Davos Agenda

Real estate is increasingly serving as integrated mixed-use destinations. Here’s why investors should take advantage

The lines separating real estate for residential, office, industrial and shopping use are softening.

The lines separating real estate for residential, office, industrial and shopping use are softening. Image: REUTERS/Thomas Peter

David Steinbach
Global Chief Investment Officer, Hines
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Davos Agenda

This article is part of: World Economic Forum Annual Meeting

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  • Real estate asset classes are more frequently combining product types and softening the lines between residential, office, industrial and shopping use.
  • As mortgage rates and inflation rise, real estate investors should take advantage of convergence and seek outsized returns from mixed-use environments in which each use contributes to the whole.
  • It is critically important for investors and developers to have a vision for how the individual pieces of a given development will work together and support each other.

We live in a world of increasingly blurred lines. As consumers desire more simplicity and efficiency, companies move up and down value chains taking on new product lines and services. Phones now double as cameras (and much more), booksellers are in the business of selling e-readers, retailers act like lenders, and ridesharing app companies redefine the way we interact with automobiles.

We are now seeing the same trend in real estate, with real estate asset classes combining product types more frequently and softening the lines between residential, office, industrial and shopping use. As mortgage rates and inflation rise, real estate investors should take advantage of convergence and seek outsized returns from mixed-use environments in which each use contributes to the whole.

Historically, the real estate industry divided itself neatly into different product types. Office, industrial, multi-family and retail were seen as distinct investment opportunities. Investors would look at the volatility and returns of each asset class and allocate capital against an efficient frontier (the investing landscape used to be simpler and hence more efficient). The guiding principle was that real estate operators needed to stay in their lanes. This is not how investors will be allocating capital in the next ten years. Product types are blending with each other.

In the last few years, bricks-and-mortar retail became a disfavoured asset class as the e-commerce wave began to take shape. However, a lot of retail has performed well, like at CityCenterDC in Washington D.C., USA, which has seen sales increase year-over-year during this same period with average gross sales exceeding $1,300 per square foot. Meanwhile, office space faces the challenge of companies struggling to meet employees’ expectations for flexible, remote-work policies. Some office projects are ripe for repositioning into multi-family, like South Temple Tower in Salt Lake City, USA, which is being converted from office to multi-family; while others are blending multifamily experiences into office settings by providing high-rise balconies, rooftop terraces, and other common areas that resemble luxury apartment offerings.

As mortgage rates and inflation rise, real estate investors should take advantage of convergence and seek outsized returns from mixed-use environments in which each use contributes to the whole.
As mortgage rates and inflation rise, real estate investors should take advantage of convergence and seek outsized returns from mixed-use environments in which each use contributes to the whole. Image: Statista

Many industrial tenants now face a tight labour market, as office tenants do, and must similarly rethink the amenities they offer. This is the case at the Yatomi Distribution Center in Nagoya, Japan, where workers have access to high-quality amenities like those found more often in office buildings, such as indoor and outdoor dining areas, business lounges and shower facilities for tenants. In addition, the lines between retail and last-mile logistics have blended, as many retail outlets like Whole Foods now serve as distribution points for e-commerce or provide grocery delivery.

As a result, investors considering any urban site must be product-type agnostic and focused on the highest and best use. However, to take full advantage of convergence in real estate requires creating a space within the built environment, in which individual components – such as office, retail and housing – are deeply connected with each other and help each other thrive. Some of the best projects incorporate all product types like Fenton in Cary, North Carolina, which is the area’s first mixed-use destination and has 2.5 million square feet of retail, office, restaurant, hotel and multi-family space.

Some of the best real estate projects incorporate all product types like Fenton in Cary, North Carolina, which is the area’s first mixed-use destination.
Some of the best real estate projects incorporate all product types like Fenton in Cary, North Carolina, which is the area’s first mixed-use destination. Image: Hines Interests Limited Partnership

This is not just mixed-use, in which each product type sharing the site simply stands on its own. Instead, retail and entertainment uses are strategically curated to appeal to the development’s office workers and residents alike, and all uses are thoughtfully integrated with each other and the site as a whole to create a walkable, lively environment from morning to night. Companies can more successfully attract employees to come back to the workplace if the office is located in a vibrant place where people want to spend their time even after work hours.

It is critically important for investors and developers to have a vision for the ways the individual pieces of a given development will work together and support each other. The “software”-- everything that keeps the site active, from farmer’s markets to concerts to retail – is just as important as the “hardware” – the physical structures, buildings and open spaces, and passageways. In an age where the lines between working, living and playing are fading, having the skills to integrate hardware and software with each other and create dynamic environments will be the true differentiator.

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