Bringing Residential Uses to Existing Shopping Centers--A Win Win
Tenant curation, experiential retail, and social media-based marketing are thriving trends in today’s brick-and-mortar shopping center industry. Retail is not the only real estate asset class susceptible to trends, and a recent dominant trend in the multifamily residential sector may offer valuable opportunities for shopping center owners.
For those in the multifamily residential real estate sector, resident “amenities” is the buzzword for attracting and retaining tenants. Almost invariably, descriptions of the amenities trend describe it as an “arms race” as multifamily residential owners seek to offer newer, hipper, and better services and features to their tenants. For instance, rooftop pool lounges, dog parks, spas, business centers, community kitchens, bike centers, and technology are among the many, many varieties of amenities that landlords are offering their residential tenants. Increasingly, an amenity coveted by residents is proximity to retail choices. Therein lies the opportunity for shopping center owners.
With retail and dining options being viewed as residential amenities for multifamily developers and owners, some shopping center owners might find an opportunity by bringing multifamily uses to the shopping center. The pitch from shopping center owners to their multifamily counterparts is surprisingly simple: we have what your residents want. Residents increasingly want walkable access to restaurants, coffee shops, yoga studios, grocery stores, and the other shopping, dining, and entertainment experiences offered by retail uses. The benefit of this arrangement to shopping center owners is readily apparent. For retailers, residents living in close proximity to their shopping center translate to shoppers and patrons who can visit the shopping center multiple times per week. “Retail follows rooftops” is transforming to “rooftops within retail.”
Plenty of examples of the mixed-use retail and multifamily model exist. Assembly Row in Somerville, Massachusetts features residential units integrated into the upper stories of an open-air outlet center. Ballston Quarter in Arlington, Virginia does the same. Both mixed-use projects were constructed over or adjacent to more traditional single-use shopping centers. Similar concepts are in progress elsewhere, and the trend is even more prevalent in larger cities. However, there are still plenty of shopping centers that would, and still can, benefit by adding multifamily to the mix, potentially by repurposing or infilling excess parking lots.
Adding multifamily residential uses to an existing shopping center presents unique legal challenges. A multifamily residential use in a shopping center has different demands and imposes different limitations than retail tenants. For instance, issues that may arise include:
- Prohibited use provisions – some retail tenants may have leases or, in the case of either anchor department stores or big boxes, recorded agreements that expressly prohibit multifamily uses. For decades, retailers had a strong belief that non-retail uses should not be allowed in shopping centers and demanded leases or other agreements memorialize such restrictions on landlords. These agreements would need to be carefully studied and potentially modified.
- Entitlements – zoning or other land use restrictions may prohibit multifamily uses in shopping center areas or may impose other restrictions, such as prohibiting any reduction in parking or a change in configuration of the overall site plan for the shopping center.
- Common Area Charges and Maintenance Obligations – the shopping center owner and multifamily residential manager will have to reach an agreement on the responsibility and allocation of costs for maintaining common areas, such as access ways, parking, signage, and amenity areas. These agreements will likely require a recordable reciprocal easement agreement or covenants, conditions, and restrictions agreement to reflect all of the operational agreements among the parties, and may require tenant buy-in.
- Construction period obligations – a shopping center owner may want to protect its property and its retailers during any build-out of a new multifamily use in the form of a temporary agreement that exists during the construction period. The shopping center owner may want to insist upon insurance and indemnity protections as well as other conditions unique to the proposed new construction, such as use of roadways by construction vehicles.
As shopping center owners look for opportunities to take advantage of trends in the multifamily residential sector to add value to their properties, each of these issues, and many others, will need to be addressed on a case-by-case basis for each shopping center.