The last couple years have seen a major resurgence for mixed-use developments. With the urbanization trend back in full force, mixed-use properties are popping up and fueling the fire on a hot real estate market.
Domestic and foreign investors are noticing this trend towards mixed-use developments and placing their bets. Millennial homebuyers are also taking part in the move towards an overall community-centric lifestyle.
With younger generations jumping on board, mixed-use properties are shaping the future of living spaces. Eliminating the need for automobile transportation, mixed-use developments are creating tight-knit neighborhoods where all of life’s necessities are a brisk walk away.
Some everyday investors might be new to the idea of a mixed-use property or confused on what these types of developments can offer. Our discussion focuses on what a mixed-use property is and why it serves as one of the best real estate investments in the market today.
What is a Mixed-Use Property?
The simple definition: mixed-use rental property is real estate that has a combination of both commercial and residential units.
Let’s examine this a bit further: mixed-use properties are a type of urban development designed to infuse commercial, residential, cultural and entertainment uses into a single property. The property can be a single building, complex of buildings or an entire city block.
Mixed-use properties share some core characteristics. To start, they are often pedestrian-friendly and easy to navigate. The properties are designed in a way to cultivate a deeper sense of community among tenants, residents and visitors. Mixed-use properties don’t just combine various types of real estate, they situate them in a way to complement each other.
The overall effect of mixed-use properties is the development of stronger neighborhoods with the community being the thread between housing, workplaces, parks and other amenities. Having multiple sources of passive income within one investment property is what makes this type of real estate asset so valuable to real estate investors.
Mixed-Use Property Example
For our example, we’re going to look at IDEA1, a six-story mixed-use development in the East Village neighborhood of downtown San Diego.
IDEA1 provides a holistic look at the concept of a mixed-use property. The San Diego Union-Tribune writes, “It will have 295 apartments, office and retail uses, a ground floor fitness center, top-floor clubhouse and a 13,000-square-foot open-air atrium, ‘The Hub.’ Open to the public, it’s where visitors can attend concerts, TED talks and movie screenings and bump into each other — out of which encounters may come the next big thing.”
IDEA represents the culture this property is seeking to build: innovation, design, education and the arts. The plan is to integrate the various uses (office, residential and retail) to encourage interaction between the property’s inhabitants and surrounding community.
The residential apartment space ranges from penthouses to one-bedroom layouts, with several units designed as live-work lofts. The commercial space will be home to several offices along with restaurants, cafes and bars. And ‘The Hub’ is the community-oriented space that brings the whole idea together.
The Hub connects the commercial and residential communities, is accessible from all four surrounding streets and is designed with a co-working space to promote collaboration among inhabitants. Putting it all together, IDEA1 shares the essential traits of a successful mixed-use investment property and demonstrates the incredible investment opportunity possible with these properties.
What’s Driving the Demand?
Mixed-use developments are rising in popularity due to the latest urbanization trend from the Millennial generation. Millennials are more connected than ever and are looking for both work and living spaces that reflect their lifestyle.
Millennial homebuyers also value walkability. A National Association of Realtors poll found that Millennials prefer walking as a mode of transportation over driving. They want housing that is walking distance from everyday activities: work, shops, restaurants and entertainment.
Developers and real estate investors have been trying new strategies to blend the urban lifestyle with a strong walkable community. Mixed-use properties incorporate all the features Millennials are looking for when making their home-buying decisions.
Why Mixed-Use Properties are the Way To Go
Mixed-use properties are driving unique and innovative business models within the commercial real estate industry. Here’s why investors are starting to realize the potential benefits.
The most commonly cited advantage of mixed-use properties is the diversification aspect for investors. These developments provide exposure to both commercial and residential real estate. This diversifies the investing risk across the real estate markets and lessens the potential impact if one sector if the industry is lagging. Investors can increase their real estate diversity with an investment in mixed-use properties.
Multiple Income Streams
Dovetailing on the diversification aspect, mixed-use property provides investors with multiple streams of income from both commercial and residential tenants. These developments are usually associated with higher incomes, cash flows and longer leases from tenants.
With the grouping of commercial, residential and sometimes industrial real estate, property management companies are often needed to address the various operations of the entire property. Having a property management company at the helm generally results in higher quality tenants, shorter vacancy times, streamlined operations and reliable support. Investors are wise to leverage a management company to optimize returns on a mixed-use development to help maximize their cash flow.
Note About Financing
Understand that you will need a commercial loan to purchase a mixed-use property, regardless of the ratio of residential to commercial units. If any part of the property is commercially zoned, then a commercial loan is required.
Also, note that commercial loans require considerably more time to prepare than a residential loan, and brokers only charge 1-2 percentage points. This can create hurdles if you are looking at smaller or stand-alone buildings.
A small mixed-use building priced under $200,000 isn’t going to pique the interest of many real estate brokers or lenders. That’s one reason why larger mixed-use projects are typically more attractive investments for real estate professionals.
For smaller everyday investors, taking the reins on a larger mixed-use project probably isn’t in the cards. But that’s where real estate investing companies can bring investors a ton of value. They enable accredited investors to participate in real estate syndications where the investment might be in a mixed-use property. This gives the smaller everyday investors a chance to access larger, lucrative investments like mixed-use properties.
As urbanization gains momentum in 2018, mixed-use properties will be one of the primary real estate vehicles to forward the trend. Millennials value community and walkability, and real estate developers are aiming to fulfill these desires with innovative property designs.
Investors are starting to buy into the trend as well after realizing the advantages it brings to their real estate investments. Diversifying risk, adding multiple income streams and leveraging property management companies are factors that make mixed-use properties an incredible investment opportunity to create large amounts of passive income.
If you’re an investor who has been stuck trying to decide if residential or commercial real estate investments are right for you, take a closer look at mixed-use property investments. They could give you the best of both worlds. And to access larger projects with the potential for higher returns, look for real estate investing companies that have mixed-use projects in the works and consider investing with them.