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Real estate players: Focus on mixed-use developments
The time is right for real estate players, including Real Estate Investment Trust (REITs), to focus on mixed-use developments. By making these investments a priority and enhancing the user experience quotient, developers will be poised to capture the benefits of the mixed-use development trend for themselves, their investors, and their tenants.
June 12, 2018
A blog post by Saurabh Mahajan, real estate manager, Deloitte Services LP
Avalon, a mixed-use development in Alpharetta, Georgia, includes a mix of spaces for living, shopping, movies, dining, hospitality, and electric vehicle charging, as well as a community fire pit.1 Its developer manages the public spaces and organizes over 200 events a year, providing different entertainment options such as live concerts and parties, which complement the leasable space.2 This entails a higher marketing and programming budget, but it pays off in the form of increased foot traffic and keeps the commercial establishments aloft.
Mixed-use is a form of integrated and pedestrian-friendly development that typically combines two or more uses, including residential, commercial, and institutional. In fact, mixed-use developments were the preferred form of living prior to the early 1900s, until increased industrialization and the automobile boom spurred the creation of suburbs as people became able to travel greater distances between residential and commercial establishments.3 Concurrently, governments imposed separate land use and zoning regulations for different purposes such as work, shopping, and schools to control the development of their respective regions.4
Mixed-use is a form of integrated and pedestrian-friendly development that typically combines two or more uses, including residential, commercial, and institutional.
In the 1970s, we saw the re-emergence of a few mixed-use developments that were meant to rejuvenate urban areas.5 This trend extended to concepts such as transit-oriented developments (TODs) in the late 1990s and early 2000s.6 Yet single-use properties remained the key focus for most existing and future developments.
However, in the last few years there has been an increased demand for mixed-use developments as consumers’ preferences for integrated urban-lifestyle centers that cater to the “live, shop, work, play” mantra have become more pronounced. Interestingly, this lifestyle preference is not coming just from millennials, but also from older generations, who want to live in walkable and well-connected urban locales. Indeed, according to the 2017 National Community and Transportation Preference Survey, 62 percent of millennials, 45 percent of Gen Xers and baby boomers, and 55 percent of the silent generation want to live in walkable communities and prefer shorter commutes.7
Why should real estate developers focus on mixed-use projects?
In addition to consumer demand, there are business reasons for developers to focus on mixed-use projects. First, tenants stand to benefit from increased exposure to consumers, since these spaces attract more foot traffic for diverse purposes. As a result, tenant attraction and retention can be improved through focus on mixed-use. Second, portfolio risk is diversified across different property types and uses, especially at a time when disruptive forces have rendered many single-use properties underutilized or irrelevant in a short span of time. This is true for many standalone office and retail buildings, which have lost tenants as the result of broader trends such as the sharing economy or retail store closings.
These trends and drivers have certainly made real estate developers rethink their strategies, and we now are seeing increased proliferation of mixed-use developments across the US. Many private developers are collaborating with local governments both to enhance the experiences for end users and increase demand for their real estate assets. The Avalon project is certainly a testimony to that strategy.
There are also many similar examples in the private space, where developers are planning to create such experiences through an integrated development approach rather than single-use buildings or property types. However, public company developers and owners have yet to join the bandwagon in a big way and have been involved only in one-off mixed-use projects. This may be due to historical market concerns around valuations and financing of these developments. These concerns now appear to be waning, with the increased demand for mixed-use developments, government support through accommodative zoning regulations, and increasing acceptability by lenders and investors.8 In fact, investors are increasingly convinced of the benefits of risk diversification and long-term returns in mixed-use projects.9 It is high time for public real estate players, including REITs, to increase their focus on mixed-use developments and create user experiences which are value accretive—not only for themselves but also for investors and tenants.
What do you think?
Are you planning to increase mixed-use developments in your portfolio and enhance the user experience quotient of your properties?
Join the conversation on Twitter: @DeloitteFinSvcs.
1 Scott Sowers, “Real Estate Developers Become the Entertainers,” CITYLAB, October 24, 2017.
3 “Mixed-Use Development 101: The Design of Mixed-Use Buildings,” Urban Land Institute, August 30, 2011.
7 “Millennials and Silent Generation Drive Desire for Walkable Communities, Say Realtors®,” National Association of Realtors®, December 19, 2017.
8 Neil Pierson, “How to finance a large-scale, mixed-use property,” Ask a Lender, December 12, 2017.
9 Adam Ducker, “How to invest in mixed-use real estate projects,” Institutional Real Estate, Inc., January 1, 2018.
QuickLook is a weekly blog from the Deloitte Center for Financial Services about technology, innovation, growth, regulation, and other challenges facing the industry. The views expressed in this blog are those of the blogger and not official statements by Deloitte or any of its affiliates or member firms.