Ground-floor retail in a mixed-use development is simultaneously the hardest component to lease and the most visible component of the project’s success. Prospective residential tenants evaluate the retail activation at street level as a signal of neighborhood quality. Lenders evaluate pre-leasing of the commercial component as evidence of market demand. The architect designed the ground floor to create urban presence. And the developer needs the retail rent to justify the cost of the commercial space and to satisfy lender pre-leasing requirements.
All of this pressure concentrates on a real estate product, ground-floor retail, that is in structural decline in many markets, where the tenant options are more limited than they were a decade ago, and where the lease economics for many retail concepts do not support the rent levels that justify the construction cost of building the space.
Getting retail leasing right in a mixed-use development requires honest assessment of who your retail tenants are, what they need, and what you can reasonably offer them.
Who Actually Leases Ground-Floor Retail
The universe of credible ground-floor retail tenants for urban infill mixed-use development has changed materially over the past decade. National chains that were reliable anchors for mixed-use projects in the 2000s and early 2010s, banks, pharmacies, clothing retailers, mid-market restaurants, have dramatically reduced their brick-and-mortar footprints. The retail space that was designed for a Chase branch or a Starbucks is now competing for a much smaller pool of national tenants who are actively opening new locations.
The categories that remain active for ground-floor retail in walkable mixed-use:
Food and beverage. Restaurants, cafes, and quick-service food operators remain the most active retail tenants for urban mixed-use ground floors. The specific segments that are expanding: coffee shops with food programs, fast-casual concepts, specialty grocery operators (not supermarkets, but specialty food concepts), and the full-service restaurants that are the hardest to execute but generate the most activation. Food and beverage tenants generate foot traffic that creates the street-level activity that justifies the retail program to residential prospects.
Health and wellness. Fitness studios, yoga and Pilates studios, specialty health services, and medical/dental offices have been reliable ground-floor retail tenants in markets where the surrounding residential density supports their clientele. These tenants generate consistent traffic during peak hours (mornings and evenings for fitness) but relatively little during off-peak periods.
Personal services. Hair salons, nail salons, alterations, and similar personal service businesses are reliable ground-floor tenants in residential-dense neighborhoods because they serve the residents who live above and around them. Their rental capacity is typically lower than food and beverage, but they are consistent and less failure-prone than restaurants.
Local and independent operators. In the neighborhoods where mixed-use development is most active, RiNo in Denver, the Capitol Hill neighborhood in Seattle, the Pearl District in San Antonio, independent operators who reflect the neighborhood’s character are often preferable tenants to national chains, both for the activation they create and for the residential prospects who are attracted to those neighborhoods specifically for their independent retail culture.
What Tenants Require in Ground-Floor Retail Space
Retail tenants have specific space requirements that mixed-use developments sometimes fail to meet, either because the architect optimized for the residential program above or because the developer did not consult with a retail leasing broker during design development.
Storefront visibility. Ground-floor retail depends on visibility from the street. A retail space set back behind an arcade, located in a below-grade portion of the building, or oriented away from the primary pedestrian flow will struggle to attract tenants and will underperform once leased. Window area, signage opportunity, and pedestrian flow past the space are the fundamental leasing criteria that no amount of interior improvement can compensate for.
Clear height. Restaurants and retail operators generally need 12 to 16 feet of clear height to accommodate their equipment, signage, and brand standards. A ground-floor retail space with 9-foot ceiling height is a residential space, not a retail space. The design decision to provide adequate clear height for retail is made early in the design process and is expensive to change retroactively.
Loading and service access. Food and beverage tenants need loading access, a place for delivery trucks to stop, unload, and not block the primary pedestrian entrance. Mixed-use buildings in urban locations sometimes have service alleys that accommodate this; others do not, creating operational problems for food tenants that are discovered after the lease is signed.
HVAC and exhaust capacity. Restaurants require exhaust capacity for commercial cooking equipment that standard retail HVAC does not provide. The building’s MEP infrastructure should accommodate restaurant exhaust when restaurant tenancy is anticipated, adding it after the building is complete is expensive and sometimes not technically feasible.
Lease Structures for Ground-Floor Retail
Ground-floor retail in mixed-use developments most commonly leases on triple-net or modified gross lease structures at market rents that reflect the specific location’s foot traffic, visibility, and competition.
For restaurant tenants in projects where the developer wants to attract a specific operator to create activation, tenant improvement allowances, cash contributions from the landlord to fund the tenant’s buildout, are often necessary to make the economics work. Restaurant buildouts run $200 to $400 per square foot for mid-level concepts in current construction markets. A tenant paying $40 per square foot annual rent cannot afford to self-fund a $300-per-square-foot buildout. The developer who wants to attract a quality restaurant needs to contribute $100 to $200 per square foot in TI allowance, a cost that must be reflected in the retail space’s pro forma from the outset.
Mixed-use developers who begin retail leasing conversations before construction starts, with realistic asking rents calibrated to the specific location and pedestrian environment, consistently outperform those who deliver a completed building and begin leasing from scratch.
Innergy Integral provides these services in Dallas, TX and across our six-state footprint.
Related: Mixed-Use Development Services · Commercial Development Services · Multifamily Lease-Up Management · Development Advisory Guide
Markets: Mixed-Use Development Seattle WA · Mixed-Use Development Dallas TX · Mixed-Use Development Houston TX