How To Cash In On The Millennial Market With Mixed-Use Buildings

May 31, 2016

You’ve probably heard that green buildings offer increased marketability and higher profit gains than comparable properties.

With the increased market demand for sustainable growth – or development that improves people’s quality of life while creating a positive impact on the natural, built and a historic environment- income property owners are searching for ways to further capitalize on this latest trend.

One way savvy investors are doing so is by building or rehabbing investment properties for use as mixed-use buildings.

Mixed-use buildings, which are also known as live, work, and play centers, cater to the growing demographic of millennials. They desire to live in urban centers, as well as empty-nesters seeking close proximity to shopping and entertainment.

Other factors, have also contributed to the demand for living, work, and play centers such as:

  • the lack of affordable single-family housing,
  • government support policies for urban renewal programs,
  • and restrictions on developing in various areas.

To technically qualify as mixed-use, a property must have at least 3 or more revenue-producing spaces, in addition to a condominium or another form of residential space. Typically the revenue-producing portions of the property include office space, retail stores, and hotels.

Pros And Cons Of Mixed-Use Buildings

There are several factors that make mixed-use buildings attractive. The increased vertical density means land, which is often expensive and is used in the most efficient manner possible. Another way for the investors to save money is by reducing the energy costs and maintenance expenses due to the diversification of the facility.

On a more general note, mixed-use buildings brighten a community by giving it a vibrant energy and activity that goes 24/7. For many people, the to be able to walk to work, then head over to do some shopping without a car, is worth a significant rent difference.

characteristics of mixed-use buildings

Amenities that include exercise studios, workspaces, and concierge services allow investors to charge premium prices for luxury spaces. Offering a luxury product to a willing demographic has investors around the U.S. rushing to build new mixed-use buildings.

However, keep in mind that even with a market demand, financing can still be quite difficult to obtain.  It’s often harder for banks or private lenders to decide how to evaluate the profitability of a property that combines several different types of properties when they themselves specialize in just one or two.

The success will also depend on the skills of the employees responsible for managing each aspect of the property. Not only will managers need to have experience in running a specific type of property, but they will also need experience collaborating with managers of totally different – yet interdependent- properties.

One way to overcome these challenges is for investors to focus on approaching those who they have built close relationships with. This, in combination with a strong team with varied skills, can help investors get financing which would otherwise be unavailable.

Once the mixed-use building is built, the investors also face the pressure of filling vacancies and keeping operational, maintenance and replacement costs low. This requires a shift in thinking of initial installation costs vs the reduced costs over the lifetime of the property.

That’s because the initial costs of installing energy-saving systems like solar water heaters, environmentally friendly materials, and upgraded technology will not be recouped immediately. It will take time until the owner sees an ROI on those types of systems.

But once the initial costs have recovered, the maintenance and replacement costs are dramatically lower.

Another difficulty might be estimating the type of commercial properties that are the best fit for a neighborhood. This often requires working with city planners to do an analysis of what can be a long-term solution.

Challenges Of Managing A Mixed-Use Buildings

Managing a mixed-use property requires a management company experienced in challenges particular to live, work and play centers. A standard commercial property type has set hours where the facility shuts down or is minimally occupied.

why to invest in mixed-use buildings

However, mixed-use buildings require careful scheduling to ensure all parts of the complex are maintained without one section disturbing the other.

For example, both design and logistics need to ensure that trash, traffic, smells, and noise doesn’t carry over from one space (a restaurant, for example) to another (residential area). At other times, maintenance or repairs need to be able to access various spaces at different times of the day, making sure all jobs are complete while minimizing the amount of time spent by the crew.

Another issue that often arises is the use of the space by both residential and commercial tenants. Parking space, in particular, can be a sticky issue. For example, residents may leave their parking spots to go shopping only to find it taken by customers of a retail store. Well-trained security and separate parking areas can help minimize tenant conflicts.

In general, careful tenant selection can help reduce potential tenant conflicts. Residential tenants who have bought a property will have different expectations from a tenant who merely rents for the advantages offered by the complex.

Mixed-use buildings are an opportunity for savvy investors. They can capitalize on the trend towards environmental responsibility while adding value to their investment portfolio.

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