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New mixed-use era rewrites the handbook on leasing

By Joel Groover

The shopping center industry’s enthusiastic embrace of mixed-use concepts can put even veteran executives in an unlikely position: back at square one.

The market rents for a traditional community center on a major highway may be fairly simple to calculate, for example, but what about for third-floor storefronts facing the interior piazza of a mixed-use project? The logistical issues for redevelopment of a 100-acre lifestyle center are familiar to any mall REIT decision maker, but what if the property’s density is quadrupled with offices, condos, parking decks and a hotel?

With so many such challenges, why bother with a midlife crisis? quips David C. Scholl, the 46-year-old senior vice president of development at Westcor, a subsidiary of The Macerich Co. “Now all of a sudden there’s an opportunity to add a whole new layer of excitement to what has been a wonderful career for the last 20 years,” said Scholl. “Things are lining up to make the next 10 or 15 years equally exciting, in a whole different direction.”

Charting this new direction means taking a wide variety of mixed-use experiments from the drawing board to reality, a process that began in the late 1990s but has accelerated in recent years as REITs have focused on squeezing revenue out of mall sites by adding uses. “Our industry will not bat a thousand,” Scholl said. “There will be some mistakes, things that don’t work.”

Fortunately, important lessons are emerging about how to design, market and lease mixed-use projects in ways that enable their retail components to thrive. And on some fronts the mixed-use landscape is getting easier to navigate, experts say. Signing national anchors, for example, is less daunting now that a wider variety of tenants, including Target and Whole Foods Market, routinely operate stores in mixed-use environments. Other retailers are jettisoning a one-size-fits-all mentality and adjusting store formats to fit into tight urban spaces, says Steve Coyne, vice president of development at Newport Beach, Calif.-based LNR Property Corp. “Just about every major retailer is coming up with some different prototypes for different scales,” he said.

Still, striking the right tenant mix requires a deft touch. The retail lineup in an urban mixed-use project needs to be broad enough to appeal to office workers, condo residents and visitors from the trade area, but it must also be special enough to complement the urban character of the project itself, says Brian M. Jones, president of Forest City Enterprises’ Western region commercial group. Niche gourmet grocery chains such as Whole Foods and Bristol Farms have emerged as prototypical anchors precisely because they do all of the above, Jones says.

Indeed, a clear trend in mixed-use is to focus on lively tenant mixes that emphasize food and beverage as well as lifestyle and entertainment, says consultant Jeff Green, head of Jeff Green Partners, Mill Valley, Calif. “We’re really talking about combining convenience and destination,” Green said. The trend is visible in the success of such projects as Santana Row, in San Jose, Calif., and Clayton Lane, in Denver’s Cherry Creek mixed-use district.

Creativity is important. Rather than sign a suburban-style multiplex movie theater, for example, Casto Lifestyle Properties recently added an urbane twist to the Main Street at Lakewood Ranch by courting a five-screen art cinema operated by a nonprofit film society, says Brett Hutchens, president of the Sarasota, Fla.-based mixed-use development firm. The project, which is under construction near Sarasota-Bradenton, will contain 124,000 square feet of retail, 48,000 square feet of second-level office space and 64 condos in a trade area that encompasses a 28,000-acre master-planned community. The lifestyle-oriented tenant mix includes art galleries, a day spa, some upscale restaurants, a Chico’s and a Morton’s Gourmet Market.

Mixed-use projects are also relying heavily on local restaurants as a way to keep the tenant mix fresh, says Ken Becker, who heads Mixed-Use Advisors, a Las Vegas-based consulting firm. National credit tenants are essential, he says, but too many of these in the lineup can rob a mixed-use project of its authenticity. Strong local restaurants are easier to find than mom-and-pop stores, add just as much

charm and stand a better chance of success because they serve all segments of the market, day and night, says Becker.

Developers are also learning how to create tenant synergies that draw coveted retailers and help to “brand” a mixed-use project. The lifestyle mix associated with Santana Row, along with the chance to be next to a Club One Fitness facility, lured women’s active-wear chain Lucy even after it failed at a mall across the street, says Green.

Mixed-use developments can be branded using nonretail names too. “We have a project here in Seattle with a Four Seasons Hotel, and the condos above that will be the most expensive in the city,” said Stan Laegreid, a principal of Seattle-based Callison Architecture. “The cachet of the Four Seasons name — just imagine the boutique-type retail you can get along with that.”

These days nearly every project Callison designs is mixed-use, says Laegreid. Whether in the U.S. or abroad, the firm relies on some basic rules it has developed through observation and experience to make these projects click. The term “mixed-use,” for example, does not imply interdependence, says the firm. Each use must have its own “sense of front door,” in Laegreid’s term, and be economically viable in its own right, based on the demographics of the trade area. “We’ve seen mistakes in several places where you effectively have to enter the shopping center to get to the core of the office,” Laegreid said. “That is a liability. Office users don’t want their address to be perceived as a shopping center address.”

Even relatively small design details can have a big impact on the look and feel of mixed-use retail, says Casto’s Hutchens. The firm tries to keep storefronts close together on grid-style street layouts with parallel parking. (Diagonal parking would ruin the atmosphere by requiring roads that are too wide.) “We want you to feel like you’re in a small town,” Hutchens said. “The challenge is convincing retailers that people will walk and that they don’t have to park right in front of the store.”

Such challenges are inherent to mixed-use projects, and those who take them on without sufficient expertise or preparation can pay a heavy cost, says Marc Hays, senior vice president of specialty center leasing at Developers Diversified Realty Corp. “There have been plenty of developers who didn’t understand the complexity, or the cost as it relates to the complexity, and the project failed,” he said.

DDR’s ongoing effort to remake the 1970s-era Totem Lake Malls, in Kirkland, Wash., into a mixed-use community is a case in point. The problems there include negotiating with the city over public financing; launching in-depth retail, residential and office market studies; razing most of the lower mall and all of the upper one; deciding which tenants should stay and how to get rid of the rest; signing new and exciting anchors; and figuring out market rents for second- and third-level storefronts facing the interior plaza. And this is to say nothing of the more mundane matters, such as how to divvy up common-area maintenance charges and parking spaces. “I’d liken it to us sitting down with a 5,000-piece puzzle,” Hays said.

Given the size and complexity of such puzzles, architect Laegreid marvels at the shopping center industry’s mixed-use derring-do. “Ten years ago you could not have imagined Simon Property Group developing anything but retail, and now they’re talking about residential, open-air centers, town squares and everything else,” he said. “I never would have believed developers would show such a willingness to adapt to mixed-use. It is very impressive.”

Then again, if there is one constant in the fast-changing world of retail, it might well be the imperative to “adapt or die.”