Compact cities don’t happen without complete buildings, and urban land economics in B.C. have helped make mixed-use projects a favourite strategy for developers seeking to satisfy municipal planning objectives and their own cash-conscious pro formas.
One of the most significant examples is the year-old Woodward’s redevelopment, which combines market and non-market residential units with institutional and commercial space in a $400 million complex funded in large measure by condo sales.
Similarly, many of the major new hotel projects gracing downtown incorporated residences targeted to investors that supported development of the hotel itself, as at the Shangri-La and the Rosewood Hotel Georgia. Office space mixed with retail and residential is also becoming common.
“When you look downtown, the developers need to do mixed-use projects to make their numbers work,” said Bob Levine, principal in the Vancouver office of Avison Young Commercial Real Estate. “They’re building new office space at the Hotel Georgia, but the only reason they’re building new office space is because the residential is carrying it.”
The same holds true for Jameson House, where residential sales helped make the numbers work for a project commended at its inception by former Vancouver planning director Larry Beasley for breaking ground with its mix of uses in the upscale Hastings Street shopping district.
At Southeast False Creek, the Executive Group Vancouver and Argo Ventures Inc. are planning a Southeast False Creek mixed-use project with 500 “boutique residences” and 40,000 square feet of retail next to the Olympic Village, with completion scheduled for mid-2013.
Similar projects have been built in the suburbs. Central City in Surrey, for example, used retail space to carry the project until the adjoining office tower filled up. Developers have occasionally leveraged existing uses to anchor additions, as in Westminster Centre on Sixth Street, where office space was added three years ago to a retail complex.
The next iteration will be in office towers, including some of the half-dozen discussed for possible construction in Vancouver’s downtown core this decade.
An outstanding example is Telus’ plan for an office tower at 520 West Georgia Street, adjacent to its headquarters, and a residential tower further down the block at Robson and Richards that will support construction of the office component. The scale of the office component – a 22-storey tower offering up to 500,000 square feet of office space – is designed to satisfy the city’s desire for commercial space in the core, and the inclusion of the residential site was integral to the project from a financial point.
“It’s currently zoned to allow residential, and we had anticipated residential there,” explained Brent Toderian, Vancouver’s planning director. “By confirming that the rest of the site was going to be for commercial [development] only, and increasing the density of that commercial, council effectively made the rest of the site much more viable for office development.”
It’s a slightly different story at the site Pattison Group and Reliance Properties have assembled at Burrard and Helmcken streets for Burrard Gateway, a mixed-use development that will include retail, residential and a 190,000-square-foot office tower. Toderian said the site could have had a different mix of uses than Pattison-Reliance plans, but the economics of development have shifted to allow for a more complete mix that diversifies the offering.
“It’s a choice-of-use area, which means they don’t have to build office. They could build a larger residential component into the project,” Toderian said. “But the fact that they’ve built in about 190,000 square feet of office space into the project at the expense of residential shows how interested people are in office construction.”
But if mixed-use projects make economic sense to developers, they also appeal to investors, for whom they offer diverse revenue streams in a single asset.
This is particularly true in competitive suburban markets where the economics of development have typically allowed larger projects – but primarily retail. With the addition of office space, and in some cases residential (such as Larco Investments Ltd.’s Morgan Crossing project in South Surrey), developers can create a more integrated and attractive environment for residents and workers that give projects a distinctive character and firmer financial footing.
“You can argue that mixed-use projects offer a greater diversification of income,” Levine said. “Say the office market is overbuilt, [then] you still have your residential and retail to fall back on.”
Winnipeg-based Artis Real Estate Investment Trust’s purchase of PoCo Place in Port Coquitlam is a recent transaction where a mix of uses was an appealing element. The $48 million purchase gave Artis a 163,844-square-foot complex split approximately 63% to retail and 37% to office space. While located amidst a key commercial area, the presence of a seven-storey office tower made the project stand out for Artis in a retail-heavy neighbourhood.
It illustrates the appeal of a diversified property in a market where caution might otherwise be in order.
“It has appeal, and you might be getting a slightly better return,” Levine said. “You look at PoCo Place – the investor’s probably getting a slightly higher return than if PoCo Place had just been purely retail or purely office.”
Of course, diversification isn’t the only factor to consider. PoCo Place is also 99.9% leased to national tenants. That boosts Artis’ confidence that vacancies would be minimal and cash flow wouldn’t face significant disruptions.
It’s a different story for investors scouting properties in the hard-hit U.S. market.
Given the ongoing retrenchment among U.S. consumers and businesses, a mixed-use property with a retail component is a daunting prospect. It needs something else to generate cash flow to make it appealing to most U.S. investors.
“A big list of retail tenants is scary,” said Ryan Dunfield, portfolio manager with Vancouver’s Second City Capital Partners, which focuses on commercial investments in the U.S.
While U.S. confidence is on the upswing in major centres, second-tier cities are hurting, and assets are still available for lowball acquisition by patient investors with a long-term perspective. The good news is that money is becoming more affordable, not just in the U.S. but also in Canada, giving ambitious investors the muscle needed to pick up assets that U.S. buyers won’t touch.
For example, Dunfield said spreads on loans have fallen from 500 basis points to 175 basis points on a good property in a major Canadian city.
“So that’s a significant squeeze in spreads, and that’s all driven – not by supply side, but by demand side,” he said, noting that demand is driven by “dividend investor flight to anything with yield.”
The downside to having a mix of uses is that the configuration of space might work to the disadvantage of some components.
“Sometimes when you have mixed-use projects, each use is somewhat compromised,” Levine said, noting that office space might be tucked away on a second floor without good exposure, or residential space might not be attractive.
This wasn’t the case at Grosvenor Canada’s The Rise development on Cambie Street.
The successful project was recognized by commercial real estate association NAIOP and the Urban Land Institute for its intelligent combination of uses. Residential units perch atop large-format retail spaces, the homes arranged around a central rooftop courtyard so as to be secluded from the gritty urban environment below.