Redevelopment of infill sites, whether individual buildings or entire city blocks, has taken on new urgency in the current real estate market. Soaring land prices are forcing developers to think vertically; new patterns in consumer demand favor mixed-use, high-density projects.

The resulting projects can be massive, complicated and expensive in comparison to building a single office building or retail project, but investors and developers are rising to the challenge. “With increased construction and land costs, developers need to turn to higher density, mixed-use projects to make economic sense,” says Trey Morsbach, a senior managing director with Holliday Fenoglio Fowler LP in Dallas. “And capital has followed along.”

Billion-dollar redevelopments are currently underway in Dallas and Los Angeles. Across the country, investors are committing billions of dollars to redevelopments projects.

As developers and lenders gain more experience with these projects, the upside benefits are beginning to outweigh the hassles. For example, banks have come to understand that multi-use redevelopments offer a hedge against wild swings in the market that often affect specific real estate asset classes, says John Heywood, who heads up real estate business risk services for Ernst & Young LLP in Los Angeles. “The different components of a multi-use project are hedges against market fluctuations.”

Heywood uses as an example a recent Las Vegas project that includes hotels, casino, retail and condominiums. Currently, the residential market has gone soft, but tourism remains strong. If the condo piece is difficult to sell, at least the hotels and casinos will do well. Retail should also perform as long as the hotels are busy. The shops will do even better once the condo segment rebounds.

“Capital markets look favorably on mixed-use redevelopment projects from both the equity and debt side of the ledger,” says Ben Spencer, CEO of Titan Industrial Development, which is converting a 500,000-square-foot former Philips semiconductor facility in Albuquerque into a mixed-use development with office, retail and hotel space.

Probably the single biggest infill project now underway in the U.S. is Victory Park, a master-planned development that will eventually encompass 33 blocks in downtown Dallas. “At one time, this was the largest urban parcel controlled by a single developer,” says Jonas Woods, president of Hillwood Capital, a division of Hillwood, a Dallas-based developer.

After building the American Airlines Center sports arena for the Dallas Mavericks, Hillwood embarked on the $450 million second phase of the $3 billion, three-phase Victory Park. When the whole thing is complete, Victory Park will include the sports arena, museum, offices, residential, retail, nightclubs, eateries and a W Hotel. “Lenders are much more amenable to financing these projects today than years ago,” says Trey Morsbach, a senior managing director at Holliday Fenoglio Fowler in Dallas, which helped arrange a $73.5 million construction loan on the W Dallas Victory Hotel & Residences.

This year, Morsbach secured a $900 million injection of equity into the project from a foreign investor. The goal in the equity financing was to secure a long-term partner to recapitalize Hillwood’s existing equity investment and, secondarily, to provide a capital commitment for future developments.

While many infill redevelopments—especially urban projects—involve government agencies and redevelopment authorities, Vestar Development Co. in Phoenix tried to keep government participation to a minimum for its project in Tempe, Ariz. The site, an unincorporated parcel of 130 acres within the city limits, was home to a sprawl of foundries and wrecking yards--the largest brownfield site in the state.

To get its redevelopment project--a 1.2 million-square-foot shopping center—started, Vestar negotiated purchases with owners of 54 sites in the parcel, rather than rely on imminent domain, which the City of Tempe was prepared to employ. Vestar did accept the city’s help in funding the environmental cleanup, but did not seek federal assistance. “We didn’t actually use Superfund monies because it would never have become available in my lifetime for this site,” says Larcher. Once the project looked like a go, a national bank came in to fund development, says David Larcher,

On the other hand, when Winston Hotels Inc., the Raleigh, N.C., real estate investment trust, acquired the historic TK NAME apartment building in Kansas City to redevelop as a hotel in 2004, a federal program made a huge difference in its deal math. “By registering the building on the National Historic Registry, we were able to obtain historic tax credits,” says Joseph Green, Winston’s president and chief financial officer. “The all-in cost of acquisition and redevelopment was about $24.4 million. We then sold $7.7 million of historic tax credits to U.S. Bank.”

Winston’s initial obligation of $13.5 million in equity was eventually reduced by the $7.7 million, thanks to the credits. The remaining capitalization of $10.9 million came in the form of a loan from GE Capital. The property has recently reopened as a Courtyard by Marriott.

Infill sites are not just in urban cores. Older suburbs have a pressing need to redevelop commercial streets and shopping centers. “Hundreds of malls built in the 1970s and 1980s lend themselves to redevelopment,” says John Bucksbaum, CEO of Chicago-based General Growth Properties Inc., the No. 2 retail REIT by market capitalization. About 20% of General Growth’s portfolio over the next 10 years will probably be redeveloped for alternative uses, says Bucksbaum. “It’s really the biggest driver of business today,” he says.

Simon Property Group, the largest retail REIT, is also undertaking what it calls “asset intensification,” which involves adding non-retail components to its malls. During its first-quarter conference call with investors, Simon executives said they are evaluating the mixed-use potential at every one of its existing malls as well as of that of those under development.

“From a value-added perspective, there is considerable upside in redevelopment projects,” says Charles Worsham, senior development director of expansions and redevelopment for Developers Diversified Realty. DDR is redeveloping Totem Lake Mall in Kirkland, Wash., a two-story, 290,000-square-foot enclosed mall built in 1973. As a mixed-use site, it will have restaurants, offices and residential components. Two factors make the site appropriate for redevelopment: a large base of single-family homes in the surrounding area and a major hospital adjacent to the property, which generates demand for medical office space. “The investor community is seeing more and more projects like this,” says Worsham. “And they are beginning to understand them better.”