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What Is Mixed-Use Development, and Is It the Right Investment for You?

May 02, 2020 by Lena Katz

Whether in urban centers or newly thriving suburban areas, new construction or adaptive reuse, mixed-use development is steadily gaining ground as a housing trend among residential homebuyers. Not coincidentally, supply is increasing, zoning is becoming more permissive to this style, and the government-sponsored entities (GSEs) have loosened up lending regulations so that more homebuyers and investors can get desirable mortgages on the mixed-use developments entering the market.

Although the term mixed-use development is mainly used among real estate professionals, the look and lifestyle are pretty recognizable to laymen. Offering a mix of different types of properties, this development style brings together a mix of retail, office, entertainment, and commercial space -- and often with townhouses or some other type of residential units.

Multifamily buildings are commonly seen in mixed-use developments because the loft or small-footprint living lifestyle is symbiotic with busy neighborhoods where food and amusement are right outside the front door.

Mixed-use developments: Learning the basics

The simplest definition of mixed-use development is a real estate development that contains multiple types of buildings -- commercial, office, retail, and residential -- all intended to coexist and ideally fill different needs and provide various benefits to the people who live and work therein.

In an old-school business park, this might look like an office park with some warehouse spaces. In the new and trendy style, a mixed-use development may consist of several residential apartments or condos, a gym, restaurants, specialty retailers, and a tiny green space, like a putt-putt golf course just for residents. For people attempting a car-free lifestyle, mixed-use developments have always been preferable, but they are becoming more plentiful and attainable, especially in certain high-density hot spots.

How do the GSEs view mixed-use development?

The GSEs are more supportive than they used to be of mixed-use developments that contain primarily residential space. Freddie Mac's Small Balance Loans (SBLs) are an investor/landlord product specifically for small multifamily buildings -- and as of 2017, up to 40% of the usable space could be used for nonresidential purposes.

Fannie Mae will securitize loans for homes that will be someone's primary residence and also their workplace -- but it has to be very specific types of business. Daycares and doctor's offices are on the approved list. Essentially, skilled services are provided, but no products are made.

Recent FHA loan policy changes power low-interest condo loans in mixed-use development

The Federal Housing Administration (FHA) used to make it difficult for homebuyers to get condos in mixed-use developments by refusing to insure loans for condos in projects unless nonresidential usage was minimal. In August of 2019, the FHA put forth new guidelines that allow for FHA mortgages in mixed-use projects with up to 35% of the space used for retail, office, or other nonresidential.

Pros of living in a mixed-use development

There can be many positive aspects to living in a mixed-use development, although this varies according to what type of businesses are part of it. The other thing to consider is location. While mixed use is a favorite of urban redevelopers, it's also moving out to exurban and suburban areas.

What are the benefits of living in a mixed-use development?

Convenience -- being in the same development as shopping, dining, and public transit -- is oftentimes the most important benefit of living in a mixed-use development.

With mixed-use developments that are intentionally located within close proximity to public transit, the ability to go car-free can be a major pro. Not only is it convenient, but it is also a way for residents to lower their carbon footprint when they don't drive.

Mixed-use developments in urban core neighborhoods are often popular with people who desire to be in the heart of a cultural center.

How can mixed-use developments be good for a city?

At their best, mixed-use developments promote lively, engaged communities through culture and recreation. Some of the nicer ones even offer green space and/or community services. In general, they provide shopping, a variety of services, and dining for the convenience of neighborhood residents.

Many mixed-use developments are actually within renovated historic buildings. This is one of the most exciting trends in urban redevelopment, as it allows landmark structures that have outlived their original use to serve the current community in a number of different new ways.

Mixed-use developments reduce traffic in their area because people don't need to drive as much for their day-to-day needs. They are a residential style often seen in walkable communities. Some developments in urban core areas are designed to require fewer parking spaces.

Cities with medium-income-housing shortages look at mixed-use development as a way to revitalize certain depressed neighborhoods. For example, Los Angeles' Transit-Oriented Community (TOC) incentives are given to projects with a certain number of affordable housing units -- although many projects are comprised of more medium-income units than low-income. Both price ranges are geared toward population demographics that are vastly underserved in LA's current housing market -- and the demand makes this type of project appealing to investors.

Cons of living in a mixed-use development

While mixed-use developments can be great, they aren't for everyone, and a lot of their appeal (or lack thereof) depends on what life stage a person is in.

Loss of privacy

When residential units in a mixed-use development share space with popular restaurant and retail venues, the residents don't really have a buffer of privacy once they step outside their condo or apartment. Busier mixed-use spaces will always have nonresidents passing through, and even if there's a security-guarded divide between the residential part and the retail side, you're still just a stone's throw from public areas.

Noise and congestion

If mixed-use developments aren't physically in a city center, they're often built with the intent to extend the city center and/or be little villages themselves. They're designed to be activity centers, with the noise and buzz that entails. The units are often smaller in footprint, meaning more people crammed into less space than in a neighborhood of single-family homes.

Not appropriate for all ages

Certain ages and life stages require a property with more protected space. Growing families often find that a multifamily development that was great before kids and workable through the baby years no longer serves their needs once the kids hit toddler age and beyond. This is the point where many families seek out single-family houses with yards and privacy gates. Also, households with elderly members may need a specific type of mixed-use development that provides amenities and recreation, but in a well-staffed, highly secure setting.

Mixed-use development is trending for good reasons

Whether bringing new purpose to historic buildings, revitalizing communities, making better use of available square footage, or reducing the need for car travel, mixed-use development has a lot of potential benefits for a city. And living in one affords many benefits: convenience, community, lower transportation expense, and more. While it does change the landscape of a neighborhood -- and will always have detractors for that reason -- mixed-use planning is a forward-thinking way to create community in housing developments.

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