Developing new mixed-use centers is suddenly looking a lot riskier. The weakening economy combined with the tanking housing sector and a crippled debt market mean that if you want to build, you've got to be sure the project is going to work.
The employment picture in particular is beginning to look shaky. Businesses may not be looking to expand payrolls in the current climate. So if you've got an office tower in the mix, it may be hard to wrangle enough tenants to fill the space.
One solution to that problem: Score a keynote corporate tenant to anchor much, if not all, of a project's office space.
A handful of projects great and small across the nation provide a model for how this can work. From the Time Warner Center in Manhattan to the Bravern in Bellevue, Wash. (which will house a new Microsoft Corp. campus), mixed-use projects revolving around a signature corporate tenant can provide a sense of stability at a time when things are increasingly being turned upside down.
A high-profile corporation can set the tone for an entire development, lending a whiff of prestige from the site's inception. Not only that, but it doesn't hurt to have hundreds or even thousands of well-paid employees as a captive retail audience, looking for new favorite lunch spots or happy-hour destinations.
And when a mixed-use site is under construction, knowing that an employer has signed up for substantial office space can help lock in financing at a time when lenders have become increasingly stingy in doling out commercial real estate loans.
These reasons may be why respondents to a 2006 survey of stakeholders in mixed-use developments ranked landing a major employer as a tenant as one of the most crucial elements of a property's success. The survey polled members of eight organizations connected to mixed-use development, including the Building Owners and Managers Association International, the International Council of Shopping Centers and the National Association of Industrial and Office Properties.
Certainly, working with a large corporation can pose challenges. “The integration between the uses is extremely critical,” says Fred Kramer, of ADD Inc., whose portfolio includes two mixed-use sites in Boston. Placing a large corporate office above a restaurant, for example, raises concerns about mitigating the attendant noise, smells and kitchen exhaust, Kramer says.
But the payoff can well outweigh such considerations, as several developers can attest. For example, the Bravern features 305,000 square feet of retail, 455 condominiums and 750,000 square feet of office space. All of the latter will be occupied by Microsoft Corp., which committed to the property last June for a long-term lease. Microsoft will transfer about 3,000 sales and marketing employees to the site's two office buildings over the course of several months, starting later this year and ending by May 2009. The move will put the employees in place in advance of the opening of the Bravern's retail wing four months later.
Bellevue-based Schnitzer West, developer of the Bravern, initially negotiated with Google Inc. to be the project's main tenant, but the deal fell through because Schnitzer was unwilling to meet some of Google's terms. Schnitzer and Google began negotiating when the market was weak and Google wanted concessions. But Schnitzer thought they could get a better deal given that office vacancies were dropping in Bellevue.
That might sound like a dangerous decision. But Tom Woodworth, Schnitzer's senior investment director, recalls that a partner bet him that if the firm passed on Google, it would be able to line up Microsoft instead.
“Sure enough, he was right,” Woodworth says.
It's a bet Woodworth doesn't regret losing. When considering a vertical mixed-use development such as the Bravern, he says, “the fact that it is fully leased is a strong credit.”
“On the one hand, it's good to know who your neighbor is,” he says. “And on the other hand, it's good to know that that neighbor is a strong company.”
Schnitzer began to envision the Bravern's retail mix well before it knew that Microsoft would join the development. The company consulted existing psychographic and demographic data on Bellevue's population. (Situated just across Lake Washington from Seattle, the city has 118,000 residents.) Furthermore, Schnitzer snapped more than a thousand photos of mixed-use environments throughout Europe and the United States to test on focus groups. It used the input to conceive the design and its targeted tenants. As a result, the developers have assembled a roster of high-end tenants that will include the first Neiman Marcus store on the West Coast north of San Francisco.
Woodworth says Schnitzer is very fortunate that Microsoft ended up aligning so well with that planned retail mix. A workforce of employees in their early 30s, earning $150,000 to $250,000 annually, promises a solid base on site for Bravern's stores and restaurants, he says. In addition, Microsoft has plans to capitalize on its captive audience by catering rewards programs and other marketing materials exclusively to the firm's workers.
Retailers signed on to the project have also responded positively to the news of Microsoft's presence. “Obviously Microsoft is a great brand, as is Neiman Marcus,” says Wayne Hussey, senior vice president of store development for the retailer. “I think we will complement each other very well.” (Neiman Marcus actually signed on to the Bravern even before Microsoft's commitment, Hussey says.)
Rick Yoder, owner of Seattle's popular Wild Ginger restaurant, shares Hussey's enthusiasm. Wild Ginger will open its second location at the Bravern, in a move that Yoder expects will strengthen the restaurant's already solid relationship with Microsoft.
“We'll just be extending ourselves to them in a different way, just because they'll be closer,” Yoder says. “We've never had them on our doorstep.”
Riding on Time Warner's clout
As it prepares to open the Bravern, Schnitzer West might look to the East Coast for an example of a mixed-use facility that hit it big with a prominent office tenant. New York City's Time Warner Center, which includes the Shops at Columbus Circle, One Central Park condominiums and the Mandarin Oriental luxury hotel, opened four years ago and has since enjoyed strong retail sales.
Time Warner occupies 1.1 million square feet of office space in the 2.8-million-square-foot property. The media giant's big name helped to buttress the property's profile and support Related Urban's development of a high-end retail and restaurant environment complemented with upscale residential units.
“It clearly sets the tone for the entire project,” says Webber Hudson, executive vice president of Related Urban, codeveloper of the project.
Related began discussions with Time Warner as it was preparing its bid to develop the site — the media company was previously at Rockefeller Center. “We did a lot of homework showing how they could fit into the building,” says Kenneth A. Himmel, president of Related.
Time Warner's commitment to the project proved crucial. “Having Time Warner here from the very beginning of our proposal allowed us to program, design and plan a project with a much higher level of confidence,” Himmel says. Equally compelling, Himmel says, was knowing that one million square feet was accounted for from day one.
Related's principals also point to the brand-name recognition lent by a company such as Time Warner. “We're weaving a very fine-quality fabric together here of hospitality, retail, office and residential,” Hudson says. “And they all need to be of the same caliber, so when it's done, you have this great mosaic that speaks to the same core values.”
A lower-profile corporate name would “have stuck out like a sore thumb” and lacked the necessary appeal to other tenants, he says. Having Time Warner in-house also provides a fleet of employees and guests to visit shops and restaurants.
Related points to Time Warner as a success, citing retail sales in excess of $1,500 per square foot while its restaurant business has grown 12 percent to 15 percent annually over the past three years. Domestic and international tourists are key to the property's livelihood.
“The shoppers have voted with their pocketbooks,” Hudson says.
New home for New Balance
Not all mixed-use developments can command such a central location, but even at more peripheral sites, corporate tenants can play key roles.
In Boston, two businesses form the backbone of Brighton Landing, a mixed-use project in an area transitioning out of a history of industrial use. New Balance, the shoe manufacturer, takes up 85 percent of the site's first building, filling 200,000 square feet. WGBH, the city's public TV and radio station and a leading producer of public TV programming for PBS, is the other prime office tenant.
“It is not currently a destination retail environment,” says Kramer, of ADD Inc., the site's developer. Retailers occupy the ground floors of the office buildings and depend largely on the habits of WGBH and New Balance employees — their desired spots for buying a newspaper, eating lunch or working out, for example.
In fact, an independently operated fitness center has opened across the street from the New Balance building, Kramer says, and has become a “destination for the community.”
Kramer contrasts the Brighton Landing site with Lafayette Corporate Center in downtown Boston, another mixed-use property. Unlike Brighton Landing, Lafayette enjoys heavy foot traffic that serves to draw retailers to the site. He adds that retailers there are less concerned with the corporate tenants at the project, such as State Street Bank, and are more interested in the overall retail tenant mix. The tenants want to make sure the other retailers on hand complement each other and extend the site's appeal, Kramer says.
In Salt Lake City, the arrival of a major employer at an already established mixed-use property has helped give business an extra boost. Last year, Fidelity Investments consolidated several facilities throughout Utah and brought the employees to the Gateway, which features more than a hundred shops and restaurants.
Fidelity's 1,900 employees now occupy 225,000 square feet of office space at the Gateway, which includes a total of 800,000 square feet for offices. The Fidelity offices were built to suit, says Nate Boyer, a project manager and partner at the Boyer Co., Gateway's developer.
“These people come with pocketbook in hand,” Boyer says of Fidelity's employees, whose patronage has helped increase sales for some food vendors by as much as 20 percent since Fidelity moved in last fall.
Fidelity promotes its location in its recruitment efforts, Boyer says, and the company has also shown interest in using a hotel now under construction at the Gateway for its corporate visitors.
“A lot of people say that to fuel a property like this, you need to bring residential dwellings,” Boyer says. “We've seen that help out,” he says, but with the addition of Fidelity, “we've really seen just a jump in terms of activity.”