Development Hurdles in Mixed-Use Projects

Winter 2008 Cole Schotz Docket

Mixed-use developments are becoming increasingly more common in both urban and suburban areas.  As our economy changes, and as redevelopment and revitalization zones emerge from manufacturing and industrial sites, forward thinking developers are taking-on the challenge of mixed-use complexes.  Retailers seek mixed-use developments for the strong and consistent customer base, while local residents and authorities see these projects as a tax profit center and an attractive addition to areas undergoing redevelopment.  However, successful mixed-use developments can be costly and difficult to achieve, in light of zoning restrictions, conflicts between proposed uses and the difficulty in obtaining a balance among commercial, retail and residential occupants.

Retailers face unique challenges in negotiating leases in mixed-use developments.  The retail market is driven by trends, so retailers seek flexibility to meet the needs of their customers in an ever-changing society.   Developers will argue that they are juggling the needs of various constituencies and cannot focus on the concerns of a single retail tenant.  However, retailers spend considerable resources to scout the most profitable locations and create different business models to ensure maximum return on their investment.   Every location is important to the bottom line of retailers and the ability change store design, signage and products or services to adapt to customer needs and trends is vital to success in the marketplace.

In multi-level configurations retailers are typically located on the street level.  In low-rise developments, which are centered around a plaza or waterfront, retailers can be located either in a plaza or even contiguous to residential or office space.  While there may be synergy between retail tenants and office tenants, no such synergy exists on the residential side.  In residential complexes, retail tenants often face significant negotiation hurdles relating to: signage, hours of operation, noise and music, control over loitering customers and odors.  The location, height and size of sign panels is critical to a retailer’s successful operation.  National and regional tenants who rely on logos and color schemes for customer recognition object to uniform sign criteria.  It is often difficult to reach a balance on signage issues when the development has a residential component, but typically not so difficult in office buildings.

Parking, particularly dedicated parking, is an important issue for the retail tenant.   Retailers in mixed-use complexes located on city streets rely heavily on public transportation systems for their customer base, as parking is at a premium.  However, in low-rise projects, developers may have the ability to accommodate residential, commercial and retail parking requirements using parking decks and underground garages, but the commercial parking demand often exceeds the needs of residential tenants.  Proximity of parking will be an issue for those national retailers accustomed to shopping malls.  Also, shoppers will not return to a center if parking is difficult, if they feel unsafe or if the parking areas are difficult to navigate.  A practical analysis of the proposed site plan for the project is a critical step in a retailer’s evaluation of the project.      

Achieving an appropriate tenant mix is equally important to the retailer and the developer.  A supermarket anchor in lifestyle developments is key to both retailers and developers alike.  A gym, pharmacy and coffee shop are likely targets for developers as the high-end specialty stores do not attract a broad enough customer base.  Specialty retailers, such as coffee shops, pharmacies, salons and donut shops will require an exclusive to protect their customer base.   However, all of these uses pose potential nuisances to both office and residential tenants.  Early morning deliveries are not a problem for office tenants, but must be coordinated to avoid disruption to residential tenants.  Late hours, restaurant odors and security also are concerns which a developer must address in its design of the project.  Ensuring security for the retail tenants when access is the same for residential and retail is also a concern. All of these factors increase the cost of development, which tends to make rents and common area costs exceed those of traditional malls and lifestyle centers.  No mixed-use project is the same, each faces  unique design, zoning, use and development issues, so flexibility is critical for both the developer and the retailer to ensure success on both fronts.



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