Houston’s Holistic Approach to Mixed-Use Development

January 22, 2014

An increasingly large percentage of Houston’s workforce is comprised of Gen Y and Gen X, the groups that tend to see all aspects of their lives as being of equal importance. As a result, real estate developers are bringing projects to the market that address the increased demand for “live/work/play” environments.  These projects reflect a more “holistic” approach to real estate development.  “Holistic” is defined as something that is “characterized by comprehension of the parts of something as intimately interconnected and explicable only by reference to the whole.

The fundamental investment philosophy for successful mixed use is a holistic understanding and balancing of the interrelationship of the component parts of the project itself, as well as the relationship of the project with its surrounding community. When all components are taken into account, the developer gets the satisfaction of a successful project and also the gratification of making a positive impact on the community and the lives of the people who walk into and alongside the project every day.

Other than live/work units, which are successful in smaller projects, horizontal –or “side by side” – mixed use projects are more successful.  Early projects with vertical stacking, one use on top of a different use, have experienced some issues with incompatibility. Multi-family spaces above food and beverage establishments can be tricky due to noise, odors, traffic and conflicting hours. Retail establishments have learned the hard way that they can’t capture 100% of the multi-family occupants’ business and won’t be successful if their retail space lacks visibility and access from outside the project.  Rents and vacancy rates for upper floor commercial tenants in vertically stacked mixed use are not as favorable.

Developers who historically have focused on a single product type may not have fully understood the complexities of the “other” product types in their mixed-use projects. In cases where the master developer has brought in expertise with “other” product types through joint development, when the project is hit with challenges like a sagging economy, each developer tends to look after his own component in the mixed-use project and has blinders on when it comes to the other components of the overall project.

In the past, lenders have focused on single product types, making financing a mixed-use project more difficult. Houston is now being viewed as the “third coast” gateway capital market. According to Jonathan Brinsden at Midway, this is a major shift in the capital fueling Houston real estate development. Sources of capital such as Canyon Capital Realty Advisors have more of a developer mentality and understand how to underwrite projects with multiple uses.  With this new source of “smart money” we are likely to see more, better-planned and better-executed mixed-used projects in Houston.

The magic number for successful mixed use seems to be at least three types of activity generators, as long as they all interrelate. Most frequently, mixed use projects combine retail, residential and office.  Recreational and hospitality uses are valuable components too in the right context.

The location of the project must be selected carefully.  Hotels within walking distance and nearby residential space help support a mixed-use project. In inner-city locations, existing parking spaces are scarce and renting a parking lot is sometimes more expensive than renting the restaurant space that uses the lot.  Locating a new mixed-use project in a walkable environment, with well-lit, well-maintained sidewalks, bike racks and proximity to public transit is critical.  Also, providing for metered on-street parking generates revenue for the local municipality, and positive revenue generates positive support for the project with local governments.

Integration of the mixed-use project into its surrounding environment is important to success.  For example, providing wider sidewalks and outdoor terraces for retail and hospitality uses and allowing for private use of such spaces helps to bring the project activity generators to the exterior of the project in a way that engages the general public and pulls it in.  Outdoor cafes are a natural, such as the 2d floor terrace for the State Bar at Houston’s Rice Hotel.  Another great example near the Austin Convention Center is a ground floor tenant that will feature sculptural displays by local artists.

An exciting new mixed-use project by Midway Companies that is now coming out of the ground is Kirby Grove, located adjacent to Levy Park near Richmond Avenue and Eastside. In this project, Midway is the sole developer of all components in the project. Midway collaborated with the Upper Kirby Management District for the redevelopment of Levy Park, and the mixed-use project is located adjacent to the park. In the same vein as Discovery Green downtown, Kirby Grove is an example of how a good public park can stimulate good private development.

We can expect to start seeing development outside the core Inner Loop markets soon. Areas like Montrose, Midtown and East End are looking very interesting as potential development markets. Not coincidentally, all of these alternative markets are located within the boundaries of established management districts.  In Houston’s no-zoning environment, these districts provide helpful tools to address issues like traffic, parking, safety and enhanced public spaces in our inner city markets, like land-use regulation “lite”.  These districts can also be effective advocates for the developer’s project in the planning and permitting process.

Houston’s strong economy and relatively light burden with regard to the entitlement process, coupled with improved capital sources, all work to make Houston a great place for development of mixed-use projects.