Mixed-use real estate developments and neighborhoods, where office, retail, and residential property coexist, were growing in popularity well before the COVID-19 pandemic. McKinsey’s research on how the pandemic affected demand for commercial real estate underscores how these areas contribute to resilience, better quality of life, and financial success. Cities with these dynamic spaces saw fewer people fleeing to the suburbs, greater office attendance, and stronger in-store retail than did cities where urban cores consist mainly of office buildings. In this interview, McKinsey partner James Patchett describes the factors that go into developing the most successful mixed-use areas—while making developments pencil.
Katy McLaughlin: Before we get into the particulars of mixed-use development, let’s talk about the current context. What kind of moment is this for developers?
James Patchett headshot
James Patchett: This is a really unique moment in the real estate cycle. The industry is facing an almost unprecedented mix of secular and cyclical shifts that have made real estate development uniquely challenging. Cyclical shifts include higher interest rates, rising construction costs, and, at least for a time, slowing demand. Secular shifts include the change in the use of office space in an increasingly remote world and higher demand for more intensely experiential spaces. But perhaps the most important secular shift is that the bar has been raised, including by the advent of technology that will increasingly shape the way people live and work and also invest in and think about real estate.
Katy McLaughlin: What’s the upshot of this combination of cyclical and secular shifts for real estate developers?
James Patchett: Getting real estate developments to pencil—industry lingo for “make the numbers work”— is harder than it’s been in some time. It demands a unique and intentional approach—yet one that is likely to be highly rewarded in the next cycle. And with market conditions showing some signs of improvement, figuring out the right playbook is paramount.
Katy McLaughlin: If you were writing the playbook for mixed-use developers, what would be on your list of top success factors?
James Patchett: Getting the anchor or anchors for a development right is more critical today than ever. But the term “anchor” means something very different from what it did in the past, and the approach has to be different. Let me explain.
In the past, the anchor was really just the tenant that filled up a lot of a development’s space—like a department store or a large office tenant. But that’s no longer enough, especially for large-scale mixed-use development.
Today, successful developers are applying a more expansive definition of anchors and setting a higher bar for what will make the development unique and a place where people want to go. We might be talking about one central draw, such as a major sporting or events venue—or a collection of draws, such as a bunch of great restaurants, specialty food shops, and food trucks that collectively make up a compelling food scene.
Developers who are truly differentiating themselves are setting their anchor strategy by stepping back at the outset and thinking deeply about their area’s unique value proposition. In other words, what will be their project’s “right to win,” or the thing that sets their location apart? Examples might be a burgeoning tech scene, a sky-high quality of life, or a fantastic culture and arts ecosystem.
Then the anchor strategy can connect back to a differentiated right to win. For example, in a right to win focused on an arts ecosystem, the anchors might include an important museum, along with a collection of galleries, dance studios, and street musicians.
Today, some of the only large-scale projects attracting investment are those that are approaching their anchors more strategically, rather than just thinking of them as filling space. And while today’s specific market dynamics won’t persist forever, setting a distinctive anchor strategy can continue to differentiate projects that uniquely outperform long after conditions stabilize.
Katy McLaughlin: What else does a mixed-use development require today that it might not have, say, 15 years ago?
James Patchett: A successful anchor strategy needs to be complemented with a thoughtful approach to programming—intentional curation of events and experiences that occur in and around the district. Multifaceted programming makes these areas active and vibrant and can draw people around the clock. Whether it’s art installations, live music, seasonal events, or pick-up flag football games, people want to be where other people are. It’s important to view the public space as another experiential tenant that is a core part of the brand.
Katy McLaughlin: Who in a real estate company is responsible for this programming?
James Patchett: Real estate developers have long had financial people, bricks-and-sticks people who focused on construction, and property managers who handled operations. Today’s more complex market calls for a new set of skills, including experience and digital engagement, to be embedded in the operations team.
The experience team needs to constantly think about the customer. They should know how to throw a great event—like a wedding planner does—or offer an excellent add-on service. Great experience is really marketing and advertising for the development; it’s what people will talk about when they think about the project. And the experience team should be a part of the project planning from the outset, not just once the project is operating.
To provide a truly outstanding experience, operations teams should also have digital capabilities. The development’s app might make it easy for residents to arrange dog-walking services or know when laundry is ready for pickup. Visitors might use it to learn about special events or sales. Office workers could use it to guide them to a free parking space, for lunch delivery, and to book a spot in an after-work exercise class. And so on. The point is to make it easy to engage with everything the development has to offer.
Katy McLaughlin: What’s a third success factor for today’s mixed-use spaces?
James Patchett: Finding ways to bring nature in. This is something that started prepandemic, but it is especially important today. People don’t want their living or working experience to be totally divorced from nature, even in urban areas. There are relatively recent developments, right in the intensely urban area of midtown Manhattan, where there are fantastic roof decks and green space. People can sit outside at café tables and look out over the city.
These spaces prove that a mixed-use development doesn’t have to be adjacent to a nature preserve. But developers do need to think about how they can intentionally integrate nature or an outdoor experience into the development.
Katy McLaughlin: The success factors you’ve listed could all add costs. Why should a developer invest in them?
James Patchett: Because these investments pay off. In the last two or three years, we have seen a major divergence between the performance of the absolute best properties and those that are just a half-step behind. And we’ve seen that providing an outstanding experience, particularly a great digital experience, leads to significantly higher NOI [net operating income] and enhanced renewal rates.
We have seen this dynamic play out in individual asset class by asset class over the last several years. The logic implies that the same should also be true for mixed-use districts.
Katy McLaughlin: What’s the optimal scenario of a mixed-use development? How do you know when it’s really a hit?
James Patchett: Success is a virtuous cycle, where people are drawn to an area because it’s a place they want to be. Companies are drawn to locate offices there because the talent is there. Restaurants, retailers, and other businesses come because there are offices and residents there. Then all these things feed on each other—more people come because there’s so much going on, more companies want to benefit from the talent, and more high-quality retail wants to be part of the energy. And so on.
But remember, at the core of this cycle of success is a really attractive place where people want to be. It builds from there.