The Pros and Cons of Mixed-Use Property

Reading Time: 4 minutes

Around the world, the demand and desirability for mixed-use property seem to be growing by leaps and bounds. While there are definite advantages to investing in mixed-use property, there are also some potential drawbacks.

In this article, we’ll look at the evolution of mixed-use property, why the demand for mixed-use space continues to grow, and discuss how to find the best investments.

What is mixed-use commercial property?

In its simplest form, mixed-use property combines two or more types of real estate, such as retail and residential, or office and industrial, in a pedestrian-friendly setting. By combining different property types, developers and landlords are able to better serve both the businesses and residents who occupy the space.

Compared to single-use properties, mixed-use buildings often generate greater long-term performance, with more predictable income streams and robust total returns.

banner image inviting crexi users to find their next property on our platform

Types of mixed-use property

Mixed-use commercial property generally falls into one of three categories:

  • Horizontal developments consist of single-use buildings offering complementary functions such as business, retail, and residential, all within easy walking distance.
  • Vertical developments contain public service retail spaces on the lower floors, offices on the middle floors, and residential or hotel units on the upper floors.
  • Walkable mixed-use developments contain a combination of horizontal and vertical design, surrounded by a core asset such as an outdoor plaza, market, or event space.

Mixed-use property zoning

Mixed-use commercial real estate was the norm even before cars were invented. These days it’s common to find neighborhoods in urban areas with two- or three-story flat buildings — made up of a storefront on the ground floor and residential apartments above.

Due to the widespread adoption of Euclidean Zoning in the 1920s, segregated land use became the norm, with districts designed for specific purposes. However, due to the growing demand for sustainability and walkability mixed-use zoning has re-emerged, allowing for broader integration of different development types within the same district.

Evolution of mixed-use property

According to Deloitte, mixed-use property developments began reappearing about 50 years ago to rejuvenate urban areas. In the late 1990s and early 2000s, transit-oriented developments (TODs) became the dominant form of mixed-use development. 

Today, consumer preference for urban-lifestyle centers that offer the ability to live, work, shop, and play all in the same place comes from all demographic groups. Over 60% of millennials and about 50% of Gen Xers, baby boomers, and the silent generation want to live in walkable communities.

It appears that developers and commercial real estate investors note the growing demand for mixed-use space. As BE Building Enclosure recently reported, the Covid-19 pandemic accelerated trends in the mixed-use real estate sector as flexibility and hybridization became the norm for mixed-use development.

Storefronts for a gallery, home design store, and office store.

Key factors driving mixed-use development

There are several reasons why the demand and development of mixed-use space are likely to maintain their growth trajectory going forward:

  • Fundamental changes in the world of work
  • A shift in consumer behavior
  • Owning a house is no longer the American Dream
  • Growing demand for apartments
  • Convenience, walkability, and a live-work-play mentality
  • More effective land use by creating cities within cities
  • Mixed-use developments often perform better in economic downturns than single-use properties

Pros and cons of mixed-use property investments

It’s important to note that mixed-use developments are not just for urban areas. An article from CCIM reports that mixed-use commercial projects are being successfully introduced into secondary and even tertiary markets.

However, as mixed-use investments continue to mature, one should keep potential pros and cons in mind:

Pros of mixed-use investments

  • Owning mixed-use properties for lease provides diversification of income streams, helping the property sustain performance during difficult economic times, reducing investment risk
  • Tenants gain additional foot traffic being near other complimentary property users, helping them strengthen their brand image more easily
  • Infill mixed-use projects in secondary and tertiary markets often have less competition, increasing the demand for mixed-use space
  • More social interaction, less sprawl, and conserved land and environmental resources

Cons of mixed-use investments

  • Poorly planned mixed-use developments can create conflicts between commercial and residential tenants with opposing interests and goals
  • Service, retail, and restaurant tenants may realize limited profits if they are unable to draw customers from outside of the mixed-use community
  • Traffic may increase in suburban mixed-use districts, especially when public transit is unavailable or parking ratios are low
  • Financing can be more challenging in smaller markets when institutional lenders stick to primary markets
Building campus with outdoor seating area and lots of trees

How to Find the Best Mixed-use Property for Sale

With careful planning, the best mixed-use property can yield excellent returns with the right blend of uses, amenities, and tenants. Investors can use several strategies to make mixed-use spaces more profitable:

  • Commercial tenants from complementary industries can create symbiotic win-win relationships
  • Residential brand or identity can increase commercial leasing activity and improve tenant mix
  • Amenities such as outdoor space, co-working, retail, and recreation options can make life more convenient for all tenants, helping rationalize rents and minimize vacancy rates
  • Co-working space can increase social interactions, boost profits, and add value to the mixed-use space
  • Curating commercial tenants can appeal to the community’s lifestyle, making mixed-use property more desirable and profitable for investors
Bird flying over modern brown and black building

Mixed-use investments can also provide unique tax benefits that are difficult to find in traditional single-use properties. 

Correctly diversifying construction costs between residential and commercial components of a mixed-use space can have a significant impact on tax depreciation and capital gains when the investment sells. 

Also, bonus depreciation can vary significantly between residential, retail, and leasehold improvements, further increasing the tax advantages of mixed-use property investments.

In conclusion, mixed-use spaces allow commercial real estate investors to diversify risk and increase long-term returns, even in economic downturns. When developed properly, mixed-use projects can create a sense of place and synergy for tenants, and increase profitability for investors.

Similar Articles

Shanti Ryle
Shanti Ryle

Content Marketing Manager

Shanti leads Crexi's content marketing strategies with 7+ years of content development experience, creating everything from blog posts to award-winning podcasts. Previously, she worked on content teams at Snapchat, Weedmaps, and HopSkipDrive as well as developed copy, articles, and media for freelance publications.

Share This Article