By Geoff Grossman
CBM Retail Specialist
Have you looked at the Southern California landscape lately? The entire region has been…
Overrun with Mixed-Use Developments!
SoCal is in the midst of a full-blown transformation. It’s happening on countless main drags. And even on many lesser traveled thoroughfares. Streets, avenues, and boulevards are bidding farewell to the low-rise multi-family dwellings and street retail shop space that once dominated this concrete jungle.
And rising up in their place? A bevy of mid-rise mixed-use developments. Multi-purpose properties featuring street retail units situated underneath apartment residences are being constructed as quickly as over-eager developers can possibly manage to erect them.
Practically speaking, the move toward mixed-use development totally makes sense…
What’s the one thing you can’t make any more of? Land. And Southern California is clearly fresh out of this non-renewable resource.
Further exacerbating this shortfall, the region is facing a catastrophic housing shortage. Which is destined to grow far, far worse before we see any indication of improvement. And this is a clear guarantee, as the Southland’s surging population growth shows no signs of waning.
In turn, the cost of the dirt alone, the real value in SoCal real property, has risen to astronomical heights. And that’s all before you factor in exorbitant design, engineering, entitlement, and construction costs.
So, how do you address land scarcity, prohibitive development costs, and strong housing demand in the face of a huge shortage?
The only option that remains: Verticality. Go UP! Hence, the current mixed-use development explosion.
The Problem – From a Retail Standpoint – With the Current Mixed-Use Development Trend
The growing mixed-use growing trend may be a practical, savvy approach to land-use in the face of challenging circumstances. The execution on the retail side of the equation, however, is falling severely short.
Scores of new mixed-use projects have risen with retail units that, in their current state, are essentially un-leasable. While other buildings have seen promising, highly sought-after tenants come and go at an astonishing speed. And these unexpected tenant departures that have left high profile vacancies in prominent locations in their wake. All because the units proved impractical for retail purposes.
Key Factors Negatively Impacting Retail Units in Mixed-Use Developments
Projects Helmed by Developers With Little to No Retail Construction Experience
The majority of recent and currently in development mixed-use projects are being handled by residential-focused developers. In other words, developers experienced in building apartments and condominiums. Not retail projects.
And it makes sense, as the majority of these projects are dedicated to residential use. But this residential focus has largely excluded any concern for the retail portion of these developments.
Architectural Design Flaws Are Limiting or Excluding Countless Retail Uses
Multi-family residential developers are fixated on their “cost per door.” As a result, mixed-use developers are intent upon maximizing residential space, while in turn minimizing overall construction costs.
This leads to architectural designs that incorporate retail space almost as an afterthought. A move which yields space that’s unsuitable for any potential tenants currently active in the marketplace.
And therefore, renders the retail portion of these new developments effectively un-leasable.
Drilling down into the problem, here are the five major architectural issues inhibiting the absorption of retail units in mixed-use developments…
Both to maximize residential unit space and serve aesthetic design considerations, mixed-use building rooflines are descending far too close to street level. This creates very short storefronts, which seriously limits visibility for ground floor retail units, heavily obscuring shops from both auto and foot traffic.
In the majority of mixed-used development, frontage is limited, while depth is plentiful. Thus, to accommodate more retail units (and accommodating as many residential units as possible, which is every residential developer’s goal), most mixed-use shop is exceptionally narrow. This reduces store frontage, which, similarly to descending rooflines, significantly limits visibility to both auto and foot traffic.
Oddly + Oversized Shaped Units
As noted above, mixed-use developments face some unique spatial challenges. To maximize the use of available space, developers are inclined to make units deep and narrow.
Also, as I mentioned, narrow units, and the resulting limited store frontage are a major drawback for most retailers seeking to maximize their storefront display opportunities.
Additionally, deep units tend to yield a good deal of square footage, often in excess of 2,000 SQFT. Meanwhile, most tenants ideally suited to typical mixed-use developments – hair + nail salons, medi-spas, private fitness studios, and quick-serve restaurants – are seeking anywhere from less than 1,000 SQFT up to a maximum of 1,400 SQFT.
As a result, mixed-used developments are struggling to find tenants due to their impractical unit footprint. Or developments wind up with tenants that are forced to over-pay for excess space they simply don’t need. And these tenants often don’t stick because their profit margins don’t justify their rent.
Lack of Forethought or Planning to Accommodate Restaurants + Food-Use Tenants
Restaurant and food-service tenants have very specific mechanical requirements. Venting for cooktops, ovens and other food heating equipment is a MUST. And grease-receptors to handle the by-products of cooking and other food preparation are also a necessity.
Additionally, proper venting must (a) be constructed to code, (b) have a practical pathway to a building’s exterior, and c) not adversely impact the residential units.
Also, a portion of a grease-receptor’s apparatus must be buried underground in a specific spot relative to the unit the receptor serves and must readily accessible.
Suffice it to say, a good deal of pre-planning is required at the architectural design phase in order to properly orchestrated the infrastructure necessary to accommodate restaurant tenant.
Meanwhile, many new mixed-use developments lack all accommodations for cooking-related venting or grease receptors. And as such, these developments have completely excluded any food-use tenants that cook food onsite.
Lack of Planning for Parking Requirements
Municipalities have minimum parking requirements for retail properties based on use-type. Food-use tenants, for example, generally require more parking, as restaurant patrons tend to linger longer than customers of other retail outlets.
Mixed-use developments already include parking to accommodate residents. But developers often fail to account for the parking necessary to accommodate retail customers.
Additionally, typical parking requirements should be eased in mixed-used developments these buildings already include onsite parking. Yet many developers fail to seek preliminary waivers and other parking concessions from municipalities in the planning and construction phase.
In either case, many tenants are denied operator permits because available parking does not meet the requirements for their particular use-type.
Based on the assessment above, the deck is heavily stacked against retail inclusion in a great many existing mixed-use developments.
Is there a way out of this mess?
The good news is: Yes! But it will require additional effort, forethought, and further capital investments on the part of mixed-use developers.
Planning For Retail in the Project Design Phase
Speaking in terms of new projects, developments should be designed with the necessary accommodations for retail units in mind from the very beginning. Proper roof lines, adequate store frontage, functional unit sizes and configurations, patio space, considerations for potential use-types (restaurants, smaller square footage users, etc…), and adequate parking allotments for retail should all be baked into original project designs.
For existing projects, any possible renovations should be strongly considered. Adjustments to roof lines and storefronts, demising interiors to create more functional space, adding exterior patio space, excavation to install grease traps, and additional building construction to connect venting for ovens and stoves.
For developments in which renovations are impossible, developers most definitely must think outside the box to fill their retail vacancies.
This means considering tenants atypical for most mixed-use develops.
== > CrossFit gyms, yoga schools, and other specialized personal training
== > Veterinary clinics, animal hospitals, and pet stores
== > Daycare facilities, early learning centers, private academies, and tutoring service providers
Additionally, tenant rep brokers also need to think outside the box. Brokers need to look beyond shoehorning in “typical” mixed-used tenants, the majority of which are a no-go in many existing mixed-used develops. And instead, seek alternative users that are more capable of using spaces as-is, and more likely to succeed financially in the long term.
And if all else fails? Many developers are going to have to bite the bullet and make financial concessions. This manifests as either offering rent-deductions to existing tenants or reduced rental rates on current vacancies to make these spaces more feasible for potential tenants.
The Bottom Line…
Mixed-use develops make undeniable practical sense. Moreover, such developments represent a huge economic potential for savvy investors.
But currently, this real estate segment is in an enormous state of disarray.
And unless developers take decisive action, and do so quickly, Southern California is going to wind up with a colossal glut of very expensive vacancies, and zero willing takers anywhere in site.
How Can CBM Help?
We have a collective 80 years of shopping center development, sales, leasing, and management experience under our belts. During our 30+ year tenure in the industry, we’ve leased and managed thousands and thousands of retail properties for hundreds of landlords across Southern California. And that includes more than our share of mixed-use developments.
With this sort of track record, it’s more than fair to say: We’re the retail EXPERTS!
But there’s another factor that figures into this equation. CBM was found by La Mancha Development, formerly one of Southern California’s most successful strip center development firms. La
Mancha designed, built, and sold thousands of strip centers throughout the Southern California market. Just about every 7-Eleven anchored strip center you see between Santa Barbara and San Diego was built by La Mancha.
That’s where our “80 years of collective shopping center development, sales, leasing, and management” expertise is drawn from.
So, not only do we know the retail leasing market. We know the ins and outs of what yields a successful retail development, too.
Before You Start Your Next Mixed-Use Development…
Before your team even settles in to discuss potential project designs, come to us first. We’ll present a practical perspective on what works for retail in a mixed-use property, including:
== > An overview of ideal tenants for your project
== > Functional design elements necessary to adequately accommodate those tenants
== > Required infrastructure for restaurants and other specialty tenants
== > Parking subdivisions to create dedicated retail parking in either subterranean lots, adjacent to resident parking, or separate surface retail-only parking
== > How to create a “parking plan” (that underscores reduced parking needs due to ride-share services like Uber + Lyft, rental scooters like Bird + Lime, and increased public transit use thanks to the ongoing Metrorail expansion) and approach municipalities in advance and successfully negotiate zoning modifications to ensure incoming tenants will secure use permits and meet municipal imposed parking requirements
== > And much, much more!
CBM is Your Best Resource to Develop a Successful Mixed-Use Project
Find out more about how our leasing services can benefit your next mixed-use development at: cbm1.com/services
About the Author
Geoff Grossman is retail leasing + sales agent specializing in landlord representation throughout Southern California. Mr. Grossman launched his commercial real estate career in 1999 when he joined CBM as a leasing agent. Since that time, Geoff has leased + sold thousands of retail properties, and participates in an average of 100 leasing + sales transactions annually.