A mixed-use renaissance: a renewed interest in creating a vibrant urban feel in city centers and in suburban settings is propelling successful mixed-use development. Here are three projects that blend the best of mixed use.

MIXED-USE DEVELOPMENTS ARE THE HEAVYWEIGHT CHAMPIONS OF COMMERCIAL REAL ESTATE. They're flexing their muscles as they become increasingly important elements in today's urban and suburban development. * These wide-ranging mixes of different land uses can range in size from 100,000 square feet or less to a series of square blocks representing millions of square feet. They dot the nation's urban and suburban landscape, located mostly in or near major population centers. * The Washington, D.C.-based Urban Land Institute (ULI), in its June 2003 Mixed-Use Development Handbook, defines mixed-use developments. It says they are characterized by three or more significant revenue-producing uses that are mutually supporting in well-planned projects; a relatively close-knit use of land with integration of project components, including uninterrupted pedestrian connections; and development in conformance with a coherent plan that often stipulates the type and scale of uses, permitted densities and related items. Typically, the developments include residential, retail, entertainment, lodging and cultural attractions housed in near proximity to each other. * Although mixed use is frequently on the cutting edge of today's real estate development thinking, the roots of the concept can be traced to the Middle Ages, according to ULI. Perhaps the most familiar example is the medieval town, relatively small and surrounded by high walls. To defend the city properly, it was necessary to keep the circumference of the protective exterior walls to a minimum, resulting in a compact city with high densities and integration of governmental, residential and commercial uses.

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ULI says many older American cities to this day exhibit some of these mixed-use traits.

Mixed use on the upswing 

John McIlwain, senior resident fellow at ULI, says mixed-use development is on the upswing because of increased interest in urbanization. He cites regeneration of central cities and regeneration of the suburbs in a new way through the creation of new centers with urban-like environments, often called town centers.

"Sometimes older towns are being renovated, and in some cases entirely new towns are being created," McIlwain says. He also cites large suburban malls that were shuttered and are now being torn down and rebuilt as mixed-use centers.

Behind the surge in urbanization is a generation of baby boomers entering the empty-nest stage who are opting for the ease and convenience of an urban environment, whether it's located downtown or in the suburbs. "The key in either case is mixed-use development," McIlwain says.

Looking at mixed use from the downtown standpoint, David Feehan, president of the International Downtown Association, Washington, D.C., says this type of development is increasing for three basic reasons:

* More public policy is pointing developers in that direction. Developers can gain an economic edge at the city level by taking advantage of existing infrastructures and increasing densities.

* The market is demanding it. There are more and more indications that people feel a sense of vibrancy and community when they live in a mixed-use development.

* People living in mixed-use developments have a definite transportation advantage. It saves on time if you work near where you live or have nearby access to grocery shopping and amenities such as day-care centers and dry-cleaning businesses.

Thomas Bisacquino, president of the Herndon, Virginia-based National Association of Industrial and Office Properties (NAIOP), says the primary driver for mixed-use development is the demand for work-live-and-play communities combining retail, office and residential space in a tight footprint. "It's all about choice. People don't want to live in disjointed communities," he says.

Herman Bulls, chief executive officer of Washington, D.C.-based Public Institutions, a division of Chicago-based Jones Lang LaSalle, agrees. He says mixed-use demand is a product of lifestyle changes on the part of people who want a confluence of work and play and want to spend more time on leisure activities.

David Cardwell, vice president--finance with the National Multi Housing Council (NMHC), Washington, D.C., points out that mixed-use development is site-dependent. "Development depends on location of the projects. The whole intent of mixed use is to have uses complement each other. That's why residential is an essential component, and multifamily development is a way to make that happen," he says.

David Tripp, vice president and director of investor relations and corporate communications for The Rouse Company, Columbia, Maryland, a leading real estate investment trust (REIT) specializing in large-scale retail projects and master-planned communities, has a somewhat different take on the current market. He sees few opportunities for large-scale retail developments, which, in turn, limits mixed-use development. Tripp traces this to general consolidation in the retail industry.

What's ahead

Looking ahead, McIlwain says the mixed-use outlook will continue to be strong because of growing demand for it. "When it's done well, mixed use makes money across the board," he says. "Also, we're seeing it show up in the new master-planned communities. Most of them have mixed-use development."

Bisacquino describes the outlook as "fairly positive." He sees demand for office space improving as the real estate markets come back. Additionally, mixed-use development is becoming more politically accepted as debate over suburban sprawl continues.

"Urban redevelopment, in particular, is politically popular. It's market-driven and adds life to the urban core," Bisacquino says. He also anticipates a major demographic trend emerging within the next five to 10 years as today's baby boomers become retirees and opt for an urban-core lifestyle.

Bulls foresees a moderate to strong outlook for mixed-use development for economic reasons. He says cities trying to distinguish themselves have the ability to absorb more space, making it easier for developers coming out of a recession to capitalize a deal.

Feehan cites several factors contributing to an increase in urban mixed-use development. "The outlook is driven by market acceptance," he says. "There are increasing numbers of empty nesters who can afford to live downtown. And with the current low mortgage rates, more younger people can afford downtown condos. The financial markets are receptive, as lenders seeing more residential development are willing to look at condos. Also, there's been a significant drop in downtown crime rates, which are at their lowest point in 40 years."

Tripp, however, foresees no significant improvement in mixed-use development. "Developers are not building large-scale retail projects," he says.

ULI defines three different types of mixed-use developments: mixed-use towers, integrated multitower structures and mixed-use town centers/urban villages/districts.

A mixed-use tower is a single structure, typically of considerable mass and height, whose uses principally are layered vertically. Integrated multitower structures include individual buildings and towers architecturally connected by a common atrium, concourse, shopping complex and/or underground parking structure, with all or most of the project components integrated at the lower levels in a common base. Mixed-use town centers, urban villages and districts are organized around streets, parks, plazas and/or squares, and function more like an urban district than a single project.

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As to which type or types may be getting the most focus today from planners and developers, Bisacquino says, "It's very situational and flexible, depending on where you are. Many communities don't want towers, but large-scale development in major markets presents more opportunities for towers."

Bulls points out that towers are attractive in urban centers, in conjunction with the revitalization of downtowns. "Vertical towers lend themselves to urban development, while town centers are more likely to be situated on the fringes and in the suburbs," he says.

Feehan says town centers are hot right now because public planners know they have to offer that product in the suburbs. "Many suburbanites are looking for the urban experience but want to live in the suburbs," he says.

McIlwain says mixed-use development is split pretty evenly across the board in cities and suburbs, while Bisacquino and Bulls say there's more momentum in central business districts (CBDs). "It's getting harder to do greenfield development," Bisacquino adds. "Greenfield" refers to suburban versus urban development.

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Job growth is major driver

Sources interviewed agree that job creation is one of the major drivers of mixed-use development.

Bisacquino says, "All real estate development is linked to job growth. As jobs fuel more demand, people need places to work, live and play, and more of them are choosing mixed-use developments because mixed-use puts together a format bringing these elements together."

Feehan says locales with mixed-use developments tend to develop a sense of community that attracts talented people, and are more likely to encourage job creation. "Mixed use can foster that type of atmosphere," he adds.

McIlwain says mixed-use development is linked to job growth to the extent that jobs are needed to fill the projects' office properties. "You don't want to do mixed-use development where there is no job growth," he says.

What's the most important "mix" or combination in mixed-use development? The experts have varying views.

McIlwain says it depends on the circumstances of the market. "Classic mixed use has housing, retail and office. The balance of how much of each is needed is determined by the market," he says. "You need to make sure there's enough housing. One of the biggest mistakes developers can make is not putting in enough housing."

Feehan says residential and retail are often the primary mix, "but it depends on local circumstances." In Bisacquino's view, the first element to bring in is residential, followed by office and then retail. Bulls says it depends on what the developer is building, but sees residential as the most important component. "The associated activity going with that is retail. That's the No. 1 combination, and you build from there," he says.

In developing a successful mixed-use plan, the name of the game is synergy. All uses must function smoothly on an independent basis and in conjunction with each other. That requires know-how and sophisticated planning on the part of developers and community planners.

Affordable Housing Finance, in its October 2003 issue, says mixed-use development can pose a whole new range of problems for developers. For example, most building codes aren't written to allow retail and residential space in the same building, and almost everything that works well in mixed-use design seems to require a variance from the local zoning board.

McIlwain points out that a successful plan requires a very strong design, with the right balance between components that will attract people and that the market will support. Proper allowance for and location of parking is important, but the critical focus should be on the pedestrian, not the car, he advises. "You need to make the place walkable and a fun place to be so that people will come. It's not simple, and it takes a lot of hard work," he says.

Bulls offers a six-step blueprint for mixed-use planning:

* Market dynamics are first. Get a market in which you can compete.

* Get a locale with an enlightened local government for ease of approvals.

* Debt and equity capital must be available for financing.

* Traffic patterns in the development should flow.

* Parking must be sufficient and integrated with the traffic flow to prevent bottlenecks.

* A series of cross-easements are required, assigning responsibility to each of the owners if the development has multiple ownership.

Feehan says a successful plan requires a very thorough and careful understanding of the market, the community and what you're trying to accomplish. Developers also need to work with tenants and architects to create space that tenants find attractive and that meets their needs.

"Don't ignore community support," Feehan advises. "Go out and build support for the project. You don't want to get blindsided by local regulations or residents who wanted to be consulted and weren't," he says.

"Density is a key issue," Bisacquino adds. "Some don't like it. A mixed-use development has to have a sense of community, so any good plan has to look at space."

Lenders become more receptive

On the financial front, McIlwain says it's always been difficult to finance mixed use, but lenders are becoming more receptive as they see more success stories. "Funds are available for well-planned projects with experienced developers," he says.

Bulls concurs that funds are there for well-conceived and well-located mixed-use projects. The outlook is also favorable from the investment standpoint, but Bulls says mixed use requires a sophisticated investor who takes a long-term view.

McIlwain agrees. "If you only care about next-quarter returns, this is not the property type for you," he says.

Feehan notes that investors are active, and mixed-use projects are going up in suburbs as well as in cities. Bisacquino says, "Investors see mixed use as up-and-coming--one of the more successful product types moving forward."

As for the biggest challenge facing mixed-use developers for the remainder of 2004 and 2005, McIlwain cites local community opposition. "Classic NIMBY [not in my back yard] problems are resisting all kinds of development, even good development," he says.

Feehan sees the foremost obstacle as conflicts between uses when developers don't do their homework--for example, trash pickups from restaurants at 3 a.m. that awaken residents.

In Bisacquino's view, the main hurdle is dealing with antiquated laws that don't take into consideration density needs.

To get a closer look at mixed-use development, Mortgage Banking interviewed developers and managers of the three representative developments: Reston Town Center, Reston, Virginia; Water Tower Place, Chicago; and Peabody Place, Memphis, Tennessee.

RESTON TOWN CENTER

Reston Town Center occupies a 25-acre site in the master-planned community of Reston, Virginia, near Washington, D.C.

This diversified development currently has more than 956,000 square feet of office and top specialty retailer space. Other facilities include a 514-room Hyatt Regency hotel, an 11-screen movie theater, a glass-roofed pavilion for ice skating in the winter and open-air events the rest of the year, a variety of restaurants and supporting business and professional services. The focal point of the center is a large fountain topped with a distinctive statue of Mercury.

First suburban mixed-use town center

Reston Town Center represents the first mixed-use town center that was built in a suburban environment, according to Thomas Bakke, senior vice president of national leasing and marketing with Chicago-based Equity Office Properties Trust Inc. (EOP), a REIT and the nation's largest publicly held office building owner and manager.

The development is at the center of 11.5-square-mile Reston, one of the nation's first master-planned communities.

EOP is the majority owner and operator of Reston Town Center, acquiring approximately 80 percent of the property in 1996, including office and retail space.

Reston Town Center was originally developed by Mobil Land Development Corporation, a subsidiary of New York-based Mobil Oil Corporation, with completion of Phase 1 in 1990. That phase included two class-A, 11-story twin office buildings and the Hyatt Regency Hotel, which has extensive conference facilities and an executive fitness center. Also completed in Phase 1 were retail shops, restaurants, entertainment and parking facilities for more than 3,000 cars.

Dallas-based Terrabrook developers took ownership of Phase 2, and proceeded to develop some and sell some of the land. Terrabrook subsequently sold its interests in Reston Town Center, including buildings and land, to Boston-based Boston Properties and Vienna, Virginia-based KSI Services Inc.

Further expansion

EOP says two more office sites and two blocks devoted to residential will be built if current plans don't change. The residential developer is Dallas-based Trammell Crow Residential. Bakke says the target date for buildout of the center is 2010. The total estimated cost will be upward of $500 million.

In addition to serving the needs of the Reston community, Reston Town Center acts as a magnet for tourism, attracting 200,000 to 300,000 visitors a year, says Bakke. "The business outlook is very favorable," he comments. "Rents are among the highest in Northern Virginia, and retailers do very well here."

However, the picture wasn't always that rosy. Bakke says the center declined in 1990 with the drop in the real estate markets. Community goals were being met but financial goals were not, triggering its sale to EOP in 1996.

"Since then, though, the center has been a huge success financially," Bakke says. "It has performed well in an up-and-down market since we took it over."

Bakke says Reston Town Center had a good master blueprint to start with, so that no serious design or development problems have cropped up along the way. Even so, Reston has very strict design parameters, and plans are subject to scrutiny by a design review board. "From our standpoint as owners and managers, we have to police ourselves and provide a high level of attention to detail," he says.

In Bakke's view, a mix of all basic product types is important for a successful mixed-use formula. "Office/hotel is a nice mix because office users need lodging. The combination of retail and restaurants provides a good environment for meetings. And when you layer in multifamily, people can live, work and shop in the same area," he says.

Bakke cites a four-point approach in developing a successful mixed-use plan: You need a visionary "guiding light" type of developer, the right location, good demographics and community support. For Reston Town Center, he lists coordinating the different owners as the No. 1 challenge for the remainder of 2004 and 2005.

WATER TOWER PLACE

Chicago's spectacular Water Tower Place is the nation's first vertical shopping center within a mixed-use complex.

It ranks as a destination landmark and one of Chicago's foremost tourist attractions, generating more than 25 percent of the retail sales on North Michigan Avenue, according to Chicago-based Urban Retail Properties Co., the original developer of Water Tower Place. The 74-story development, situated in the heart of the upscale retail corridor known as the "Magnificent Mile," has a 62-story tower rising from a 12-story base. The development contains 3.1 million square feet of space and was completed in 1976 at a cost of $195 million.

Water Tower Place features an eight-level shopping center accessed by shimmering glass elevators and containing 726,000 square feet of retail space. The twin anchors are Marshall Field & Co. and Lord & Taylor, which occupy more than half of the space. The remaining space is occupied by more than 100 specialty shops, fashion boutiques, restaurants and services.

The development hosts more than 20 million shoppers per year, with tourists accounting for 40 percent of the customer base, according to The Rouse Company, Columbia, Maryland, which leases and manages the retail and office segments of the development.

Five-star Ritz Carlton

Water Tower Place, named for the picturesque Water Tower landmark across the street, includes the five-star Ritz Carlton hotel, which has a total of 431 rooms, suites and apartments situated on 22 floors. Conde Nast Traveler named it the best hotel in North America for each of the last four years, according to Caryn Torres, marketing manager of Water Tower Place.

Water Tower Place received ULI's prestigious Award for Excellence for large-scale urban development in 1986.

The upper 40 floors of Water Tower Place comprise 260 luxury condos. Down below, 651 parking spaces are available on four underground levels. A four-lane motor concourse at street level provides access to the shopping centers, offices, the concourse lobby of the hotel and the parking elevators.

Vertical retail pioneers

Ross Glickman, chief executive officer of Chicago-based Urban Retail Properties Co., the original developers of Water Tower Place, says he and his associates faced real challenges in the integration of different elements that had to work independently and as a whole through a variety of design mechanisms.

"We had to establish a blend between office, retail and hotel on a tight site," Glickman recalls. "All of the uses had to make sense and work well from both the economic and physical plant standpoint."

The concept of vertical retail was untried and untested anywhere when construction began in 1972, Glickman says. "Retail proved to be difficult," he continues. "It took five to seven years to reach a comfort zone with retailers. It really was a question mark until the early 1980s."

The combination of uses from the critical mass standpoint is very important, Glickman says. "We were able to enhance the critical mass of Water Tower Place and integrate it with the surrounding North Michigan Avenue neighborhood. North Michigan Avenue developed its cachet as a result, and Water Tower Place became the linchpin of the Magnificent Mile."

Glickman says a successful mixed-use plan requires a footprint that works. Circulation patterns and transportation systems making it easy to get from one place to another are essential. It's also necessary to know how each component works, independently and collectively, and whether the project can be financed.

Torres says the focus ahead is to continue attracting flagship tenants. "We want to make sure we're out there with the best retail concepts and strict leasing standards that reflect the quality of the property," she says.

PEABODY PLACE

Peabody Place, in the heart of downtown Memphis, Tennessee, is one of the nation's largest mixed-use developments, covering approximately 2 million square feet over eight square blocks.

The development is located a few blocks from the Mississippi River and Beale Street, renowned as "the birthplace of the Blues." The developer, Memphis, Tennessee-based Belz Enterprises, is a major family-owned real estate development company with interests throughout the South and much of the country.

Peabody Hotel renovation is key

The project is named for its anchor, the historic 465-room Peabody Hotel, originally built in 1925 and famed throughout the South for its ambience and amenities. The restoration by Belz Enterprises and reopening of the hotel in 1981 are widely credited with launching the renewal of downtown Memphis and the development of Peabody Place.

When the Peabody opened its doors again as a premier hotel, it came complete with the famous Peabody ducks. In the 1930s, a tradition began of placing live ducks in the lobby's marble fountain. That tradition continues today as the ducks descend from their Duck Palace on the hotel's rooftop each morning, march out of the elevator and down a red carpet to inhabit the fountain.

In its June 2003 Mixed-Use Development Handbook, ULI describes how downtown Memphis experienced significant deterioration and blight in the late 1960s and 1970s following the assassination of Martin Luther King Jr.

A turning point occurred in 1977, when the city of Memphis and Shelby County governments established the Center City Commission (CCC) to direct the comprehensive development of downtown Memphis. It was to serve as the official partnership between private business and government in the revitalization effort.

The leader in spearheading the revival was Jack Belz, president and chief executive officer of Belz Enterprises, who had a vision of what downtown Memphis could become, according to Andrew Groveman, senior vice president of the company.

Major entertainment/retail center

Following restoration of the Peabody Hotel, Belz Enterprises acquired six additional blocks of property and named it Peabody Place. Today, the development includes a 300,000-square-foot retail and entertainment center with more than 30 specialty shops, restaurants and entertainment retailers, beckoning Memphis residents and visitors to "come downtown and play."

Peabody Place's largest tenant is the 22-screen Muvico Theatre complex, designed to accommodate 4,300 moviegoers. The retail and entertainment center is connected by sky bridges to three adjoining parking garages accommodating about 3,000 cars.

Other components of Peabody Place include a 15-story office tower; The Tower at Peabody Place; Pembroke Square, a 200,000-square-foot development that includes 120,000 square feet of office space; a Chinese art museum; 45 luxury apartments; and the Center for Southern Folklore and Cafe. Also included are Gavoso House, an urban apartment community featuring 156 apartments; 50 Peabody Place, a 50,000-square-foot, class-A office complex with 10,000 square feet of retail space; and a 144-room Hampton Inn and Suites.

Peabody Place is situated at the center of a metro area of 1.1 million residents. In addition, the city hosts 8 million visitors a year who spend an estimated $8 billion during their stay, according to Belz Enterprises.

Groveman says Peabody Place was built at a cost of more than $200 million, with planning and development occurring over a 20-year period. He explains that Belz Enterprises had to create a sense of community in designing the project. One of its outstanding features is traffic patterns that put everyone in close proximity to everyone else, he says.

"We also knew that parking and ease of access to parking were critical, in addition to an attractive merchandising mix that would complement what was downtown. Our single most important asset was the Peabody name, with the hotel serving as the linchpin for the development," Groveman says.

In Groveman's view, mixed use works best in downtown areas. "The health of any city is measured by the vibrancy of its downtown," he says.

Groveman adds a successful mixed-use plan requires a major commitment of time, the resources to overcome obstacles and the ability to obtain the necessary financing. "You need a real team effort and good working relationships between public and private sectors," he concludes.

Demographic trends and public policy are converging in ways that suggest increasing mixed-use development in the years ahead. Mixed use is incorporating some of today's most advanced real estate concepts to design and build places where people want to live, work and play.

John Bell is a Chicago-based freelance writer specializing in commercial real estate and finance. He can be reached at [e-mail].