On August 29, 2016, ULI hosted an exclusive Lunch & Learn event featuring Richard Peiser, a professor at Harvard University’s Graduate School of Design and author of Professional Real Estate Development: The ULI Guide to the Business. The talk, which was sponsored by WeirFoulds, focused on two main topics: the first being the results of Peiser’s recent research on the question: “Is there an investment premium for multi/mixed-use properties,” and the second, on the implications of Brexit on economics and real estate.
Mixed-use developments are usually thought of as vertical/horizontal developments with at least 3 different uses in the same structure. It offers an exciting opportunity to live, work, and play all within the same vicinity. The hypothesis here was that “properties in mixed-use projects perform better financially due to benefits from mixed uses, holding all else equal.” Peiser joined forces with colleagues Raymond Torto, a commercial real estate advisor and former CBRE Global Chief Economist, and Shohei Nakamura, currently an economist at the World Bank, to prove it through the presentation of an academic paper. However, the results of the trio’s research were mixed.
Data was gathered through CBRE, property information from NCREIF, and Raymond Torto’s connections to support this study. Research was conducted in areas within a half-mile radius from the following 4 areas containing mixed-use developments: Kendall Square, Cambridge, MA; Seaport District, Boston, MA; Union Station, Denver, CO; South Lake Union, Seattle, WA. Peiser focused on a time period between Q1 of 2012 to Q4 of 2014 where 5,630 observations (on 677 unique properties) were made. Financial performance with raw data was compared between areas within and outside the mixed use radius. Furthermore, control variables such as the structures themselves (age, size, number of storeys), neighbourhood (median income, % white), accessibility (population density, distance to nearest station), public tax rate for public sector, and market conditions (growth rate of office stock, vacancy rate) were used for the research.
The results demonstrated that there were lower vacancy rates, higher growth rates, and denser populations within the half-mile mixed-use radius. Financial performance was also greater compared to outside. The net operating income per square foot saw an increase of 16% and the market value was significantly higher at 41%. However, no significant difference on investment returns were found. This was a disappointment because the study anticipated that mixed-use development would enjoy a higher rate of return. Offices yielded higher results inside mixed-use geographies for total returns of 1.74% while retail was at 1.21%. ROI on apartments on the other hand were not significant with a total return of -0.93%. This discrepancy is a result of the market appearing to price apartments at a premium. A lot of total return has to do with the initial buy-in cost and Peiser found that prices are already being bid up for apartments and retail in comparison to offices. Essentially, residential and retail properties already have the premium priced in, which was why it seemed that offices appreciated comparatively significantly in value.
Oftentimes, mixed-use developments are more complex and time consuming than single-use developments, requiring deep pockets (and financial staying-power), multiple public/private financing sources, as well as political and neighbourhood support. For example, Seaport District in South Boston, a 21-acre development that Peiser was personally involved in, took over 20 years to get off the ground. Therefore, successful developers must be able to overcome these aforementioned obstacles. Peiser presented 12 case studies and singled out three that were extremely successful: Shanghai Center and Embarcadero Center in San Francisco by Portman Architects and University Park at MIT developed by Forest City.
Embarcadero Center was a 5.8 million-square-foot development that cost $428 million and sold for $1.52 billion in 1998 after 25 years. Shanghai Center started in 1981 with 1.9 million square feet. The ROI multiplier for the development was 2.54x for partnership. All three were located in superior locations with long histories (spanning 30-40 years) of planning and great public transportation. The developers were also successful in garnering public financing support as well as local official approvals for mixed uses that required changes in traditional zoning. On top of all that, great design with a combination of at least three uses and significant public spaces such as parks and common areas were also important.
Proximity to institutions and the quality of tenants also plays a role for mixed-use success in the case studies presented. Mixed-use developments that are anchored by major universities and medical centers, such as Kendall Square (Boston), University Science Park (Philadelphia), and Cortex District (St. Louis) enjoyed strong demand for office and laboratory space from companies with connections to neighbouring institutions. South Lake Union in Seattle became mixed-use by “accident” when the online shopping giant Amazon selected it as its global headquarters and began purchasing buildings within the neighbourhood. Evidently, mixed-use communities can often become magnets for high-tech innovative companies and residents seeking that 24-hour lifestyle.
The second half of the Lunch & Learn conversation focused on the United Kingdom’s intention to withdraw from the European Union (a separation process known as Brexit) and its implications on economics and real estate. Peiser noted that one of the most important arguments for leaving the EU was that the UK would save £350 million per week, a contention that turned out to be false – it was actually half that. Some voters have since expressed that they would have changed their vote if they knew the full picture. However, the choice to leave sent shockwaves through UK’s economy and undermined the confidence of stock market investors worldwide. Both the British Pound and Euro plummeted to a historical low as a result. Since UK exports 40% of its products to EU countries, a new trade agreement with the EU and other nations will need to be initiated within two years.
The UK currently represents about a sixth of the EU’s economy and its withdrawal will result in a rebalancing of power in Europe. For the United States, the volatile markets brought about by Brexit will cool the engine of US growth (eg. the stock market) and pressure the Federal Reserve to lower interest rates. Brexit is also expected to trigger a stronger US dollar, which hurts US trade. It’s predicted that investors will sell off riskier assets in favour of safer ones, which would further prompt declines in government bond yields in the US.
For real estate, the uncertainty generated by Brexit may prompt international investors to increase their holdings of real estate in other international markets, including the US and Canada. With the expected increase of investments in North America and Canada’s low interest rates, the housing market is expected to remain hot.
Peiser also remarked that Toronto is currently the most exciting city development-wise even when compared to China. With the sale of the LCBO site downtown, development at the Yonge and Sheppard site in North York currently underway, and the completion of the Canary District, Toronto is starting to see a lot more big-block mixed-use developments taking shape. The podium-tower typology will continue to be a common element in these developments and the key challenges here are creating vibrant public spaces and fostering street life.