New York City—Many retail developers who don't have residential space associated with their shopping centers are planning or at least considering mixing the two. But the marriage is not as easy as building apartments over stores.

Executives who have built both say developers face multiple challenges when taking on these types of projects. The first is whether a market is even appropriate for such a venture, says Dan Herman, Developers Diversified Corp.'s senior vice president of development. “You have to do your homework on the residential side,” he says. “While there may be demand for residential, are you creating something different?”

The homework involves determining if a particular market needs more housing, and, if it does, whether rental or ownership units work best. He also points out that housing in retail environments tends to price higher than average in a market, so there needs to be consumer demand for higher end units.

Most retail should work with housing, though, he says. DDR's Shops at Midtown Miami includes big boxes, like Target and Linens 'N Things, while other developments work with smaller stores. “It's not fair to say that the retail will force the market one way or another,” he states.

Developer Steiner & Associates of Columbus, OH is convinced that the two uses work well together. As a result, management has vowed not to build another project without both, reports David Zoba, a principal of the firm and chief operating officer. “We call ourselves new town center developers,” he says. “The residential component is really a vital part of the energy of a new town-center project.”

Steiner shouldered the residential development itself and retains ownership of the entire project. “There are a host of legal and operational problems if the ownership is divided between the retail and residential,” Zoba says.

So far, Steiner has built only rental units above its shopping centers, but Zoba reports that the firm is looking at offering for-sale condos in efforts to get better returns on residential. However, management is leery of individual owners taking spaces because the firm might have to deal with complications from ownership associations.

Executives that play in retail and residential stress that parking is important, especially parking that differentiates residential spaces from retail to assure residents places to park. That isn't always easy because of the other outdoor requirements a retailer might have, says Navid Maqami, principal of architecture at New York City-based design firm GreenbergFarrow. “For a major retail, you have a huge loading facility that's required,” he says. “It becomes very challenging.”

Developers must deal with additional expenses to coordinate loading docks and back entrances for delivery trucks to maneuver. “Office and residential is easier than major retail development,” Maqami says. “If you have a mall with residential you have a lot more traffic with the retail coming in.” With office, even the parking sometimes works nicely at night because the residents are there but the office workers are not.

But Zoba stresses that the problems associated with mixed-use pay off. “The residential is one of the hardest to pencil out,” he states. “The returns, we find, are less on the residential. And yet, we still think it is an important component for that energy. The people who live there are good shoppers and consumers for the rest of the project.”

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Challenges With Retail, Housing Demand

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