North American Properties' $3B Retreat A Sign Of Mixed-Use Realities

The maelstrom of rising construction costs, retailers falling into bankruptcy and looming concerns about the U.S. economy have made ambitious mixed-use projects tougher to pull off. Market experts say those factors are likely behind North American Properties' decision to back away from nearly $3B combined in major developments over the last month.

North American Properties pulled out of its $900M Revel project — a partnership with the Gwinnett County Convention and Visitors Bureau to redevelop the Infinite Energy Center into retail, apartments, offices and hotels — this week, after backing out of its partnership with GID on their planned $2B High Street project in Dunwoody last month.

“If you think you can do a very large ground-up mixed-use development this late in the cycle, it's likely to stress your pro forma,” Piedmont Office Realty Trust Executive Vice President George Wells said.

There had been rumblings of difficulties at Revel in the months before the announcement, sources familiar with the project told Bisnow.

While construction had begun on a second parking deck and a new Westin hotel with Concord Hospitality, the rest of the project — which was expected to have 300K SF of retail and 865K SF of office — hasn't started construction yet, and has now been put on hold by GCVB officials until a new development partner is secured.

An hour after the GCVB announced NAP was out as its development partner on Revel, the company told Bisnow it was also shaking up its Atlanta leadership and would stop pursuing new, ground-up mixed-use projects. Mark Toro, who co-founded the Cincinnati-based firm's Atlanta office, will step back from day-to-day operations but remain as chairman. 

“We were at a point of decision at Revel and at High Street that we had to make a major [multiyear] commitment and hundreds of millions of dollars," Toro said in an interview with CoStar. "We chose to pursue this change in strategic direction."

At least one senior executive has left the company in the shakeup: John Kelley, the senior vice president of commercial development at the firm.

“I will be leaving North American Properties at the end of the year to continue my focus on mixed-use development under a new venture, while North American realigns its own strategy,” Kelley said in an email to Bisnow. “My eight years here has been an exceptional experience, and I’m grateful for the opportunities they gave me on Avalon, The Hotel at Avalon, and Colony Square, in which I will remain involved.”

NAP's pivot makes sense given the current lending environment, industry experts said. Banks and other sources of capital are getting more nervous with the length of the economic cycle, the longest period of sustained growth in modern U.S. history. Big mixed-use projects have a longer development timeline than one-off commercial buildings and are often more complicated.

Spruce Street Partners CEO J.R. Connolly, who developed a mixed-use project in Chamblee and was recently tapped by the city of Loganville to redo its town center with new retail, said lenders are more focused on the amount of retail space in mixed-use projects and the strength of a site's surrounding demographics.

“I think it's much harder to get retail projects financed today than it was five years ago,” Connolly said. “I don't know the particulars of the Revel project, but that's a lot of retail in an environment where there are not as many retailers to go around and not as many viable sites for a project of that scale."

Gwinnett County is one of the most-retailed jurisdictions in all of Metro Atlanta. More than 65M SF of retail space across more than 4,000 buildings sprawl across its 437 square miles, servicing a population of more than 900,000.

Gwinnett Place Mall, just 3 miles south of the Revel site, has been ailing for years, bleeding tenants under ownership that has been often criticized by local officials for failing to turn the mall around. The core portion of the mall is now officially for sale.

“If you're doing a project like Revel or a project like High Street or even Colony Square, where you're getting a significant percentage of your real estate leased to a retailer — not a restaurant, not an entertainment player, but a soft goods retailer — you're going to have a very difficult time,” The Shopping Center Group partner Marc Weinberg said.

That perception likely didn't help North American Properties' efforts to lure tenants to the project, especially at a time when retailers, particularly apparel and soft goods retailers, are shying away from expansion or just struggling to survive.

Nick Garzia, Hines' director of retail leasing in the Southeast, said that even backfilling shuttered apparel retail store spaces in existing centers has become more difficult.

“It's hard, even in great centers, to backfill apparel,” Garzia said. "There are only so many restaurants you can lease to."