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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   April 2012

Making the Right Mix

Thriving ground-floor retail is key to a mixed-use development’s success

Making the Right Mix

Commercial mortgage brokers who work with developers must understand the difference between how city planners look at the benefits of introducing ground-floor retail space and how lenders view it as a critical factor to the success of a mixed- use development.

Mixed-use developments are often multistory buildings with either an office or a residential component above retail space. City planners may require ground-floor retail space in an attempt to encourage pedestrian traffic generated by sidewalk cafes, restaurants and boutique retailers — adding a charming aspect to urban neighborhoods.

Ground-floor retail space can range from a small percentage of the leasable space in a building to as much as half of the total leasable area. In a six-story building with apartments, the ground-floor retail space can be 17 percent of the building. In a 50-story building, it can be just 2 percent of the building. A significant portion — if not all — of a building’s profit can be found in the ground floor, however.

One point that is often ignored by city planners — and perhaps by some developers — is whether the density of the potential traffic supports a retail business or not. Lenders, however, are likely to closely study the traffic pattern to determine if the ground-floor retail space will contribute to the success of a mixed-use development or create challenges for the developer.

That is why commercial mortgage originators must understand the two points that lenders look into when they make a decision on providing financing for a mixed-use development. These points also may help your client decide whether an investment is worthwhile or not.

1. Location

Having the building in the right retail location is a critical factor to the success of its ground-floor retail business. For example, tenants likely will pay the highest rents if the building is located in a retail core or on a successful retail street. 

In some cities,  ground-floor retail space in high-rise office buildings — in the heart of the retail core downtown — commands higher rents than penthouse office space. If an identical building is just outside the retail core, the ground-floor retail rent may be cut in half. That is why lenders study whether the ground-floor retail space is attractive to retailers and restaurants — and if so, at what rental rates and lease terms.


If an area cannot support retail business, the space is likely to remain vacant for an extended period and fail to achieve its pro forma rental rate. The developer eventually will be forced to lower the rent, provide an additional tenant-improvement allowance and offer an incentive-leasing commission. These additional costs are rarely built into a developer’s pro forma.

2. Tenants 

If the building is located on a nonretail street, likely candidates to lease its ground-floor space include full-service, quick-service and fast-food restaurants, in addition to other service businesses such as banks, insurance agencies and  hair salons.

Your client must be aware — just as the lender is —that most service tenants provide limited to no amenities to a building. Some of these tenants may end up as just space fillers. Additionally, second-tier tenant rents are significantly lower than rents paid by retailers and restaurants in a  retail street.

To determine which category of tenants is likely to lease ground-floor retail space, walk the area and make a list of the types of businesses that are located on the street and in the neighborhood. Don’t assume that retailers on nearby streets — or even on a block or two down the same street — will relocate to the subject property’s street.

Lenders have the resources to study street traffic and analyze the demographics and psychographics of the trade area to decide which types of retail business can be supported by the population. Your client may find acquiring a similar study useful in determining the prospects of investing in a property.

• • •

Although municipalities have a point in requiring developers to include ground-floor retail space in a mixed-use development, only the market will determine if that space can be leased successfully. If the location and traffic are right, ground-floor space can be leased at or higher than the pro forma rates to retailers and restaurants. This will contribute to the charm of the neighborhood and enhance the value and marketability of the mixed-use development. 


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