December 11, 2008
Mixed-use projects can pay off handsomely
By KERRY NICHOLSON and BOB TISCARENO
Special to the Journal
Take a look around. It’s hard to miss the growing prevalence of mixed-use urban communities high-density, pedestrian-friendly projects that integrate such uses as retail, office, hotel and residential space to re-invent a town center or further invigorate an already vibrant community. Wherever you wander in the Seattle metropolitan area, you’re likely to encounter a mixed-use center that has won over investors and users alike.
Why is this? By any measure, mixed-use projects are challenging to launch, especially now that financing is so hard to come by. Studies may cite Seattle as a top market for commercial and multifamily investment, but developers still need every advantage possible to obtain financing. Well-designed, well-executed mixed-use projects are full of such advantages, including potentially impressive financial returns.
Advantages over single-use
There are many reasons why these new urban centers are finding favor, but five stand out:
1. Growth management. To arrest sprawl, the state Growth Management Act calls for urban development that contains growth within boundaries. This has led to a scarcity of buildable land and created demand for high density.
2. Changing lifestyles. Whereas families once influenced housing trends, they now represent less than 25 percent of American households, according to the U.S. Census Bureau, replaced by young professionals, childless couples, single parents and empty nesters. The Urban Land Institute’s “Emerging Trends in Real Estate 2008” reports that these new households “want 24-hour residential environments closer to where they work ... pedestrian-friendly layouts offering varied living options ... and service retail.”
3. Shift in retailer attitudes. Ten years ago, retailers preferred shopping centers and malls to storefronts on urban streets where parking was inconvenient. Many now recognize the enhanced visibility and sales potential of placing stores in high-density, mixed-use projects.
4. The green factor. Mixed-use is easier on the environment, mainly because it shrinks the carbon footprint by relieving dependence on cars. In addition to walkability and proximity to public transportation, many projects are built on previously built sites that take advantage of existing utilities and city services. These centers also reduce impervious surface areas that cause erosion, as well as runoff of polluted stormwater (as much as 30 percent less, according to a New Jersey study).
5. Investment returns. Research has confirmed the superior financial performance of mixed-use developments. In their book “Creating Walkable Places,” Adrienne Schmitz and Jason Scully wrote: “Pedestrian-oriented, mixed-use centers are more successful by virtually every measure: rental rates ..., sales prices for residential units, sales and tax revenues, hotel-room occupancy rates, and property values.” The fact is, people will pay for access to mixed-use amenities.
Crossing the finish line
Despite these advantages, creating mixed-use projects is not for the faint of heart. To highlight the challenges, we’d like to use Riverpark in Redmond, a six-acre development that abuts Luke McRedmond Park, the Sammamish River and a recreational trail system. The project includes a 144-unit hotel, 106,000 square feet of office space, a 745-stall parking garage podium with 319 apartments perched on top, and more than 10,000 square feet of ground-floor retail space.
Since its planning stage in 2005, Riverpark has overcome a number of challenges characteristic of high-density, mixed-use projects:
Jurisdictional issues. Although many cities encourage mixed-use development, they don’t always have fully formulated policies to streamline entitlement and review processes. Redmond has actually been a model in conducting land-use studies and developing design standards. But the city’s standards are still open to interpretation and re-interpretation, which can contribute to costly project delays. (Fortunately, the new mayor, John Marchione, is committed to improving the process.)
Multiple stakeholders. Mixed-use projects always involve an assortment of players. In Riverpark’s case, the players include master developer Legacy Partners, master plan architect Tiscareno Associates, other developers and architects, consultants, contractors, and city and state jurisdictions. Many have never worked together, yet they must all cooperate to move the project forward.
Risk-adverse capital sources. Even in flush times, investors are wary of how long it takes for complex, mixed-use projects to come together. There is also risk that one or more components (retail, commercial, residential) will lose its financing appeal along the way or its viability at completion. Still, the more attractive returns are such that most investors are open to persuasion through an understanding of:
• Higher rental and sale prices that benefited similar projects.
• Financial incentives available to commercial projects with housing. (Redmond’s basic floor-area-ratio, a measure of allowable density, is almost three times higher for projects with residences than for single-use office space.)
• Cost savings that result from different project types sharing infrastructure, such as parking.
• Accelerated absorption rates.
Financial realities. In the next few years, tight capital for the real estate industry will make it harder to create projects like Riverpark, which depend on the participants’ ability to attract capital and lift off at the same time. Financing might, for example, be unavailable for a component (such as condominiums) that has fallen out of favor; or a weak component at completion could drag down the others. More often, however, healthier components positively affect the weaker ones in a continual feedback loop that fuels the absorption rate for the whole project.
At Riverpark, it was precisely this feedback loop that motivated Legacy Partners to focus on more than just dollars when choosing a qualified buyer for each parcel of land. For the office space, Legacy chose Group Health because of its pressing need for space and desire to push the schedule. For the hotel, Legacy chose Hotel Sierra because it planned to turn Riverpark into a regional showcase for its product. Broadly speaking, Legacy looked for fair, motivated and financially viable companies.
Multiple design teams. A cohesive design identity is critical with mixed-use urban centers, not only to attract tenants but also to rise above the competition. Here the potential obstacle is the varied agenda of multiple design teams. Bringing these teams together around a common, if flexible, aesthetic requires a strong master architect a leader who understands city requirements, relationships between buildings, open space attractions and the energy of circulation paths.
Five architectural teams shared in Riverpark’s complex design projects: the master plan, parking podium, retail facades, apartment and office buildings, hotel, and landscaping. Through weekly meetings and systematic follow-up, the teams came together and hammered out the buildings’ designs, incrementally progressing toward realizing the guiding vision European-style street scenes that pulse with energy from early morning till late at night.
Tenants want amenities
The office portion of Riverpark recently opened, and its apartments and hotel are scheduled to open next spring and summer, respectively. Even in this troubled economy, the future looks bright for a steady absorption rate. Thanks to the project’s mixed-use amenities and the special attributes of its location, Riverpark was underwritten at pro forma rents of $2 a square foot, compared with $1.75 or less for comparable single-use projects.
Indeed, the project has all the characteristics that attract tenants. Each building is distinct, while coming together through common elements such as lighting, signage, window treatments and color hues. Large windows pull the activity within the retail spaces and lobbies to the outside, where courtyards and resting spaces, studded with benches and fountains, beckon passersby. People drift in from the nearby park and trails, or emerge from the garage, onto paths that intentionally circulate them through the outdoor spaces, infusing the area with activity with life from every direction.
All in all, Riverpark is a series of happily irregular, interconnected spaces awash in light and defined by an unmistakable urban feel. As the buildings fill up and word of its amenities spreads, Riverpark promises to coalesce into a community abuzz with the comings and goings of many types of people, day and night, seven days a week.
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