Blurring The Lines
Retail and residential become even more entwined.
Kenneth Paauw

Paauw

The goal of the New Urbanism movement is to motivate municipal officials, urban planners, architects, developers, lenders and consumers to create buildings and neighborhoods that provide a high quality of life, while reducing sprawl and protecting the environment. It sounds great on paper, hearkening back to early 20th century urban neighborhoods of relatively small houses, lots of sidewalks and plentiful stores within walking distance. In today’s world, the concept translates into a 24/7, live-work-play environment with proximity to jobs, entertainment, restaurants, shopping and, most essentially, a grocery store. These are the elements of successful neighborhood development, whether the neighborhood is urban or part of a suburban community.

What New Urbanism created is a world in which residential developers have become more adept in collaborating with their peers, particularly retail developers, as well as in accommodating municipal planners working from a New Urbanist perspective. A typical scenario for a New Urbanist project involves multiple developers partnering formally or informally on different pieces of the development, sometimes under the aegis of a master developer that controls the overall land plan, sometimes under the authority of municipal planners.

Not surprisingly, securing financing for a New Urbanist project can be time-consuming. Even the most seasoned developers can find it challenging to secure financing for a mixed-use project in its entirety or even for components of a mixed-use project — and New Urbanist properties by definition include multiple uses. The challenge becomes even more complex when the project involves a public-private partnership and possibly an arts center, auditorium or other facility that does not quite fit residential, retail, office or industrial property categories.

KeyBank Real Estate Capital recently provided a $170 million construction loan facility for the first two phases of Perkins Rowe, a 25-acre retail/office/multifamily community in Baton Rouge, Louisiana. The first phase includes 317 apartment units, 373,018 square feet of retail space, 137,766 square feet of office space and parking for approximately 1,600 cars.

Whether a residential or retail project is New Urbanist or a traditional, low-density development, the fundamentals remain the same. To succeed, the retail component in a suburban environment needs exposure to a busy street on the edge of any mixed-use or master-planned development, because the immediate residential community may not have sufficient population to generate a profitable amount of retail traffic. In a high-density urban environment, New Urbanist concepts present yet different challenges and new opportunities for lenders.

In an urban setting, a zoning requirement for street-level retail in a high-rise building offering residential condominiums, office space or both can become the most challenging part of development financing. While municipal planners often want a single-building, urban office or residential development to include street-level retail, the market may not feel the same way. Residential condominium tenants do have daily needs for coffee, dry cleaning services, newspapers and so forth — but a neighborhood only needs so many dry cleaners. In this kind of environment, a smart lender will base the financing on the strength of the housing market, as most of the development costs will be associated with the residential component. The residual income that may result from street-level retail rents therefore becomes non-essential to the project financing.

The other issue that creates a challenge in an urban mixed-use development is the rising popularity of office condominiums, sometimes in conjunction with residential condominiums and retail space. A lender will typically require the office and residential condominiums to have separate associations, which cannot be fully independent until the project is nearly sold out. Sharing an association structure does not work legally in most states, if not all, nor financially from the lender’s point of view, and financing an office condominium project generally is more difficult than financing a residential condominium building because the office condominium concept is still relatively untested. Another complication is that the office and residential condominium facilities must have separate entrances built into the property design.

In a suburban mixed-use, multi-property development, the retail component’s financial pro-forma must accommodate the demographics of the surrounding homes as they are being built. Lenders must be prepared with solutions that help sustain New Urbanist retail projects while the surrounding residential community is developed. Many times, retailer tenants need rooftops before they are ready to open shop, and if the residential is not yet built — the retail must be timed to coincide with the move-in dates of prospective shoppers. For example, the release of construction funds may be contingent upon the developer achieving a certain level of occupancy.

As New Urbanism continues to take hold, it is critical that retail developers and their lenders be straightforward in communicating the realities of retailing to municipal and master planners. Retail and residential developers and their lenders need not become experts in every property type — but should know enough about the business to work side-by-side with their peers to create the best possible communities. Also, lenders, developers and planners alike must be realistic when considering market possibilities. If a community is not open to high-density development, the planning and development team either must commit to a sustained communications program or commit to a different development concept rather than force an unwanted program on existing residents.

Retail Developers Taking the Bull by the Horns

In conjunction with, or perhaps as a result of, the New Urbanism trend, retail developers are learning how to anticipate the desires of suburban planners. In the past, homebuilders were the primary drivers of suburban development. Today, retail developers that have the capability to do so are actually leading the way in securing land sites for residential and retail development. 

Confluence in the Cornfields

This blurring of the lines between the traditionally disparate disciplines of home building and retail real estate development is a growing trend. Both traditionally retail and residential developers alike are beginning to cross ‘party lines,’ and buy land not just for their component of the equation (the home buyers or the shoppers), but for both retail and residential. In this manner, a home builder provides his buyers with access to the amenities retail centers bring to a community, and retail developers have a more concrete idea of when, where and how the demographics around their shopping center will emerge. For lenders, succeeding in the New Urbanist world means being able to provide flexible solutions that address this complex development environment and help further, rather than impede, exciting new development concepts.

Kenneth Paauw is national sales manager of KeyBank Real Estate Capital’s Home Builder Group.