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Making Use Of Mixed-Use Development

Making Use Of Mixed-Use Development

Commercial real estate trends encourage the combination of residential, retail and other project elements.

Longstanding local construction and development company Kraus-Anderson Cos. had plans for a new, expanded headquarters office building in downtown Minneapolis. No one expected that a large local business looking to maintain a strong presence in the heart of the city would have much trouble getting its project approved. But Minneapolis city planning staffers did not like the idea of a new four-story office building surrounded by a large surface parking lot, arguing that the plan underutilized the site.

Kraus-Anderson leaders went back to the drawing board and sharpened their pencils. They returned to the city pitching an ambitious revised project that added apartments, a hotel, event center, brewery and underground parking to the mix. The combination of different project elements—known as mixed-use development in commercial real estate circles—struck a chord with the city, which embraced the new plan.

“It got our gears churning and we were up for the challenge,” says Mike Hille, senior vice president of development for Kraus-Anderson Development Co. “We created this master plan and went looking for the uses that we wanted that were all complementary. Each building complements the other buildings.”

The project now includes a five-story, 100,000-square-foot office building; H.Q., a 17-story tower with 306 apartments; and the Elliot, a 168-room luxury hotel. The hotel will be connected to the Finnegans House, which will include Finnegans brewery on the first level, an event center on the second floor and third-floor incubator space for nonprofit startups. The project includes 550 underground parking spaces. The ballpark budget for the project, which takes up a full city block, is $165 million.

The office building and apartment project are under construction; the hotel and brewery elements start this spring. Before charging ahead, Kraus-Anderson did market studies to test the demand for both residential units and a hotel at the site. Ultimately, Hille says, Kraus-Anderson wanted to create a “legacy” project on the city block that it has owned since the 1940s.

The Kraus-Anderson project in downtown Minneapolis will feature a 168-room luxury hotel, the Elliot, located on the right side of the frame.

“What it came down to is downtown Minneapolis has been our home for so long, we didn’t want to leave it,” says Hille.

Mixed-use projects have been on the rise over the last decade for a number of reasons. As development trends have shifted back to downtowns and other urban locations, smaller sites encourage combining different components to develop projects with more density that use land more efficiently. The most common mixed-use projects are apartment buildings that also include retail space on the ground floor. Many real estate pros say that combining those elements can make the overall project more attractive for both neighbors and tenants.

But mixed-use also brings many challenges. For example, retail customers and residential dwellers will likely use parking spaces on different schedules. One issue for developers is finding a way to accommodate both while smoothly combining those elements. In some cases, developers may need to arrange separate financing pieces for different parts of the project.

Some developers say that cities may need to step in with financial assistance to help pay for infrastructure costs related to structured parking—parking ramps or underground stalls—which add expenses. With typical costs in the range of $20,000 to $25,000 per space of structured parking, it can quickly add millions to development costs.

Suburban ‘Main Street’

The Excelsior & Grand project in St. Louis Park was a significant, trend-setting mixed-use project in the Twin Cities. The multiphase development brought 644 housing units—a combination of apartments and condos—with 88,000 square feet of retail space, effectively remaking a 16-acre site along Excelsior Boulevard, into “Main Street” for the first-ring suburb. In the wake of the project, planning directors with many other metro suburbs wanted to recreate their own versions of Excelsior & Grand.

“It was kind of ahead of its time for Minnesota,” says Gary Dreher, president of Plymouth-based Told Development Co., the project’s developer. “There was no project like that in the Twin Cities.”

Dreher recalls traveling to Portland, Ore., Atlanta and Dallas to study mixed-use projects in those cities. Excelsior & Grand was developed in four phases from 2002 to 2007. Dreher says that one of the condo phases of the project was originally slated to be office space, but that concept was scrapped because there were no office tenants who wanted to lease space at the location. Retail tenants included grocer Trader Joe’s, which opened its first Minnesota location at Excelsior & Grand in 2006.

“We had some underdeveloped, underutilized properties, some of which were problem properties that the city was able to replace with a landmark mixed-use development that the community had requested,” says Greg Hunt, economic development coordinator for the city of St. Louis Park. “The community was looking for more or less a focal point within the community.”

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The newly-opened Oxbo in downtown St. Paul combines apartments with retail space.

In one sense, Excelsior & Grand created a “downtown” for St. Louis Park. “We had to basically develop a neighborhood,” says Dreher.

Hunt notes that Excelsior & Grand attained the nation’s first LEED (Leadership in Energy and Environmental Design) Neighborhood Development certification.

“It shows that there was a great deal of thought that went into making this truly a neighborhood-oriented redevelopment,” says Hunt, who adds that he is still fielding inquiries about the project a decade after its completion.

One wrinkle was the parking for the Trader Joe’s store, which was often congested when the project first opened. Dreher says that the parking issue has improved over the years but acknowledges, “I think we could have tweaked the design of the parking more.”

Midtown Exchange

Minneapolis-based Ryan Cos. US Inc. tackled another one of the largest mixed-use projects that has been pulled off in the Twin Cities. The developer converted a former Sears store in south Minneapolis that had been sitting empty for a decade into the 1.1 million-square-foot Midtown Exchange project that combined office space, retail, apartments and condo units. The project was anchored by nonprofit Allina Health, which leased 400,000 square feet of office space. Ryan also built a new hotel across the street from the vintage building.

Veteran developer Rick Collins piloted the redevelopment for Ryan Cos. Collins, now regional president in Ryan’s southwest division office in Phoenix, recalls that in the case of Midtown there was a “political will” to get the project done. In addition to securing public money for cleanup grants, Ryan was able to tap both federal historic tax credits and New Markets tax credits to help finance the project.

“The challenges are probably more significant than the benefits,” says Collins of mixed-use deals, noting that each project component—office, retail, residential, etc. —will probably be underwritten separately.

“Most lenders or most investors are more focused in their underwriting, so that limits the universe of both lenders and buyers for your project,” says Collins.

“The financial-structure side of a mixed-use project is probably the most difficult.”

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The new Kenwood Village is a mixed-use project in Duluth with 83 apartments and 14,000 square feet of retail space.

Collins also cautions that the retail space in a mixed-use development needs customers beyond those who live in the building itself to survive.

“There’s never enough demand created by the project itself to support the retail,” says Collins.

Mixed-use development evolved from new urbanism, a design philosophy that started to emerge in the 1980s touting walkable neighborhoods and transit-oriented design. Leading up to the recession, retailers and developers continued to push projects further and further out from the core of metropolitan areas. Today strip malls are falling out of favor, and many people don’t want to have to get in their car for every single errand says Ed McMahon, senior resident fellow with the Washington, D.C.-based Urban Land Institute.

“We completely overbuilt in the retail world,” says McMahon. “Everything we built for 40 years is out in the suburbs. Since the recession, virtually all new development is mixed-use development. When the market changes, the world changes.”

Mixed-use projects have become common for many developers.

Ensuring retail demand

“Mixed-use works great in locations where there’s enough demand for both uses,” says Matt Rauenhorst, vice president of real estate development for Minnetonka-based Opus Development Co. LLC, in reference to projects that combine residential units with retail space. “In the right neighborhoods, the two uses are complementary to each other if done right.”

From his vantage point, Rauenhorst says that city planning departments often encourage mixed-use projects. That can be a plus for many projects, but Rauenhorst says that developers need to balance additional challenges.

“The financing groups that are out there are pretty specialized,” says Rauenhorst, noting that it’s common for lending groups to focus on a single sector such as multifamily housing. “Sometimes you’ll be forced to finance the retail separately,” he says. “You’re adding risk when you’re adding different product types.”

Opus is under construction on 365 Nicollet, a new apartment tower at the north end of Nicollet Mall in Minneapolis that will include 369 units and 9,000 square feet of retail space. But a smaller North Loop project calls for more retail space because there is a stronger market for that component in that neighborhood. Opus, in a joint venture with Minneapolis-based Greco LLC, is building a project called Variant in the North Loop with 144 units and 16,000 square feet of retail space.

“There’s a strong retail market in the North Loop,” says Rauenhorst.

In downtown St. Paul, the developer’s Oxbo project recently opened. The project includes 191 apartments and 11,500 square feet of retail space. A location of New Bohemia, a local chain featuring artisan hot dogs and beer, opened in late January at Oxbo before the apartments were complete.

“We’ve seen good strong interest there from a retail perspective,” says Rauenhorst of the St. Paul project, noting that Opus is seeing pent-up demand for new retail space at the location, which is across the street from the Xcel Energy Center.

Bloomington-based developer United Properties just completed Kenwood Village, a mixed-use project combining apartments and retail space in Duluth. The project came together through a confluence of factors: the city of Duluth wanted density and housing on the site, while Brooklyn Center-based Caribou Coffee wanted to open a location in the area.

The need for structured parking on the site presented a challenge, says Rick McKelvey, vice president of commercial development with United Properties. Kenwood Village includes 83 apartments over 14,000 square feet of retail space, with approximately 195 parking spaces. The cost of the parking was daunting.

“We wouldn’t build structured parking if we didn’t have to,” notes McKelvey, who characterizes the development as a great project. “But the city had to help us financially close that gap. They became really a partner in the project,” he says.

The total project budget was about $22 million. The city of Duluth provided approximately $2.8 million in tax increment financing to help pay for the parking costs.

When United Properties is evaluating a potential mixed-use project, the first test of a site is whether it’s a good location for commercial development. If it passes that test, McKelvey says that the developer then studies if it would also work for housing.

“A successful mixed-use project has to start with a great retail or commercial site,” says McKelvey.

He notes that it is tough to try to replicate one mixed-use project at another location.

“I think mixed-use is here to stay,” says McKelvey, but adds, “Every site, every project has different variables.” tcbmag

Burl Gilyard is TCB’s senior writer.