How Commercial Real Estate Is Changing Residential Housing
The bond between commercial and residential real estate is growing as people choose urban centers and close-knit communities over suburbs.
San Jose, California(Getty Images)
Suburbia boomed in the 1950s as people moved out of urban centers throughout the country and into newly developed neighborhoods filled exclusively with houses. As suburbs developed, commercial hubs – from shopping malls to office complexes – grew to meet the needs of suburban residents.
But over time, the move away from city centers has reversed itself, as people move back to urban areas for closer proximity to work, shopping and cultural amenities they enjoy on a regular basis. Urban home values are now outpacing suburban homes, worth more than 2 percent on average, according to a January 2016 report by real estate information company Zillow. In 2013, the average urban home was worth more than 1 percent less than the average suburban home, Zillow notes.
Recent college graduates and empty nesters alike are returning to homes within the city limits of major urban areas. The change has not only reunited commercial and residential property in the same neighborhood, but they now are more reliant on each other than ever.
But the tightening bond between residential and commercial space isn’t exclusive to major cities. New developments are incorporating a variety of property uses throughout their plans, including homes, retail space and even offices for residents to easily access.
In downtown Seattle, large multifamily properties have seen significant development over the last 30 years, according to Jon Scholes, president and CEO of the Downtown Seattle Association, a nonprofit dedicated to enhancing the area's community.
While much of the city’s 83 square miles are made up of single-family residential neighborhoods, Scholes says downtown Seattle has managed to meet both commercial and residential demand.
“Residential has been the big story over the last couple decades,” Scholes says. “Downtown, prior to that, really evolved as the commercial office location and retail, and then for the major arts and cultural institutions and facilities. And then the big residential boom started in the early 1980s, and that of course continues into today.”
That residential boom is seeing plenty of demand for new housing, as the Seattle metro area grew by nearly 4 percent from net migration alone between 2010 and 2014, according to the U.S. Census Bureau.
Major companies located in Seattle are paying close attention to the wants and needs of their employees. Scholes notes significant office development going on in downtown Seattle from Amazon, Google and Facebook, with changes happening both now and in the near future.
“It’s where they see their workforce wanting to be both before and after work, or in some cases where they want to live," Scholes says. "It’s the desire to be in an urban environment where you’ve got lots and lots of amenities in close proximity – whether they be parks or trails or great restaurants or arts and cultural opportunities.”
Fitting the Profile
Moving down to the street level from the high-rise apartment buildings and major office spaces, retail spaces meant to meet the needs of nearby residents are a considerable focus for property owners and commercial real estate agents, who try to follow the profile of people who live in and visit the neighborhood.
Commercial real estate agents and property owners have to carefully consider the profile of neighborhood residents as they search for new retail tenants. The store below a person’s apartment or down the block matters not just for convenience, but also for an image the tenant may want to present about their home and themselves as well, explains Bruce Leonard, managing principal of Streetsense, a commercial real estate brokerage firm based in the District of Columbia area.
“If I’m living above West Elm or if I’m living above H&M, that’s kind of a cool, prestigious tenant to be associated with, as opposed to living above a 7-Eleven,” Leonard says. That being said, Leonard says retailers with less prestige, such as a dry cleaner and convenience store, are a necessity for many neighborhoods.
But the type of commercial brands and companies going into a space to attract tenants also has to fit with the neighborhood. The 14th Street area on the northwestern side of the District of Columbia is lined with eclectic boutiques and unique restaurants, with apartments and condos on the floors above overlooking the street. Leonard says popular tenants along the street, like bookstore-restaurant hybrid Busboys and Poets or home decor shop Home Rule, influence the next retailers to join them on the street. For commercial space in that area, “We would be targeting local and cool as opposed to national,” he says.
The relationship between commercial and residential real estate doesn’t end in a major city's downtown. Neighborhoods and towns with a main street, rather than a business district, within walking distance are in high demand among many who dislike being in a big city but still want all their amenities within walking distance. Hundreds of developments throughout the country have turned their focus to traditional town design instead of residential-only neighborhoods, according to The Town Paper, a media company focused on discussing similar neighborhood planning systems.
In Gaithersburg, Maryland, a community called Kentlands began when 352 acres of a farm were purchased in 1988 and redeveloped with a plan for new urbanism, an architecture movement focused on creating a freestanding community comprised of residential, work and recreational property. The resulting community is similar to that of small towns scattered throughout the country, complete with a main street and commercial shops within the development itself.
The Kentlands community in Gaithersburg, Maryland.(Courtesy of DPZ Partners)
The community consists of small, tree-lined streets occupied by single-family homes and low-rise condominiums, complete with a main street of shops, restaurants and small businesses. While there are a few big box stores – including a Lowe’s home improvement store and Giant grocery store – the community's layout makes it fairly easy to redesign those spaces in the future, explains Marina Khoury, architect and partner at Duany Plater-Zyberk & Company, the town architect for Kentlands.
“The utilities [in the area] run down aisles for any future main street-like development, and they can be retrofitted with parks and tree-lined,” Khoury says.
While Kentlands hasn’t fulfilled its vision yet, residents of the community and those outside take advantage of the walkable community all the time, and homes that go on the market in Kentlands are a hot ticket.
Barney Gorin, president of the Kentlands Citizens Assembly, the community's homeowners association, says a few years ago a new resident told him how she had to work long and hard to purchase a home in Kentlands because homes would go off the market just as quickly as they went on.
“She said, ... 'I made friends in the community so they would tell me the [homes] that were going to become available, so I could buy one before it went on the market,’” Gorin says.
What Is the Best Balance for You?
Whether you like the convenience of everything you need in one block or don’t mind driving 10 minutes to the grocery store, you should determine your needs prior to picking your next home. Consider these four questions as you weigh your options:
- Drive or walk to the grocery store? Easy access to your favorite brand of cereal is a must for many homebuyers, so be sure you're comfortable with how long it could take you to get to your grocery store of choice. If you don't mind a 10-minute drive, a primarily residential neighborhood could be a good fit. If you're living in an urban neighborhood without a car, walking distance to your preferred shop will be much easier than squeezing all your bags onto public transportation.
- Brands you know or go local? Your personal shopping preferences can have a big impact on which type of neighborhood works best for you. A small-town development or eclectic city neighborhood may be good for local shops and restaurants, but a larger mixed-use development or major downtown area could give you the brands you know and love.
- Single family or big building? A high-density area isn’t for everyone, but that doesn’t mean you have to live in a retail desert, forcing you to drive long distances just to get to a restaurant or store. Scholes says the single-family neighborhoods in Seattle have their own small groupings of commercial properties to meet residents’ immediate needs and interests.
- How well do you want to know your neighbors? In a city center apartment building you may not even meet your neighbors, but in a community like Kentlands that boasts a small-town feel, it’s quite the opposite. “You have to be comfortable with the idea that your neighbors are very close” Gorin notes.