Mixed Up Priorities for Mixed-Use Buildings

Empty ground-floor retail in Lexington, Kentucky. Ground-floor retail in this particular building has been over 75% vacant since the building’s construction. (Source: Google Maps)

Empty ground-floor retail in Lexington, Kentucky. Ground-floor retail in this particular building has been over 75% vacant since the building’s construction. (Source: Google Maps)

In cities and towns across the country, hundreds of acres of urban land are going to waste. In the Bay Area, it has reached the status of blight. Along Main Streets and within retail clusters across the country, it lies dead, draining life from the streets that host it. No, I’m not talking about parking requirements. I’m talking about ground-floor retail.

If you live in an urban neighborhood, you probably already know what I’m talking about: the rows of empty storefronts and stray mixed-use buildings that can never stay leased out. But what you might not know is that, in many cases, this empty ground-floor retail is the unintended consequence of policies that urbanists have cheered on for years.

Today, many major cities require ground-floor retail for new apartments and offices. More commonly, as in the commuter suburbs of New Jersey, incorporating ground-floor retail is a necessary condition for receiving the variances and rezonings needed to construct apartments and offices, particularly near transit.

How did we get to this point? The goal, in itself, isn’t unreasonable. As Jane Jacobs observed, ground-floor retail can add a lot to a neighborhood. Where it works, it activates streets, improves safety and, at its best, makes car-free living possible. Having seen and experienced great streets and neighborhoods with ground-floor retail, urbanists today assume that to build a great neighborhood you need to have a lot of ground-floor retail. Ignoring that causation may work both ways here, they settle on the easiest solution: mandate it wherever possible. The result is the empty storefront blight that we now see in cities across the country.

The trouble with these mandates is that they are instituting an outcome—ground-floor retail—where the processes to make that outcome sustainable aren’t present. In order to make ground-floor retail work, you need at least three things: developer expertise, an existing retail corridor, and sustainable retail market rents.

Criteria #1: Developer Expertise

Before any mixed-use project can get underway, you need developers with experience building and managing mixed-use urban retail. We often lump “developers” in together like they all do the same thing, but really we should think of them more as farmers, specializing in specific products and regions. Foisting urban mixed-use retail onto a market-rate or affordable housing developer is like asking a family-run orchard farmer to set aside a quarter of her budget to cultivate potatoes. If it doesn’t make the whole enterprise unprofitable, it will at least force the farmer to take a big hit and provide a sub-par product.

A mixed-use building under construction in Seattle (Source:  Joe Mabel )

A mixed-use building under construction in Seattle (Source: Joe Mabel)

Requiring the inclusion of ground-floor retail into a proposed housing or office development from your local developer can, for similar reasons, lead to higher costs and less efficient construction and management.  This ultimately makes the project less attractive than, say, a comparable development opportunity out on the edge of town. This alone can often kill a project altogether, meaning that your city will need to wait on a large, national developer with expertise in urban mixed-use projects, which might not happen depending on the size of your town.

In many small and even mid-size towns, lack of expertise is a major stumbling block for these kinds of projects, which means fewer homes and offices in urban neighborhoods. This lack of expertise can kill otherwise great urban projects (e.g., apartments near transit) where mandates are present.

Criteria #2: An Existing Retail Corridor

But let’s say you have that local developer who can do mixed-use projects or a national developer with expertise and confirmed interest. Next you need an existing, naturally emerging urban retail corridor. The heart of the problem with ground-floor retail mandates is that they are often speculative projects. Policymakers want this to be a thriving, mixed-use neighborhood someday; they want you to make the first bet on that gamble by adding ground-floor retail to your project.

The trouble is that urban retail (e.g., with minimal setbacks, abutting a sidewalk, with parking in the back) in isolation almost never makes sense, even if the parcel is neighbored by conventional suburban retail. Market research from the folks who have skin in the game—the real estate research firms—indicates that ground-floor retail absent an existing retail corridor adds no value to a unit or neighborhood in the eyes of prospective tenants. It will take decades of consistent mandates, high population densities, and, as we will discuss below, ongoing demand for housing and retail space in that area for this kind of corridor to form. That is to say, far longer than any investor is interested in considering. In the meantime, residents who want to live in an urban neighborhood will look elsewhere, and the retailers who depend on their dollars will follow.

Criteria #3: Sustainable Retail Market Rents

But perhaps you live in a really exceptional city: you have a developer with expertise plus a busy urban retail corridor. You still need market rents on retail that are high enough not only to cover construction costs, but also the additional operating expenses unique to retail, including new management costs, marketing, and leasing commissions, as well as new costs like tenant improvements. If you have been paying any attention to commercial real estate markets lately, you know that this is not the case, even in most highly desirable urban retail clusters, let alone in smaller towns and less desirable retail submarkets.

This means two things: First, it means that rents are low. Second, since it’s a renter’s market, landlords won’t be able to defray costs by off-loading things like property taxes and tenant improvements onto retail tenants. For these reasons, mandated ground-floor retail acts as a huge negative drain on a project, diverting valuable space  from productive uses (e.g., residential and office spaces) toward unproductive uses (retail).

If margins are already thin, this forced set-aside can and does kill projects. But if margins are a little larger and developers are clever, they will build the retail and let it sit vacant. Why? Because they must build it to build the associated profitable use—housing—but the costs of operating and marketing retail (tenant improvements, in particular) and the risk of signing an unprofitable lease in a bad market make keeping the space occupied a bad deal. Thus, the brand new retail space sits vacant.

In the end, nobody is happy: developers are forced to lose money on retail space that shouldn’t be built, while residents have to suffer a new drain on the streets.

Too Complex to Mandate

Even within her lifetime, Jane Jacobs saw her followers try to incorporate her praise for ground-floor retail and mixed-uses by including corner groceries into their revitalization projects. But as Jacobs and others have pointed out, it’s not the corner grocery itself that makes a great city, but the dynamic and unpredictable process of urban change that gives rise to complementary and symbiotic land uses.

If urbanists want to create great streets, they should focus less on a particular ends that they want to engineer into existence. After all, as we can see with the unintended consequences associated with these ground-floor mandates, cities are far too complex for that kind of thinking. Instead, urbanists should focus on understanding and supporting a framework by which these great streets could emerge. Sometimes that means proactive action—say, by beautifying your streets or working with your chamber of commerce to train local developers. But sometimes that means doing nothing—particularly when doing something means blocking the small, unplanned changes that will, over time, add up into a great street.

(Top photo source: Johnny Sanphillippo)