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MORE CENTERS ADD HOMES TO MIX

BY STEVE McLINDEN

Retail real estate developers are finding that people are as eager to be tenants at their centers these days as retailers. So the builders are increasingly incorporating homes into their retail developments.

Not only Steiner + Associates and other cutting-edge New Urbanist developers, but also such traditional mall developers as Simon Property Group and General Growth Properties are putting housing in their centers.

“I do believe the residential component is going to become a part of regional shopping malls,” said General Growth CEO John L. Bucksbaum, SCSM, at least where there is a market and space for homes.

Given the right chemistry and location, retail and residential can mix both practically and profitably, real estate experts say.

“It’s become pretty clear in the last five to eight years that there’s a growing desire for well-designed, walkable communities that include housing, stores and restaurants of different types,” said John McIlwain, a senior resident fellow and housing specialist at the Urban Land Institute (ULI). “And what you are seeing is higher housing values in these developments.”

That’s certainly the way it worked out for the original owners of the condos in the Tower Condominiums in downtown West Palm Beach, Fla. They bought their units in the $200,000 to $250,000 range in 2000, when the mixed-use CityPlace community, developed by the New York City-based Related Cos., was in its infancy.

Over the four years following, they watched as designer apparel stores, jewelry shops, sidewalk cafés, theaters, residential and commercial lofts, and other upscale elements sprang up among the colonnades and fountains of their European-themed town-center habitat. They also watched their condos surge in value.

“Right now, less than five years later, they’re selling them for around $400,000,” said CityPlace spokeswoman Jennifer Sullivan. In fact, she says, demand for permanent housing in the community has become so acute that nearly all the several hundred apartment units built there have since been converted to condos. Occupancy for residential space in CityPlace is a lofty 98 percent, while retail space is 97 percent.

Homing instinct
Demographic shifts are paving the way for such hybrids. The average U.S. household has declined from 3.1 members in 1974 to 2.6 members last year, according to the U.S. census. Subsequently, empty nesters have sought more-distinctive urban nesting grounds, observers say.

“Instead of retiring to Florida, a lot of baby boomers may want to retire to a community in the city,” said Donald Briggs, development director at Federal Realty Investment Trust. This Rockville, Md.-based REIT developed such high-profile mixed-use communities as Santana Row, in San Jose, Calif., and Bethesda (Md.) Row. “And today couples are also getting married later and having kids later. That translates into a young urban professional demographic, without kids but with money.”

Town center residential development creates a 10 percent to 15 percent rent premium, according to Federal Realty. “Plus, you are creating density and more value,” said Briggs. “And because this land comes at a premium, the more things you can put on the site, the better.”

Many retailers “have quickly figured out they needed to be there when residential started joining other commercial uses,” said Daniel Fasulo, an associate at Real Capital Analytics, a New York City-based real estate research firm. Even some big-box retailers are starting to get very active in the urban environment.”

The inclusion of new Nordstrom and Neiman Marcus stores is driving the planned expansion of General Growth’s Natick Mall, but the Greater Boston project is to contain a pair of new luxury condominium buildings as well. Housing is also under strong consideration for some existing properties in Hawaii and in Virginia, near the Washington, D.C., market, says Bucksbaum.

Further, General Growth absorbed several retail-residential community developments in its recent acquisition of The Rouse Co., and Bucksbaum says the firm has no plans to sell those off.

“Conceptually, I think the idea of living, working and playing in the same environment makes sense, both from a smart-growth point of view and in quality of life,” he said. “Whether or not it always makes economic sense is another question.”

Simon, too, is deviating from its retail-only norm, with the Coconut Point Town Center it is building in Estero-Bonita Springs, on the Florida Gulf Coast. Up to 400 residential units will be built there, including luxury condos. Anchoring the 1.2 million square feet of retail will be Barnes & Noble, Dillard’s and a Muvico megaplex.

Simon spokesman Les Morris says the firm “has taken baby steps into mixed-use up until now.” Company president and COO Richard S. Sokolov said in a press release that the Coconut Point makeup “represents our best thinking relative to the creation of a mixed-use, Main Street environment.” Coconut Point is scheduled for completion by 2006.

Build, sell, build ...
In Canada, Cadillac Fairview Corp. is including 1,500 apartment units in its redevelopment of Don Mills Town Centre, in eastern Toronto, in response to a heavy demand for residential property there (see story, A tail for two malls).

At the vast, new, 4,700-acre Stapleton mixed-use development in Denver, “residential has been selling as fast as it can be built,” said Thomas Gleason, a spokesman at the Denver office of the project’s developer, Forest City Stapleton. “We’ve even had to implement a lottery system because of the demand.”

Stapleton, which splits Interstate 70 at the site of the now-defunct Stapleton International Airport, will contain 12,000 residential units as well as 3 million square feet of retail distributed among several centers of various formats by the time it is built out, in about 15 years. The homes will go for about $100,000 to $1 million. A Bass Pro Shop and an 18-screen Harkins theater will anchor the planned 1.3 million-square-foot NorthField at Stapleton retail center.

With its enormous landmass, Stapleton has a wide variety of entry points and generous freeway access, says Gleason.

ULI’s McIlwain notes the desirability of New Urbanism retail clusters near a highway or busy thoroughfare versus those with the retail in a town center away from the highway. The latter “often struggled because they are too dependent on their own housing,” he said.

Federal Realty learned a different economic lesson when it started building urban mixed-use communities. In the beginning, the firm took on development and operational responsibility for the residential components as well as the retail. “In Santana Row we found that residential investment took a lot of time, a lot of risk and a lot of investment,” said Briggs. Now the firm is content to parcel off the residential components to a separate developer and is balancing its portfolio by acquiring centers with supermarkets and high-volume value retailers as anchors.

Creating community
With Santana Row and Bethesda Row, which opened in 1997 and 2002, respectively, Federal Realty’s retail formula was to first establish strong service components within a one-mile radius of the housing. Then it would add entertainment components, such as cinemas and sidewalk cafés, and lastly it would back-fill the balance of its lease space with some of the most recognizable local retailers and national lifestyle tenants. “We’re not just creating a mall on a street,” Briggs said. “It is a community.”

The mix at Bethesda Row, which has won the Best Block award from The Congress on New Urbanism, goes a long way toward making it a self-contained community. More than half the patrons of its Marvelous Market, a gourmet grocer on Bethesda Avenue, also live in Bethesda Row. “And most of them are fairly affluent,” said Tom Derecskey, the assistant store manager.

The most successful New Urbanism residential development occurs in areas with tasteful streetscapes and ample off-street parking, says McIlwain, adding that when projects are designed around transit stops, residents and retailers can both enjoy enhanced property value.

In fact, more than 100 so-called transit-oriented developments have already been built across the United States, says a report by the Transportation Research Board and the Federal Transit Administration, and at least as many again are being planned.

Once relegated to busy commuter stops in urban areas, these transit-oriented projects create numerous niche retail and residential mixed-use opportunities, the study says, and the U.S. “is in the midst of a sea of change when it comes to linking transit and urbanism.”

One such project, Avalon Chrystie Place, in New York City, will feature 712 high-end apartments and 138,000 square feet of retail. The project is going up above a subway stop between Chrystie and Bowery streets on formerly city-owned land. Slated for completion this fall, a 60,000-square-foot Whole Foods supermarket and other retail tenants will join the rental units, which are 80 percent market rate and 20 percent low-income, according to AvalonBay Communities, an Alexandria, Va.-based REIT that specializes in urban apartments.

Greasing the gears
Mixed-use urban projects are tough to finance because they have so many moving parts, says McIlwain. “From a developer point of view, it’s more complicated,” he said. “Very few lenders will finance the whole package. Your retail underwriters don’t understand housing, and your housing underwriters can really dislike retail. They are such totally different markets, yet they can work together so well.”

On the flip side, more banks are realizing that mixed-used spreads the risk around the risk, says Real Capital Analytics’ Fasulo. “If you build a 500-unit apartment and the apartment market goes south, that’s it. But if it’s mixed up, the risk is mitigated.” Although such projects create logistical hurdles, profits in these markets can override any additional expenses, he says.

If anything, McIlwain says, developers of mixed-use projects have erred in building too few residential units. Valencia (Calif.) Town Center, which contains offices, a hotel and a 790,000-square-foot regional mall, has only a few hundred residential units. McIlwain acknowledges that the center is successful, but he insists that “it would be a knockout” with more residential space.

It’s no surprise that urban residential and retail are mixing well, says Briggs. “That’s the way our cities were built for hundreds of years and the way we lived until people fell in love with their cars,” he said. “But the biggest thing to remember is choice. When cities provide their citizens choice, it creates great urban environments.”