Finding Mixed-Use Tenants

The W Dallas Victory Hotel & Residences is just one of many mixed-use projects being developed by Hillwood Capital in Victory Park. For more about these buildings currently under construction and scheduled to open at various dates from September through 2009, visit www.victorypark.com. The W project is a 33-story building comprised of 20,000 square feet of street-front retail space, a 252-room W hotel, 63 tower condo units above the hotel, and an additional 83 mid-rise condo units above the parking garage just to the south of the hotel. The W also features a nightlife venue, Ghostbar, on the 33rd floor of the hotel/tower condos, a Bliss spa/pool/fitness center on the 16th & 17th floors (it divides the hotel/tower condos) and the king of amenities—a heli-deck. Multi-Housing News’ Editor-in-Chief Diana Mosher spoke recently to Clay Likover, Hillwood Capital, about finding mixed-use tenants. MHN: When planning a mixed-use project, what’s the best ratio of multifamily to commercial spaces? Likover: We don’t believe there’s a set formula in terms of a hard ratio. It’s more about having “critical mass” and a truly authentic mixed-use environment that creates a place where people want to live/work/shop/play, and return to time and again. This is what makes great cities—or certain areas of great cities—enjoyable places to be and why people tend to gravitate to these mixed-use areas. This is what we’re creating with Victory Park, a vibrant mixed-use neighborhood that incorporates the best of the world’s great cities. Getting the right mix of multi-family and commercial is more art than science. You’ve got to have enough multifamily that you create a permanent population and a neighborhood that has staying power—not just an office/retail district that’s vacant at certain times of the day or night—but then, on the flip side, there has got to be a critical mass of commercial (office/retail) so that the project can not only be self sustaining, but so that you have enough amenities to serve the multifamily population.In the type of high density/urban mixed-use development that we execute, our biggest challenge tends to be finding the space to build enough retail at the ground floor. This is especially problematic when trying to execute retail with office/hotel density on top, because there tends to not be as much space left for the ground floor retail as you would like. So, we design our buildings with an intent to preserve and maximize as much useful ground floor retail area as we can. A big piece of achieving success in this is using architects who understand how to execute high density/mixed use and are familiar with the issues of retail. There are plenty of great residential architects—but you’ve got to have one who can execute the retail/mixed-use component as well.MHN: At what point in the development process do mixed-use tenants need to be secured?Likover: Once again, it’s more art than science. It also highly depends on the type of mixed-use project and what kind of retail or restaurant tenants you’re targeting. It’s also highly dependent on what type of residential you’re executing; for rent or for sale. In a rental project, you can wait much longer into the process, while in a condo situation, you tend to need the retail/restaurant names to add credibility/desirability to the sales pitch for the units (which is many times required prior to construction in a pre-sale requirement situation).Depending on the balance of all these issues, we tend to find that it’s better to wait as long as possible to secure at least a good portion of the mixed use tenants. The longer you can wait, the more selective you can be. As the project matures and begins to move from vision to reality, you tend to be able to convince the more desirable mixed-use tenants to sign on. In our view, in the end, these are the tenants that make it a really interesting and desirable place for people to visit and live, and are really the fuel for the project. You may have 20,000 square feet of retail and 300,000 square feet of multifamily space in a project. From a cost basis, the retail barely moves “the needle” but what you do with it can make a huge impact. This is a big piece of the vision for Victory Park—creating the ultimate urban neighborhood by offering cutting-edge hotels, world class dining, interesting shopping, sophisticated nightlife and parks and green space. MHN: How do you decide which prospective tenants you’ll court for a particular project? Describe the process that goes into these decisions.Likover: It’s very much both “macro” and “micro.” We believe very strongly in understanding the general market area and what is needed in terms of retailers/restaurants and what the customer in the area truly desires—and what will make them excited about the project. You also have to understand how you fit into the competitive environment of all the existing projects in the area and what other retail/restaurant/living options the users will have.For example, at Victory Park, we knew Dallas did not need any more “typical” retail space. Dallas already has plenty of malls, lifestyle centers, etc. One of our guiding principals was “nobody is going to drive past a Gap to go to a Gap; nobody is going to drive past a Chili’s to go to a Chili’s”—you’ve got to understand where your project fits in your market (geographically relative to the potential users, and also regarding what they still need and will be willing to come to this project for). We knew that Dallas did need/desire unique retail and restaurant tenants that were not yet in this region (and many times were not yet anywhere in the US except on the coasts). So, we focused on bringing to Dallas unique retail and restaurant concepts that couldn’t be had anywhere else in the region—and mixing this with great, proven local operators doing new concepts that we knew understood the local market and could add the local flavor.Once we had this macro vision, we could then fine tune the focus of each individual project based on its tone; for example, the retailers and restaurants we’re targeting for the W project tend to be a little more cutting-edge, hip and fashion forward then we would target for another project (like the block of Victory Park) that doesn’t have the W hotel in it. MHN: Is a developer typically approached by the tenants or vice versa?Likover: Given our vision, it is almost always us approaching the tenants. Occasionally we are approached, but many times the tenants that seek out the developer are not the ones you want. I would definitely say that doing high quality mixed-use is not a game of “sit back and wait.”MHN: Are there negative repercussions when all tenants aren’t in at the same time?Likover: It depends on how you manage it. Critical mass is important, but so is making sure you have the right tenants. You also have to be strategic about making the market happy vs maximizing the value of the project by maximizing rental rates as commercial space gets scarce and late tenants realize how profitable it will be to be a part of the project.MHN: Are there special incentives offered to retail or restaurant tenants such as Tenant Improvement (TI) Allowances? Likover: Yes, sometimes we will do unique deals with tenants that you would not see in traditional developments. Sometimes this involves a special TI allowance, sometimes it means structuring a deal where the tenant pays a percentage of rent only for the first year or two to reduce their risk on the front end of coming to a new market/new project.MHN: In terms of finding mixed use tenants, how do you measure success?Likover: Early on, we can measure success based on the excitement in the market for the new and unique retailers or restaurants we’re bringing to the market and the level of interest amongst potential condo buyers/office tenants/multifamily renters. Later on, we can measure based on the staying power and popularity of the tenants in the market…and based on their profitability and performance such as sales per square foot.