The art and science of mixed use development

Copyright David Lawson - Property Week 2004


Why is mixed use suddenly so sexy? After all, it has been around a long time. Look along any high street, lined with offices and flats over shops. Look at the West End of London, where some of the world’s most expensive stores and offices jostle with plush apartments, theatres, hotels, restaurants and coffee shops.

   Yet mixed use will emerge as the most important  sector in  property over the next five years, according to a report published this week by Knight Frank.* The industry is set for a massive shakeup as  residential and  commercial developers combine to meet new challenges. And a ‘formidable force’ will be created if they are in turn taken over by banks and/or institutions.

    Ironically, this has emerged from a combination  of factors which aim at a return to the traditional – almost forgotten – structure of towns and cities.  Developers are scrambling to learn forgotten skills – not just how to build homes and cinemas but to evolve ways  of putting noisy restaurants beneath bedroom windows,  find the right mix of work and play and persuade investors that this eclectic pot pourri can be a good way to spend their money.

   The fact that developers find this such a challenge is rooted in a planning system based on separating all these uses in reaction to the squalor of the 19th century, says Yolande Barnes, director of research at FPDSavills. It spawned a property industry which diverged widely into two sets of skills – residential and commercial.

   Then came the U-turn. The Tories slammed the door on greenfield development in 1995 and New Labour has spent its time strengthening the padlocks.  Pushing development back into town centres  inevitably  meant  multiple uses, often wrapped up in other factors such as sustainability and development ‘fees’ paid with social housing and community facilities.

    Headlines have proliferated around giants like the Greenwich Peninsula and Thames Gateway, yet thousands of smaller sites have quietly been regenerated. Commercial developers have begun to learn the ground rules that if they want offices, local authorities will also demand homes. Where a builder asks for flats, planners will want the streetscape maintained with ground-floor shops.

  The scale of activity can only be guessed but  Richard Rees, head of mixed use development at FPDSavills points out that his firm alone has more than 30m sq ft of instructions on the books. These range from new communities to individual buildings, which themselves vary from  huge towers proposed around the City of London to the continuous infill in every UK centre.

  A booming housing market has eased the traumatic change, making primarily residential builders like St George more ready to take on commercial space, although MD Toney Carey points out that the firm anticipated such changes when it was set up almost 20 years ago.

  It also helps that more people now  want to live in town centres. A new lifestyle has emerged where younger buyers are looking for a mix of live, work and play.  Meanwhile, potential commercial tenants are now as likely to ask about local shops and bars as about rents. In an era of low unemployment and disillusionment with commuting, they need ways to attract and hold quality staff.

  Commercial developers have already responded.. The old lady of the industry, Land Securities, has cast off her crinolines in joint ventures such as the partnership with Berkeley Homes at Gunwharf in Portsmouth.  St George and Argent are similar partners in London’s massive Kings Cross redevelopment.

  Others are broadening in-house expertise. Capital & Regional is as much a leisure operation as a retailing specialist nowadays with developments like Xscape and acquisition of MWB’s leisure funds.

  So the merging of skills anticipated by Knight Frank is already taking place – from volume builders in one direction and commercial specialists in the other. Whether, and where,  they will meet is anybody’s guess. But some see no need for such dramatic change. P&O Developments is managing quite nicely on its own on another Kings Cross scheme, the Regents Quarter. 

  ‘We might have hived off the housing to someone else if it ran into the thousands but we saw no reason why we couldn’t handle 140,’ says senior development surveyor Graham Corser.

   These are the kind of decisions every developer will face in future. And they are not made any easier when planners are in the driving seat yet no two local authorities have the same views on what they want, according to Knight Frank.

 ‘One critical factors is to get in early to find out what local planners want rather than coming in with completed schemes,’ says Rees at FPDSavills. ‘You might be surprised at how much agreement is possible.’

   Detailed guidelines are almost impossible in these circumstances but Knight Frank boils down the basics to:

 * Mixed Use: Art or Science? – Knight Frank

Potential pitfalls

Taking on mixed use is seen by many developers as walking into a swamp. Every step is a potential disaster. But safe paths are emerging from those that have gone before. And the very fact that so much mixed use development is under way proves it can be done without sinking into the mire.  The problem is that there are no universal rules, as every scheme is different. Mix of uses, type of location and market demand will all vary with location. Even sticking to a small area can be troublesome, as planners are not always consistent.

  ‘The first priority is to get in early and start talking,’ says Tony Carey , MD of mixed-use veteran St George. Going to a town hall with half-produced ideas can be a waste of time. Find out what planners want beforehand. One local authority might want community facilities; another will look for on-site housing; a third could want a say in the commercial mix and demand restaurants to raise the tempo of a location.

   Negotiations are not as painful as some expect. Councils now commonly use   consultants to do their talking, according to Nick Jopling, MD of CBRE Hamptons International, so the faces – and non-political approach - may be familiar. 

    That means facing up with similar expertise. Even the biggest housebuilders and  commercial developers are setting up partnerships to cover areas outside their expertise. On smaller schemes commercial developers often go to high street agents for advice on housing but Jopling points out that a new breed of advisor is evolving with residential development and investment skills equivalent to commercial colleagues.  

    He is putting one in every CBRE office while Richard Rees, head of mixed use at FPDSavills, says the firm now has three specialist teams dealing with low cost housing. They will advise on the third vital leg in these partnerships – housing associations. Again an early choice is vital, as each has its own targets and niche markets, although local authorities will often push for favourites.  Once more, fears about shouting matches with sociology lecturers and unreconstructed hippies are groundless. Most associations are now run as businesses by hard-headed realists.

   Their job is to get the best  deal in social housing and this may not be as simple as the minimum percentages scattered around by politicians. For instance, they can be immune to ‘bribes’ such as high-quality property as they have tight budgets and prefer homes that are cheap to run. But that does not mean lower specifications, says Carey. One hint is to try and shelter social housing from service charges by hiving off part of the site from commercial development.     

  On the positive side, housing bodies are experts at finding grants which can bolster the economic case for a mixed development. And they can avoid one critical pitfall, says Alistair Parker, lead development adviser with Cushman & Wakefield Healey & Baker on schemes like Paradise Street in Liverpool.

  Investors dislike commercial leases being tainted by what may be dozens of virtual freeholds on homes above. Renting to a single housing association can smooth such ruffled feathers.Allocating to key workers such as the police adds even more benefit by raising quality, he says.  ‘It can also avoid the backlash against the perception of a yuppie neighbourhood.’

  Many look on any kind of housing as a benefit rather than a burden. Neil Morton, regeneration partner at Dixon Webb, points out that in cities like Liverpool and Manchester homes are easier to sell. Yet rarely do people want to live on the ground floor, so commercial comes into the equation.

     Residential can also bring better density and parking levels than pure commercial schemes. Meanwhile, housebuilders see the benefit of creating a ‘place’ or local community, which carries huge weight with planners under pressure from the government to meet sustainable development targets. But choosing the right balance for each location is critical, says Morton.  Some schemes in his North West stamping grounds are doing poorly because the demand is not there for uses like showrooms.

   Mixing uses can have pitfalls, however. Lawyers should be another voice called early to the table. Issues such avoiding giving the right of first refusal to homeowners on disposal of a building have to be carefully worked into schemes, says Mark Gaffney of Mace & Jones, who is advising Liverpool Land Development Company on Stonebridge Cross, the former GEC Marconi site. Commercial owners will also not want to pay service charges for common parts restricted to residents.

   The very nature of mixed use imposes new responsibilities. Housebuilders are used to selling and moving on while institutions still favour let and forget. But with leisure uses such as bars and restaurants playing a bigger role they both have to take a longer view.  That means making room at the increasingly crowded table for management and facilities specialists. ‘Mistakes on these issues could effect values and marketability of residential or commercial elements,’ says Gaffney.

   Covenants ensure restaurants and bars can’t make noisy deliveries or pour out customers at unsociable hours. But this has a price, as commercial tenants will be loathe to take on such restrictions.   Layouts and careful division of uses can ameliorate these conflicts, so the discussion table expands yet again to accommodate architects who know not to put bedroom windows over delivery yards.

Rules for success

Golden rules for successful mixed use development can be hard to distil from a morass of  planning, design, economic and political issues. It doesn’t help that the term covers anything from a few flats over shops or surgery to gigantic regeneration projects  like Greenwich Peninsula and Birmingham Bullring.

  Trevor Osborne is well qualified to find the key factors.  He  practically invented the term through the Urban Villages Group, which  anticipated the need for a return to integrated development long before ministers made a planning U-turn.   The veteran developer makes fewer headlines nowadays but continues putting theory into practice with schemes such as conversion of the historic Oxford Gaol site into hotel, homes and market stalls. And he is more than willing to boil all this down to an informal guide to potential pitfalls.

 But that runs to five pages.  One thread is common, however, to anyone who has picked through this minefield: do your homework properly and get the funding right.  Commercial developers are petrified that lenders and investors will shun anything which includes housing, while residential specialists fear the quicksand of commercial leases. Yet funding need not be a major hurdle, says Osborne.

   Firstly, pick the right bank or institution for each use.  Then consider a long-term takeout  through a loan or sale of commercial elements, as this will give any bank confidence about providing short-term construction debt.  Putting in your own money will also help cut interest rates and charges.  Grants and subsidies can make a difference, so working closely with local groups and regeneration bodies is crucial. But subsidies are not essential.

  Sylvie Pierce strode in where others recoiled from the £3.5m conversion of a semi-derelict listed former school in Hoxton Square, east London, into flats, commercial and leisure space.  Despite working in partnership with regeneration body Shoreditch Our Way, the MD of  Capital & Provident Regeneration insists the figures added up on a purely commercial basis.   C&PR raised funding from conventional banking sources. ‘But to do this you must do a lot of work before going to a bank, researching the viability of every element to ensure it is feasible,’ she says.

    Commercial developers will find this easier than housebuilders, who normally rely on in-house knowledge of home buyers. Consultants like DTZ, Knight Frank CBRE and Jones Lang LaSalle have responded by creating teams of finance advisers from both sides of the industry to bridge the knowledge gap.  Housing finance specialists like Regentsmead which handle hundreds of grassroots developments across the country look at overall viability rather than content, according to sales executive Nicholas Warren.  Residential developers unsure of how to handle commercial can pick the brains of the lenders’ surveyors.

  One critical funding problem is that sites are priced according to their potential value after development but lenders look at existing use, says Simon Hodson,  a director in Nelson Bakewell’s  investment consulting team.  This gives cash-rich private investors an edge. They are funding more small projects as property becomes fashionable and a further boost is likely from new rules which will allow both commercial and residential into self-administered pension funds.

   Institutions are beginning to soften, however. David Barnett of residential specialist London & Newcastle, which has just joined forces with commercial giant Rugby Estates to exploit mixed use, says: ‘Gaining finance has undoubtedly become easier.’   L&N normally raises 70-75% of the cost of a scheme from a senior lender but due to the uncertainty associated with obtaining planning permission, bases this on a ‘worst case’ scenario.  Projects must cover themselves with existing use income in case development is refused.  Once permission is secured,  they can be refinanced at the enhanced value. 

  Banks are more switched on to the needs of mixed-use development but still require a great deal of information. ‘We assess all possible competing developments either being built or proposed within a mile of a site and in other locations which could draw our target market, and forecast conditions two or three years down the line when our scheme would be completing,’ he says. This is done  for each element so if, for instance, they are proposing a bar on the ground floor, L&N will analyse the market for similar establishments locally. ‘We often develop in up-and-coming areas so a forecast of how it is due to develop as whole is also very important.’

   Major schemes require vastly more up-front capital – not just because of the size but to cover years of preparation and planning work before a brick is laid. Ironically, they  can be simpler to finance, however,  as uses are generally easier to separate.

  Institutions generally prefer this rather than taking mixed use chunks as it fits their sector allocation targets, says Keith Perry,  property and development Director for Lend Lease Europe, which is involved in landmark schemes such as Greenwich Peninsula and Battersea Power Station. As overall asset manager, Lend Lease would decide whether to use a ‘superfund’ to back the whole of a scheme or set up individual funds for separate components.   Where uses are more integrated, such as retail on the ground, offices on the middle floors and residential above, investors look at the major constituent and value on a blended basis, he says.

 Residential is the main problem, and this is often the biggest component of major regeneration schemes.  Big schemes rely on funding through joint ventures with housebuilders such as  St George at Kings Cross. But Perry sees proposals for property investment funds – the UK version of REITs – as a way to bring institutions into the fold in future.  

Cure for all ills?

Politicians scream endlessly for more mixed use development but that very enthusiasm is corrupting what should be a good idea.  ‘It is being seen as a panacea for all ills,’ says Marcus Wilshere, director of Urban Initiatives, voted the top UK planning consultant last year. ‘You can’t just throw everything into a pot and expect it to be a success,’

   Neighbourhood shops, for instance, seemed a winner on suburban  estates, yet many now lie boarded and derelict. Housing was carefully laid out in cul-de-sacs to enhance  lifestyles  but that focused travel outwards  and killed hope of  passing trade, says Wilshere.Similar lack of joined-up thinking could overshadow hotels, offices and leisure, now considered such an integral part of new schemes but pushed into unsustainable locations.

   Future historians could look back on some developments as disasters. Developers and planners are in danger of cloning the same mix repeated endlessly across the country with little regard for  location, says Mark Anders, a director of REID Architecture.  Deciding uses should be more scientific. Leisure, for instance, can help integrate retail into a town by drawing in the public outside shopping hours, according to REID, which is involved in  Gunwharf Quays, Portsmouth and The Gate, Newcastle,  winners of the 2001 and 2003 Leisure Property Award for best commercial mixed-use schemes.

    Housing, shopping and offices can also play a wider role. P&O Developments’ Regents Quarter, next to London’s Kings Cross, evolved from a pure office scheme to a mix of  flats, retail and workspaces to eradicate a dead and dangerous after-hours environment.

  Design is vital in  preventing creation of ghettos. In the past, developers have given shopping centres their own feel and architectural style which was often unrelated to surrounding streets and buildings.  Modern centres like Cardiff and Liverpool are trying to avoid this with a mix of open and covered streets and different styles of architecture, says Sanders.

  Social elements like medical centres are another way of locking into the surrounding community. They can also be a useful tool for much smaller schemes, winning seemingly unavailable  sites, says David Barnett, director of London & Newcastle.  But he warned not to expect them to guarantee an easy ride. Despite winning backing from the public, MPs and local councillors for a scheme in Abbey Road, London, he still had a tough time with local planners.

  Yet the very fact that mixed uses are involved should be exploited to the hilt. ‘Developers miss a trick by not asking planners to offset the benefits against their section 106 (planning gain) contributions. What tends to happen is that developer try to cram more commercial uses in to justify the cost of the planning gain,’ says Bill Soper, partner at architects TP Bennett.

  Even when the mix is right, design plays a big part in deciding whether developments will work. A  'wow' element will create a sense of purpose and identity, says  Keith Perry of Lend Lease, the power behind schemes like Greenwich Peninsula.  And that hinges as much on civic and open spaces as the buildings.

  Charter Quay, in Kingston on Thames,  designed for St George by John Thompson & Partners, overcame public suspicion and walked away with a hatful of awards by  drawing outsiders in via a piazza, river walk and theatre. The  flats,  shops and restaurants were broken down into blocks rather than create a private ghetto walling off the river.

   Veteran mixed-use developer Trevor Osborne says that even the smallest scheme can face problems through lack of thought.  ‘Anticipate the natural conflicts,’ he says. Developers should put themselves in resident’s shoes and imagine the disturbance from customers leaving late at night or rubbish being collected  early on a Sunday morning.

  Problems can be designed out, such as not putting bedroom windows over delivery yards. Osborne has detailed discussions with local authorities and refuse collection contractors  to alleviate this kind of conflict,  planning when and where collections and deliveries are made and the kind of equipment used. ‘I am constantly told that few developers do this,’ he says.

    Conflicts should be expected even while projects are being built. Residents may move in long before commercial phases are finished, so  choosing a contractor experienced in mixing commercial and residential can be critical, says Graham Corser of P&O Developments, which handed the whole of Regents Quarter to HBG.

     Friction can arise from the most unexpected direction. ‘Sometimes you  can get caught in the middle of rows that have nothing to do with the amount of social space,’ says Corser. Planners may demand preservation of sash windows in old buildings while the housing association insists on double glazing to keep down service costs.  ‘All you can do is try to mediate and not let things spiral out of control,’ he says.

  Much of this distraction could be eliminated if mixed use was taken  to its logical conclusion. Rather than fire-fighting conflicts, a new kind of building is needed which can easily switch between residential, office and hotel is needed,  much as manufacturing and offices have merged on business parks. Mixed use is the prime weapon against yesterday’s mistakes, yet developers may be creating problems for the future by producing schemes which cannot adjust to meet changing needs.