Our Understanding of Mixed-Use Developments Evolves as Developers Learn from Successes and Failures
by Sally Turner, Director, Research & Consultancy
The boom in new multifamily housing continues to attract Mixed-Use developers and investors to transform the urban and suburban landscape. New high-rise developments are adding density, pedestrian-friendly streetscapes, and diverse, vibrant, mixed-use neighbourhoods, attracting tenants and generating income for investors. Developers today are a long way from the old models of building subdivisions of single-family homes and selling them as quickly as possible. It is a sea change.
But any major change is a step into the unknown. Developers know that great rewards come with risks, but the risks themselves are learning opportunities. As new mixed-use multi-family housing developments come on stream, developers are getting a better idea of what styles of development work, as well as which don’t work.
[Learn why retail and apartments are a perfect match]
Vertical versus Horizontal Mixed Use
Some of the earlier mixed-use multi-family developments followed what was known as “vertical mixed-use design”. These buildings offered a blend of retail, commercial and residential development, usually placing apartments or condominiums above residential and commercial spaces on the lower floors. Businesses like restaurants or banks were to benefit from the built-in foot traffic, and the business would increase the net operating income of the building.
But some developers are finding that building a completely self-contained community within one building is not always feasible. Indeed, the retail and commercial portions of some vertical mixed-use developments have underperformed. This has reduced the achievable rents and, in some cases, created unsightly empty storefronts that mar the character and detract from the value of the whole building.
By contrast, “horizontal mixed-use development” has performed far better, where the diversity comes in the form of many buildings, and residents walk out from a residential-only building to access jobs and services at nearby commercial and retail spaces.
A Growing Trend
These scenes are playing out in growth centres of the United States, such as Dallas. The challenge of empty storefronts was noted at the 2016 Crittenden Multifamily Conference. The lesson learned appears to be that individual buildings can’t always create a fully vibrant community of commercial, retail and residential on their own. Successful developments are successful as much for their location in relation to other developments and amenities as they are in building those amenities themselves. In Canada, we see similar integration happening at the Shops at Don Mills in mid-town Toronto.
None of these issues discredit the merit of building mixed-use communities. Indeed, some developers encountered the most success by adding multi-family residential buildings to established commercial and retail areas. Residents flock to new buildings that have amenities such as stores, schools and parks already built nearby. The developer gets the income from the residential tenants without taking on the risk of commercial or retail.
The Chicken and the Egg Problem
On paper, building a single building with a mix of residential, commercial and retail uses looks like it will create a vibrant community that will attract residents and businesses. However, there is sometimes a chicken and the egg problem. A single multi-residential building, no matter how tall, is unlikely to have the foot traffic on its own to keep its retail spaces in business. These stores need a pool of dozens of residential buildings, many of which may not be built yet. So, when a multi-use building opens in a new area, business may be slow to start for the new commercial or retail tenants, which can make it a challenge to stay in business.
It is a challenge to plan and create a community that builds organically. We need a diversity of land uses in our cities in order to build a vibrant community, but that often requires a diversity of construction and construction timing. Sometimes, multiple multifamily residential buildings have to be built and given a chance to lease-up before an area hits a critical mass that can support more commercial and retail. This requires careful planning not only of the developments, but also the timing of their construction.
An example of such construction is the Lakeside community near Dallas-Fort Worth airport. This master-planned community features a mix of multi-family apartments and single-family homes along with commercial spaces overlooking a nearby lake. The development features a 26-acre retail centre, a town-square park, an amphitheatre, and a 3.5 mile trail network. But not all of this was built at once. A major movieplex and eatery opened in July 2015, and developers just announced construction of a 12-storey hotel. Just because a community is master-planned doesn’t mean that everything is ready on a single date. Condo development at the Shops at Don Mills in Toronto, Canada, has followed a similar trajectory, with the residential component of the master-planned community being delivered in multiple phases after the retail redevelopment and expansion.
The Need to Plan Ahead
The changing landscape of multi-family residential development in mixed-use areas is another reason why it is important for developers to conduct a thorough feasibility study before the build. A feasibility study examines the local marketplace and offers unbiased and expert advice on the best places to build and what to build. It can also provide good advice about when to build, so that developers can manage the changes of a marketplace as it matures.
Developers don’t have to build everything all at once to get the most from their development. Oftentimes, it’s a matter of finding the right location, and taking advantage of the amenities that are already there or anticipating when other amenities will be built elsewhere. A prepared developer is thus able to make the most of their investment.
At SVN Rock Advisors, we have three decades of experience in helping developers build successful multi-family residential developments. Our research team knows how to explore a territory, assess the marketplace, navigate the government regulations and permits, and identify construction partners and financiers who can turn a developer’s vision into reality. Our feasibility studies will help developers understand what they are getting into, what they can get out of their investment, and the best way to proceed to ensure the highest chance of success.