Mixed-use properties come in all shapes, sizes and locations, but developers say the most effective projects are those that transform multi-use real estate developments into unique destinations with vibrant social scenes.
In Texas’ biggest markets, robust job and population growth have bolstered demand for more apartments and hotels, as well as office, retail and restaurant space. But it takes a developer that understands human psychology and social behaviors to successfully combine three or more of these uses into a final product that receives equal levels of demand for each use.
To that end, the “live, work, play” notion has become a catchphrase that to some extent figures into the branding and marketing campaigns of virtually every mixed-use project that comes out of the ground. However, the developments that become real hubs for social gathering, new experiences and the general passing of time are those in which uses complement one another, and in which the site supports all uses evenly.
“The concept behind ‘mixed-use’ — a smaller environment where uses aren’t as clearly separated and people conduct their home, work and entertainment lives in the same place — really defines how people live in many other parts of the world,” says Chris Bright, CEO of Bright Realty. “Historically, we’ve been disconnected in this country, and we’re transitioning to mixed-use as we recognize that that’s how people prefer to live.”
Bright Realty is developing The Realm at Castle Hills, a 324-acre project that will ultimately feature 235,000 square feet of Class A office space and 260 multifamily units, as well as a significant amount of retail and restaurant space. Both the project and the company are based in Lewisville, one of several suburbs on the north side of Dallas experiencing steady growth in mixed-use development.
Just north of Lewisville in The Colony, Berkshire Hathaway-owned Nebraska Furniture Mart is developing Grandscape, a 433-acre mixed-use project that will include several hundred thousand square feet of retail and restaurant space, as well as a 345-unit apartment tower and a hotel and resort.
To the east in Frisco lie established mixed-use developments like The Star and Frisco Station, which respectively offer hotel and residential space in addition to office and retail. Frisco will also be home to the PGA of America’s new headquarters, which will feature two championship golf courses, a 500-room Omni hotel, office and retail components, as well as a network of walking and jogging trails.
Further east in Plano is perhaps the most epitomizing example of a mixed-use project — Legacy West, the landing spot for the city’s most high-profile corporate relocations, including FedEx, Liberty Mutual and Toyota North America. Just north of Plano is Allen, where Howard Hughes Corp. is developing Monarch City, a 270-acre mixed-use project.
Besides being located on the fringe of a growing city, these projects all have one thing in common: They feature three or more distinct uses. This characteristic is becoming increasingly important to the definition of a “true” mixed-use project.
A Balancing Act
Incorporating three or more separate uses that complement each other and individually promote a bustling urban environment is both the essence and the bane of a mixed-use project. Failure to provide evidence of how the uses work well together can sink a project well before dirt is turned, according to Henry S. Miller III, who returned to his family’s namesake company in 2017 after a 27-year hiatus.
“Mixed-use developers always have to take into consideration what kinds of mixed-use projects haven’t worked,” says Miller, who now serves as managing director of mixed-use development at HSM. “A lot of lenders have an appetite for mixed-use, but when it comes down to it, lenders look at individual components and how they interact, then try to put it all together.”
Simple numerical analysis that outlines how office and multifamily users drive retail sales — and how the presence of retail and restaurant options are considered amenities for employees and renters — goes a long way with lenders, Miller says.
Securing financing for each component of a mixed-use project can be especially challenging for developers. This is due to lenders’ tendency to specialize on one property type and the difficulty of quantifying how the presence of one use impacts the performance of another.
“Retail in mixed-use isn’t typically valued by the same methodology as it is in traditional settings,” says Bright. “Lenders and appraisers work off history, and when they see retail in mixed-use, there’s a tendency to underwrite it with a higher vacancy rate and lower rental rate than what you’d see in a typical environment. But you still have to think of the retail as part of the larger plan, because the more cohesive the project feels, the more successful it will be in the long run.”
Without successful interplay and standalone appeal from each use, a mixed-use project is little more than a development adhering to zoning and entitlement guidelines from a municipality that likes the way the term sounds. But managing the overlap between the financing, construction schedules, branding and leasing of each element is immensely challenging.
“Developers in the past called projects ‘mixed-use’ because municipalities told them they had to do mixed-use or they wouldn’t get their entitlement,” says Terry Montesi, CEO of Trademark Property Co. “But real mixed-use projects draw on demand for three or more uses with real critical mass, not just token inclusion, for each of those uses.”
Victory Park in downtown Dallas, an epitomizing example of a successful mixed-use project in today’s market, features retail, restaurant, hospitality and office space.
Montesi, whose company is developing the 75-acre Victory Park project in downtown Dallas, defines critical mass as something in the neighborhood of 250 units for multifamily, 100,000 square feet for office and 50,000 square feet for retail and restaurant, depending on the size and location of the project. In addition, he says, public spaces in between vertical constructions are key to establishing the vibe and image of the property.
“In today’s market, the public realm, including the streets, sidewalks and green spaces, is really an anchor for the retail and an amenity for the multifamily, office and hotel,” he says. “We want these public spaces to not only be artisanal and contextual to the surrounding neighborhood, but also places where people can learn, have fun and be inspired.”
Who Leads, Who Follows?
PMB Capital Investments is a Dallas-based firm developing The Station, a $250 million mixed-use destination in Sachse, a northeastern suburb of Dallas. Spanning 119 acres, the project currently calls for 400,000 square feet of commercial space that will be marketed to office, retail and restaurant tenants, as well as 600 apartment units and 250 single-family homes, all surrounding a 34-acre public park.
Taylor Baird, partner at PMB Capital, says that the company’s approach to mixed-use centers on developing the residential component(s) first to establish a foundation of users for the later phases. By having renters onsite who are committed to the property for at least six to 12 months, the developer organically creates a customer base for the ensuing retail and restaurant components.
“Sometimes projects get rushed because the cities want the tax from the commercial space or developers need to move quickly because they’re highly leveraged,” says Baird. “The quality of the commercial components doesn’t always hold up when that’s the case. So we try to lead with residential, make sure the amenities and public features are finished and setting the tone of the project and let that drive the quality of the commercial side.”
Baird notes that PMB Capital also buys land with equity and borrows on vertical construction. Given the overall cautiousness that lenders are exercising toward any type of retail deal, this strategy can lead to lower leverage ratios and reduced risk on project financing.
“Banks today feel like we’re in the ninth inning of the economic expansion,” says Baird. “So for mixed-use, leverage and proceeds are coming down and there’s more recourse being added to construction loans. But because we buy the land with cash with no debt, we’re only financing individual product types, which is easier for banks to digest.”
Not all developers adhere to the residential-first philosophy. Miller of HSM, for example, sees retail as the true anchor of mixed-use, the component that defines several key facets of a property, from its brand image to its hours of operation.
“A true mixed-use project has to involve retail because it contributes so much to the kind of experience that people want in urban, pedestrian settings,” says Miller. “Office and multifamily can be very valuable, but they have to work for that particular project.”
But regardless of which foot gets put forward, prudent mixed-use developers recognize the value in looking at projects as long games and not rushing into vertical construction. Underwriting terms may not always allow for that, but the more established the reputation of the mixed-use borrower, the more viable that approach becomes.
— By Taylor Williams. This article first appeared in the March 2019 issue of Texas Real Estate Business magazine.