Mixed-use developments are finding new homes in secondary and tertiary markets. Jeff Green & Jerry Hoffman, Shopping Center Business - As creative new mixed-use developments continue to carve out space in urban markets around the country, high barriers to entry and highly competitive primary markets are prompting developers and retailers to capitalize on opportunities in secondary and tertiary markets. Secondary markets have larger geographic reach, with cities and metro areas that amount to a population of 500,000 to 2 million, such as Denver and Seattle. Tertiary markets are cities and towns that have a population of 50,000 to 500,000, such as Madison, Wis. and Lincoln, Neb. Other factors that could apply include sales numbers, transaction volumes and growth potential to further refine these distinctions.
Today urban mixed-use is no longer a novelty, and dynamic new mixed-use destinations have become a familiar sight in major metro markets–but the mixed-use trend has clearly become a real phenomenon in smaller markets, as well. To better understand this trend, it is important to consider why developers and retailers are seeking out and capitalizing on opportunities in these smaller markets, and to take a closer look how and why retail and real estate professionals are adapting to these environments with new formats, new concepts and different leasing strategies.
There are several forces prompting the expansion of mixed-use developments into secondary and tertiary markets. Foremost among those is simple economics: the high property prices and skyrocketing rental rates makes smaller markets an appealing proposition, especially for small-to-medium-sized developers who are being priced out of gateway cities and other competitive urban landscapes.
Additionally, there tends to be a lack of competition for similar mixed use projects in secondary and tertiary markets. In most cases, the developer is either local (i.e., from within the city) or regional (i.e., a company outside the city but works in the surrounding cities or within the particular state). Such projects also tend to take place in partnership with the public sector – a local municipality and/or a university.
Along with a lower barrier to entry, there are a number of assets that makes these markets a good fit for projects that offer a mix of uses. Many have campus expansions and a robust university (and university/medical campuses) presence, and a fair amount of high-density office space that adds an appealing demand component. With primary markets largely saturated and extremely competitive, a sustained period of economic growth has elevated the prospects of smaller cities and towns. Many of these secondary and tertiary markets have flown somewhat under the radar and, as a result, land is relatively affordable and opportunities are available for savvy retailers and developers.
Mixing it up
There are a variety of different types of mixed-use projects in secondary and tertiary markets. Projects in urban contexts closer to downtown are more likely to go vertical and typically feature office or residential above a grocery anchor. The Court Avenue Hy-Vee in Des Moines, Iowa, is one such project. The mixed-use development features a 30,000-square-foot grocery tenant below 80 units of mid-rise residential. In a suburban environment, with more land available, mixed-use projects in secondary and tertiary markets are often more horizontal and take advantage of the streetscape. The Shops of Legacy in Omaha, Nebraska, for example, combine 125,000 square feet of open air street retail with the newly completed Legacy Flats apartment homes.
Suburban expansion has slowed in many secondary markets, and we are seeing more mixed-use in urban infill sites, as well as mixed-use projects on the fringe of the urban core. There are an abundance of promising opportunities in secondary and tertiary markets to “piggyback” off of an existing residential component or mall. Single or multi-tenant office space; clinics, specialty hospitals and other medical uses; and colleges or universities looking at new buildings, new facilities and satellite campuses are all a good fit to add depth and multi-use appeal to areas in and around new mixed-use projects. In addition, there are still an abundance of former industrial, warehouse and manufacturing spaces in these markets that are ideal venues for redevelopment by creative companies looking for distinctive office space or unique residences.
The Union Berkley Riverfront mixed-use development in Kansas City is one such project. Union Berkley is a 480,000-square-foot project close to Kansas City's Richard L. Berkley Riverfront Park. The project includes 410 residential units, a 425-space parking garage, and approximately 12,500 square feet of attached retail space.
Other mixed-use projects are taking advantage of the additional space by featuring more parks and open space. The Shops at Prairie Crossing just outside of Des Moines includes civic park space, community space and performance space, aiming to become a true community amenity. Aksarben Village in Omaha has a 4.5-acre park–part of a 1 million-square-foot mixed-use development located on the site of the old Aksarben Coliseum and horse track, all adjacent to the University of Nebraska at Omaha. The project includes over 750,000 square feet of space for research and business office, 250,000 square feet of retail and entertainment, 500 housing units and a 135-room hotel.
Generally speaking, secondary markets have fewer national retailers and more regional and local tenants. The tenant mix in secondary markets typically includes a supermarket anchor and some specialty retail that may or may not be chain oriented. Some of these markets are simply not large enough for national chains, but may be an excellent fit for strong local and regional names.
That said, the mixed-use momentum in smaller markets is building, and it is much more common today to see larger national tenants than just a few short years ago. Retailers are looking increasingly favorably at intriguing financials and strong mixed-use projects with built-in demand components. In fact, many national chains have been proactive about facilitating their expansion into these secondary markets. Even in cases where retailers have largely saturated major metro markets, oftentimes the prototype used in those contexts tends to be a little too big for secondary and tertiary locations. Consequently, brands like Sephora and Famous Dave’s have come out with new concepts and smaller footprints specifically designed for use in these smaller markets. Other retailers are combining different brands under one roof in a consolidated format, a strategy that can be seen in TJ Maxx/HomeGoods combination stores, and with Toys R Us and Babies R Us.
With projects taking shape and retailers taking notice, it is clear that mixed-use development in secondary and tertiary markets will continue to grow in the years ahead.