Despite the recession—or because of it—mixed-use sites get a new look (3/5)
Mar 5, 2009 3:20 PM, By Arthur Zaczkiewicz
Meanwhile, Ross Halle, vice president of architecture and town planning at Avalon Park Group, says his firm has looked to community and civic organizations to fill space at centers the firm is developing. “Because a mixed-use environment is more diverse, it is more accepting to a variety of users that are not purely retail,” Halle explains. “This mix of retailers, civic organizations, and service establishments creates a healthier economic situation that can adapt to the changing needs of the market. The different uses also create more vitality throughout the day rather than just at some peak evening or weekend hours.”
To be sure, simply trying to further diversify uses in a center isn’t a cure-all for every development. Furthermore, there remain opportunities, even in today’s tough climate, to proceed with more traditional mixed-use projects. For example, Houston is proving to be more resilient than other markets.
“Office leases, restaurants and residential continue to be strong in the Houston market,” says Jonathan Brinsden, executive vice president and COO of Houston-based Midway Cos. Traditional retail is under more pressure, Brinsden says, but the relative strengths in other uses means the company hasn’t had to completely rework the massive CityCentre project that the company has under development.
CityCentre is a 1.8-million-square-foot, mixed-use project set for completion in September. About 400,000 square feet is carved out for upscale retail, restaurants and entertainment. There will be a fitness facility, office space, 370 multifamily residential units and 250 urban lofts as well as brownstones, penthouse-style condos and hotel rooms.
The COO acknowledges that Midway has altered its strategy as a result of the macroeconomic climate. And this is opening doors for new types of tenants, such as a culinary school. But it hasn’t gone so far as to consider medical or educational uses. That’s “not an option for us at CityCentre,” Brinsden says. The target market demographics for the center, he says, simply don’t make it a good candidate for those kinds of unconventional mixed-use tenants.
Trouble finding tenants
This newfound creativity on the part of mixed-use builders seems like a progressive step. In part, however, it’s born out of necessity stemming from the shrinking pool of potential conventional commercial real estate tenants. And arguably no segment has slowed down as much as retail in the current economic quagmire.
“It’s more challenging to find tenants right now,” Seifert says. Retail sales have fallen off. ICSC expects same-store sales to be cumulatively negative through the first six months of 2009 on the heels of the first-ever drop in same-store sales during a holiday shopping season. As a result, retailers are scrapping expansion plans, closing stores and, in the most dire cases, filing for Chapter 11 bankruptcy protection or deciding to liquidate entirely. An informal count by Retail Traffic indicates that announcements to date from retailers shutting stores, liquidating or filing for bankruptcy could affect up to 2,910 stores. For comparison, in all of 2008, about 6,100 chain stores were closed, according to data from ICSC.
“There certainly are less individuals or businesses looking to relocate, expand or start a new company in the current economy,” Halle says. “So yes, it makes filling the space a bit more challenging.”
There is a bright spot to this. Brad Freel, chairman and CEO of Midway Cos., says this presents a special opportunity for regional retailers who can differentiate themselves from larger, more homogeneous chains. “Personally, I like the regional guys because they do bring in something unique,” Freel adds.
When retailers are willing to sign on the dotted line, however, they are asking for large incentives. Halle said the amount of incentives and concessions being given today “are much greater than any time in recent history.” Halle did not reveal the specifics, but says retailers are looking for generous terms, including free rent and shorter lease periods. Existing tenants too are asking for help, looking to restructure leases.
That’s just one problem for retailers, however. Retailers that rely on franchisees for expansion face an additional hurdle in that it’s become difficult to line up financing to allow the opening of new units. Seifert says financing for these types of users is “practically nonexistent and if they are not well capitalized, it’s hard to make the deal work.” As a result, Seifert says the firm is “listening to the tenants and are empathetic to their situations. If you can’t be creative and see the potential for the future, then now is not the time for you to build. And in this environment being ‘creative’ has taken on a brand new meaning.”
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