio: The retail and commercial portion of a mixed-use project is usually financed through banks and conventional lenders. But due to COVID-19, banks and traditional lenders are now cautious to lend to mixed-use projects.
A new option is empowerment zones, which work to fund the commercial element, but unfortunately do not work well with the low-income housing tax credit rules and structure.
Why are mixed-use developments important?
Hamer: Mixed-use developments are extremely important for the social vibrancy and economic well-being of a community particularly in dense urban areas like San Francisco, New York, and Chicago. But smaller markets like Detroit, Nashville, and Indianapolis benefit as well. Even though you are seeing some shifts right now with people moving out to the suburbs, people still want to be in close proximity to amenities. Let’s look at a specific choice like dry cleaning. Given a choice, someone would rather be in walking distance to that service as opposed to having to drive a mile away to drop off their dry cleaning. Another great example is food. Residents prefer to be in walking distance of a food mart or a grocery store instead of having to drive a mile or two to get to their food. The value of the residential portion of a building increases when you can provide those services within the development.