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First Comes Mixed-Use, Then Come Joint Ventures

March 9, 2022

Mixed-use seems to be the rule rather than the exception for lenders funding new retail spaces, and so developers seeking fresh opportunities outside the grocery sector find themselves partnering up. It’s not uncommon these days to find three or more players joined at the hip to make deals workable. A recent JV pact between Poag Shopping Centers and mixed-use and residential specialist KRN Development, though, takes things even a step further. They’ve created a third development entity, KPS Development Partners. It melds each firm’s skills and capital and forms a launch point for multiple new projects.

Poag Shopping Centers president and CEO Josh Poag has watched over the years as developers profited from the dynamic his firm has created. Right next to Poag lifestyle center sites, developers would put up their own multifamily and other compatible uses. “So instead of just handing off that upside, we decided to go in this direction,” he said.

It’s a path that offers Poag Shopping Centers and KRN Development greater transparencies and economies of scale as they blend project capital and talent in the new firm, Poag said. “This allows us to expand into residential without that steep learning curve we would need to build a platform from the ground up; it allows us to focus on our core business while still investing in [KRN’s] properties.” KRN, in turn, will benefit from Poag’s well-situated real estate and access to its back-of-house functions like accounting, finance and marketing. Scott Kern, president and CEO of KRN, will serve as president of KPS. Josh Poag and Poag Shopping Centers executive vice president and CFO David Selberg will serve “actively” as KPS board members, Poag said.

The new firm’s focus will begin in downtown and Midtown Memphis, as both Poag Shopping Centers and KRN are based there. “Real estate development continues to evolve with an eye on mixed-use projects anchored by a significant multifamily component,” Kern said. “Memphis is experiencing high demand for these types of projects. Josh, David and I have a real passion for Memphis.” KPS then could expand to other metro areas where Poag Shopping Centers has a foothold; it has metro-area properties in Texas, Pennsylvania, Illinois, Georgia, Florida, Indiana, California, Mississippi and Tennessee, including the Poplar Collection center in Memphis. Then, new markets could follow, Poag said. Projects will primarily be ground-up, but redevelopment remains a possibility.

KPS’s projects could include not just residential, restaurant, retail and services spaces but also ghost kitchens and flex space. One flex use may provide residents with co-working areas so they wouldn’t have to exit their residential buildings, Poag said. “We haven’t figured out the details functionally and philosophically yet. We do want to stay a step ahead of the competition with unique ideas.” Parking shouldn’t be an issue in adding residences to centers. Outmoded excess parking spaces once demanded by cities will allow ample construction space at sites, Poag said. Fortunately, he added, the high demand times for residences and retail generally complement one another.

The Capital Benefits

There are three main reasons developers and lenders take on venture partners these days, said CBRE retail investor services senior managing director Todd Caruso. First, retail rents have been relatively flat, “so developers see an opportunity to jump the return with other uses, and they might not be an expert in that area so they need to lean on others,” he said. Second, property owners, particularly institutional owners, see a JV as a way to spread risk while bringing in additional equity and expertise. “Third, follow the capital,” he said. “it’s still a relatively good market for debt.” But given the complexities of mixed-use JVs, “I advise our [developer] clients to be absolutely sure they’re performing the proper research and that there’s really a customer demand.”  

In general, capital sources for retail developments still prioritize grocery-anchored centers but also are favoring residential buildings with select retail on the ground floor that stabilizes them, Poag said. “However, we have had recent conversations with capital partners who are interested in getting back into classic retail again, so that tide may be turning.” Indeed, not all retail-related JVs include new construction or residences. CenterSquare’s new venture with Arch Street Capital Advisors is acquiring high-end, potentially undervalued service-oriented properties in the Sun Belt, CenterSquare said. Tenant mixes typically include restaurants, salons, fitness centers and medical and other professional-services providers, most of whom stayed open through the pandemic. Similarly, developer Peninsula Retail Partners has launched three separate JVs with Hanover Financial for the acquisition, lease and development of shopping centers in California’s Arcadia, Sacramento and Victorville.

The disruption of COVID may be forcing investors to take a longer look at select JVs, Caruso said. “Companies are rethinking how they get to market and how they put capital out the door, and they’re keen on finding partners who can bring solutions and expertise.”

The JV structure seems to be working exceptionally well at the macro level, as well. An April 2021 Harvard Business Review report on 60 leading global companies that looked at 2,200 JVs and partnerships in six sectors found that the firms most active in creating JVs were more likely than industry peers to meet or exceed the three-year average return on capital in their industries. Moreover, JVs diversify risk and serve as pathways to new markets, a 2021 survey from the European Association for Investors in Non-Listed Real Estate Vehicles found.

JV Mixed-Use Projects Featuring Retail That Are Going Up Now

  • The $600 million Northeast Heights mixed-use development in Washington D.C.’s Ward 7, is under construction. It features a multipronged, multisector joint venture among Cedar Realty Trust, Ashland Capital Partners and Goldman Sachs Urban Investment Group. Trammell Crow Co. is the project fee developer. The office component is fully leased to the U.S. Dept. of General Services for its new headquarters. The Opportunity Zone project will include affordable apartments and at least 18,000 square feet of restaurants and retail tenants.
  • A JV between Pebb Enterprises and Banyan Development that has already developed several retail/mixed-use projects is bringing the new-build Shoppes @ the Heart of Tradition to 15 acres in the Tradition residential community of Port St. Lucie, Florida. The partners also are developing the mixed-use Mainstreet at Boynton in Boynton Beach, Florida.
  • A suburban Chicago JV development called District 1860 will feature 299 midrise multifamily units, an Amazon Fresh grocery store and more than 40,000 square feet of restaurants and additional retail. JV Partners AECOM-Canyon Partners and Tucker Development announced the deal for the transit-oriented project in Lincolnwood, Illinois, last fall.
  • Also last fall, a JV between Sares Regis Group and Dostart Development Co., broke ground on a 185,000-square-foot office and retail redevelopment in downtown Burlingame, California, adjacent to the town square. The project preserves a former post office for ground-floor retail.

Working Together

Kern and Josh Poag’s future joint projects are rooted in a history together. Kern worked for Poag’s firm for more than 16 years, laying a groundwork for mutual respect and trust, Poag said. And the two already have worked together on projects in the run-up to the new JV. Trust and mutual agendas are key to making JVs work, said Caruso. Problems can arise when a majority equity owner starts to impose its will on its JV partners’ development segment, he said.

Poag agreed. “It may sound trite, but a joint venture is like a marriage,” he said. “Over the past 25 years, I’ve had JVs that have gone well but others that have gone south with partners who didn’t see eye-to-eye with us or who only looked at the short term.” Thus, this is the first time Poag Shopping Centers has embarked on a long-term joint-venture partnership, Poag said.

By Steve McLinden

Contributor, Commerce + Communities Today

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