Oil and water don’t mix. Very often, neither do building occupants of different types thrown together in the same complex. Welcome to the reality of mixed-use assets, and it falls to the property manager to act as sheriff, advisor, confidant and general keeper of the peace.
The Growing Trend of Mixed Use
How big is the mixed-use trend? Big and getting bigger, apparently. Here are a couple of fun facts for you, from the pages of the National Real Estate Investor: Fun Fact A) “The desire for uplifting experiences is now invading the workplace, and forward-thinking office developers/owners are cashing in on this trend by integrating office space into mixed-use environments,” says Mike Hoeck, San Diego-based senior vice president specializing in office leasing and sales with CBRE, AMO. “Office space within a mixed-use environment leases up faster and commands rents that are 22 to 33 percent above rents at stand-alone office buildings.” Fun Fact B) “Mixed-use developments are rapidly becoming one of the most popular product types in US development,” making up a substantial portion of 2017’s “all-time high of $1.26 trillion in construction spending.”
Mixed-use assets are a growing trend in the U.S. (see sidebar) That implies a growing need for managers with a unique blend of both hard and soft skills to navigate the potential landmines inherent when commercial and multifamily—or differing commercial uses, for that matter—come together in the same sandbox. Add to that the complications of different management organizations for each use, not just homeowner associations (HOAs) but also the growing number of commercial owner associations, and you can see that managing this type of asset requires a great deal of expertise. “The expectations today are so much higher than they were 10 years ago,” says Lisa Nerheim-Chereck, the Portland, Ore.-based managing director of real estate for Greystar Management, AMO. “So training and mentoring are an incredibly important part of the mixed-use industry today. “The challenge in our market, and I’d assume in many markets, is that initially multifamily managers did not have the background to manage the retail or commercial space without additional training,” she continues. Greystar, the largest operator of apartments in the United States, not only has robust on-boarding and ongoing sessions for staff, but it is also working with IREM to provide live-session commercial management training programs. “The bulk of the multifamily supply delivered in Portland over the past 10 years has had a retail or commercial component,” she says. “Many residents prefer a lifestyle with amenities close to where they live.” The surge has also been fueled by local-government mandate, and mixed-use zoning was implemented in the 1990s “to minimize city congestion and auto traffic.”
|“The dynamic changes if the owners’ association isn’t managed by a professional company. If it’s just an owner representing the rest of the owners, it can become more emotional.”|
|-Karinna Cassidy, CPM, Cushman & Wakefield, AMO|
“The greater L.A. area has a housing shortage,” says Karinna Cassidy, CPM, senior managing director for Cushman & Wakefield, AMO, in Los Angeles. “So we absolutely see mixed use as a growing trend, and everyone in management will be challenged to deal with conflicts arising from this segment of the industry.” The potential conflicts can come at you from anywhere. They include but certainly aren’t limited to noises and aromas wafting from restaurants to homes, battles over parking spaces when a hotel banquet takes place during office-tenant hours, even ATM security lighting shining through unit windows. And then there’s the “me first” mentality. “Residents have expectations of their rights, and they certainly don’t want any reduction in those rights in a building with other uses,” says Stephen L. Burger, CPM, CRX, CRM, president and COO of Eugene Burger Management Co., AMO, in Rohnert Park, Calif. “They often arrive with the idea that everyone else should understand their rights and treat them accordingly.” Ironically, he adds, “The businesses in the same complex have patrons who need to be served properly in order to build a profitable business. That’s their objective. There are residents who think that’s fine when they need that service. But when they don’t need it, they don’t want issues that they hadn’t already anticipated.”
The Lease: Before & After
A clearly worded lease helps keep all parties in their lanes, but it’s not enough. “You can address some issues in a lease or a shared services agreement,” says Cassidy. “But it’s not always feasible. Conflicts aren’t always so black-and-white.” Cushman & Wakefield and Greystar both find advantages in involvement before leases are signed. “We work with most of our clients through the entire process,” says Cassidy, and that starts with development. “So developers come to us for consultation and get our feedback in terms of the best approach for the asset. Together we can outline and forecast how services will be placed and used for the commercial, hotel and residential components.” This can include such nitty-gritty details as submetering and coordinating access, “so when we’re billing expenses back we have an accurate measure and can regulate how to prevent commercial operations from impacting the residential experience,” says Cassidy.
|“We see successful commercial property management within the mixed-use capacity becoming as fundamental as any other essential operation within the multifamily industry.”|
|-Jesse Miller, MBA, ACoM, ARM, Greystar, AMO|
There are many benefits to managing all aspects of the mixed-use asset, explains Jesse Miller, MBA, ACoM, ARM, the Portland-based director of real estate and commercial property management for Greystar. “There are a variety of synergies that can come from being the sole property manager for both components,” he says. “Synergies such as maintenance inspections, which help to scale pricing for the services, ensure consistency and reduce exposure, are just one example of added value provided by a centralized management platform.” Given Greystar’s size, its clients also gain from its immense buying power. On the flip side, sharing management responsibilities with another firm demands both a professional demeanor and a dollop of patience. “That’s where soft skills come into play,” says Cassidy. “It’s all about strong relationships, constant communication and solid documentation supporting how things are supposed to operate. And ideally you’ve set meetings for the week’s or month’s activities, so you’re both working together and understanding what the other is trying to accomplish.” If there are HOAs involved or, with increasing frequency, commercial ownership associations, it requires increased communications. “Today, in addition to HOAs, there are some newer commercial developments where they’re implementing owner associations,” says Miller. “We have one development with office, retail and residential, with one ownership group for residential and office, another for retail and a master association to oversee the entire project. It’s a structure that’s new to us and the industry.” No matter whom the association represents, “The sensitivity changes,” he says, especially because the association is not typically made up of professionals. Cassidy agrees: “The dynamic changes if the owners’ association isn’t managed by a professional company. If it’s just an owner representing the rest of the owners, it can become more emotional.” And then crops up the challenge of balanced representation. “You’ll have a nonprofessional, volunteer board of directors, elected by their members,” says Burger. “Typically the number of residential units is greater than business units, so when board members are elected, they’re predominantly residential unless it’s specified otherwise. And some feel compelled to exercise their authority. If I’m a homeowner and I know the board members are mostly residential owners, I’m going to expect them to lean toward me.” The manager often labors under another burden, namely not knowing who the occupants are. “In the beginning, the developer might know what’s happening and who’s moving in,” he says. “But once that unit is sold, the manager doesn’t know who the new residents are until after the sale.”
Clearly, it takes incredible communication skills and management expertise to oversee a mixed-use project. Here are some tips from those who have succeeded: “We encourage mixed-use managers to invest in themselves and their future success by pursuing the robust commercial property management training IREM offers,” says Miller. “Within the next few years, we see successful commercial property management within the mixed-use capacity becoming as fundamental as any other essential operation within the multifamily industry.” Burger agrees: “You need time to get experience,” he says, “but first you need training, and it’s best to look for groups that offer that training particular to what you’re doing. IREM certainly cuts across most management types, and then there are other specialty groups, like BOMA (Building Owners and Managers Association).” He also suggests the training programs offered by local and state organizations. The main lesson in that training and experience is that you’ll “understand that there’s a big difference between mixed use and other property types,” he says. “You need to read all of the association’s governing documents as well as the lease and the CCRs [covenants, conditions and restrictions] and bylaws.” He further suggests specialization by product type. At his firm, “There is some crossover, but we prefer specialization,” he says. “It allows managers to increase their experience and carry their knowledge from one issue to another. Also, their assignments are mostly in the same general area, so they’re dealing with similar county and city issues.” He says his managers meet with their boards on a monthly or quarterly basis. “The primary skill I would hone into is being solution-oriented,” says Cassidy. “If you become a partner with the hotel or residential manager or the retail folks in your mixed-use project, be a cheerleader for everybody. It will circle back. Attitude is number one.” Indeed, mixed use is a growing development trend, addressing many needs in the local community, from housing to traffic control. And therein lies major opportunities for property managers…at least those with the proper hard and soft skills.