The unprecedented boom in mixed-use development is now being threatened by a slumping housing market and an uncertain retail climate. Many observers agree that proper execution is now more important than ever. To gain insight, we spoke to Tom Gilmore, SVP Investments of Madison Marquette and Daniel McCahan, Development Manager at Archstone, a leading national investor and operator of residential real estate.

Q:   Why has mixed-use development become so popular?

DM: Mixed-use reflects how people want to live. Increasingly, more Americans want the action and excitement of the urban experience and they can get it from developments that combine retail, residential and other uses. We have also seen local planning boards insisting on such projects—seeing them as good "smart growth" alternatives. In the end, developers follow market demand and mixed-use is what the market wants right now.

MP: Retail developers follow trends. Trends result from creative solutions to challenges and opportunities. Retail developers who have moved into mixed-use development have been responding to challenges such as increasing land and development costs, reduction in available green field development sites, a shrinking national tenant base, and changes in various demographic patterns. They have adapted by taking advantage of opportunities resulting from trends such as the desire to work and live in close proximity to shopping, dining, entertainment and cultural amenities. Also, well-planned mixed-use developments have the potential for significantly higher yields.

Developers, investors and creditors are also becoming more skilled at understanding and quantifying the value premium that comes from additional uses in a project. That experience has freed up capital to fund the wave of new mixed-use development we've seen in the past few years.

Q:   What is the impact of residential market decline?

TG: In the short term, projects in the pipeline will be looking at alternate uses that can also achieve synergy with retail, including office, health services, government and education. This departure will be especially acute in areas hardest hit by the decline in housing prices such as certain areas in Southern California, my home base.

DM: The market will come back though—it always does. Those of us who have the capital this year to identify opportunities will be positioned to best profit on the market's return.

Q:   What makes a mixed-use project successful?

DM: First understand that we do not consider a project to be fully "mixed-use" until it has at least 40,000 to 50,000 square feet of retail. At that point, developers need to really focus on perfecting synergy by incorporating multiple programs and creating a "place." Traditional land use plans should be disregarded and developers need to think outside their specialty and start thinking creatively. The project must really connect with what is there—the culture, the neighboring projects and the broader community's needs.

TG: Also, each use must not abandon the fundamentals of what makes them successful. For retail, that means a relentless focus on the getting the right merchandising mix and having a critical mass of retail. It also means fundamentals such as having the right visibility, signage, parking and loading docks.

Q:   What are the major stumbling blocks in mixed-use development?

TG: Going outside of your comfort zone is a handicap. It is very important to understand what you know and don't know and then to find the right partners that can fill in the gaps. It is also important to determine the right amount and mix of retail and whether it can stand alone as an amenity to the development or if it must draw from a greater area to survive.

DM: The baseline costs are simply higher for a vertical mixed-use project. It is more expensive to build retail and residential together because the regulations and requirements are different and must be integrated. Parking is also a major problem because residents and shoppers alike desire convenience and accessibility—desires that cost substantial sums to satisfy.

As an industry though, we are still learning lessons in best practices. The condo boom hid a lot of mistakes and it is incumbent upon us to really study and understand what has worked and what has not if we are to be successful.

Q:   How should retail and residential developers structure their partnership?

DM: Our experience is that joint venture agreements where both parties have a shared stake are the best way to align interests. The inclination at first was to have each developer own their area of expertise—one owns the residential and the other owns the retail. This arrangement encouraged too much dispute over cost allocations and development decisions. When all sides recognize the importance of making the entire project successful, it is more likely to be done right.

TG: The joint venture also allows for greater flexibility as the project moves from design to execution. Tweaks to the amount of retail versus residential or other uses are more easily made when the total project is jointly owned.

Q:   Where do you see mixed-use development going in the next few years?

TG: After a short break, I think we'll see retail and residential projects really ramp up in major urban markets because the demand is there. In the meantime, property owners can prepare for the market's return by beginning the entitlement process for additional uses now.

DM: Geographically, I believe the Sunbelt is promising if general interest in a mixed-use lifestyle continues and conditions are right for new development. A challenge in planning mixed-use is quantifying the premium associated with connecting retail and residential. In the Northeast, many communities are densely populated and a lot of mixed-use already exists. In the Sunbelt, they have fewer traditional mixed-use areas and I think they are ready for this type of development. Comparisons of residential-only and mixed-use developments in Sunbelt markets indicate that people will pay a premium for a mixed use location.