The biggest challenges for investors can be high demand and limited supply, so it’s important to thoroughly evaluate potential mixed-use investments. Before adding them to your portfolio, consider: 

Renter mix and balance

Mixed-use properties’ renter mix is one of its benefits, as leases and operating expense reimbursement structures can help property owners and operators reduce operating expenses and improve net operating income. 

That’s why it’s important to find the right combination of occupants. As you determine the best mix, look at multiple factors, including:

• Anchor tenants: Usually a retailer, such as a grocery or big box store, these occupants can help increase foot traffic and may even draw other commercial renters to your development.
• Business compatibility: Seek renters that complement each other’s success. For example, a vertical mixed-use property might combine office or multifamily residences on upper floors with a cafe on the ground floor, making it convenient for residents or office employees to grab coffee on their way to work.
• Diversification: A mixed-used property should include businesses that appeal to a wide range of customers and residents, such as restaurants, salons and fitness centers. Try not to rely too heavily on a single type of renter or industry.

Location considerations

Location is critical for any commercial real estate property, including mixed-use investments. Key geographic considerations include:

• Market acceptance: Determine whether mixed-use developments are typical in the area. “Surrounding land use is a driver of demand and can influence cash flow volatility,” Croot said.
• Land-use density: “Especially for vertical developments, considerations for density in land use can be a driver,” Croot said. “For an investor, having a variety of leased space options—both vertical and horizontal—can broaden your tenant pool and leasing demand.”
• Unit compatibility: Ensure commercial and residential components complement each other. For example, retailers that provide a service or amenity multifamily residents or office workers find important or convenient is more likely to succeed.

Legal and regulatory compliance

Make sure the properties and their units comply with local laws and regulations. For example, parking ratios vary by city, county or municipality. Understanding whether or not the mixed-use investment has a zoning variance and is legally conforming or non-conforming is important.

“This is important not just for zoning compliance, but it can also make financing or insuring the asset difficult to impossible,” she said. “In a mixed-use residential property, for example, the number of residential units can have an impact on financing options because of various regulatory requirements that may limit lender appetite.”

Need for capital reserve

Commercial properties typically require higher capital reserves to manage rollover. “Debt leverage tends to be lower and cash flow coverage requirements tend to be higher for mixed-use investments than multifamily properties to account for commercial occupant concentration, cost to re-lease and higher risk profile in the cash flow,” Croot said.

Retail and office also frequently have higher renter-improvement and leasing commission costs related to turnover compared to apartments, often requiring significant customizations. Build-outs, such as office conference rooms or retail fitting rooms and display areas, can be complex and expensive. Because each new commercial occupant has specific infrastructure needs, each round of modifications can quickly add up.

Cash reserves can also be important when you first add mixed-use properties to your portfolio. “If an investor is transitioning from solely apartments to mixed-use, there’s potential for greater liquidity needs to account for commercial tenant rollover and re-leasing costs which can be significantly higher relative to apartment units,” Croot said.

The bottom line: “Mixed-use assets will only continue to gain favor as investors and property owners look for stability and diversification in income and cash flow,” Croot said. Before adding a mixed-use investment to your portfolio, consider location, occupant balance, legal and regulatory compliance, and the need for capital reserves.