A Shifting Future For Outlets

Appeared in the September 2016 issue of Shopping Center Business Magazine.
By: Katie Sloan

A marked shift in consumer mentality has been seen in the years following the Great Recession. Shoppers – both young and old – are seeking value and quality in whatever they buy. That trend has especially been felt in the outlet industry, causing developers and owners to take notice. A flurry of new outlet development can be seen across the United States – from traditional outlet centers, to mixed-use, urban locations and mall redevelopment.

Gone are the days when outlets were located in sparsely populated cities between metropolitan areas, and predominantly visited by those on dedicated shopping trips. Outlet developments today are moving towards the rooftops and attracting the millennial consumer – mixing the bargain soft goods-centric approach to include food and entertainment offerings, as well as hybrid merchandising with full price and fast fashion co-tenancy.

While demand for new development continues to be seen throughout the country, some wonder if the hot streak will continue to last. High-end retailers are beginning to question whether or not outlet locations make sense for their brands moving forward, and developers are noticing the market eek closer towards capacity. The outlook today is optimistic, but the future for outlet retail is reported to be unclear.

NEW DEVELOPMENT
New development of outlet centers continues to be seen at high levels throughout the United States, from Los Angeles Outlets in California, to The Outlets at Turning Stone and Empire Outlets in New York. Many of these newer projects are closer to major metropolitan areas and include a mix of uses.

As entertainment continues to increase in relevance for outlet centers, projects adjacent to entertainment facilities have grown in popularity. Following in the footsteps of Tanger Outlets at Foxwoods Resort Casino in Connecticut, construction is underway at the The Outlets at Turning Stone , a 300,000-square-foot retail addition to the already popular casino destination in Verona, New York, by Gordon Group Holdings. The casino grounds contain five golf courses, 25 restaurants, a 5,000-seat convention center, four hotels and an expansive casino floor. The project – currently being leased by The Was Group – is scheduled to open in 2018.

The Was Group is also working on leasing the redevelopment of Merle Hay Mall in Des Moines, Iowa.

“That project is interesting in the sense that they are looking to do a hybrid project by adding outlet to the existing mall,” sys Jeffrey Was, the president of The Was Group. “The mall has recently added some different uses that drive a lot of consumers to the properly, like Flix Brewhouse and several other amenities that increase foot traffic. They’ve made the determination that a mix of outlet would be well served in the market.”

In Rochester, New York, a similar transformation is taking place. The Outlet Resource Group is currently providing strategic guidance for the conversion of Wilmorite’s enclosed regional mall, The Marketplace Mall, into an outlet center to be rebranded Marketplace Outlets. “Wilmorite engaged us to do an initial feasibility study, and we learned during that process that there was tenant and consumer demand for outlets in the market,” says David Hinkle, principal of The Outlet Resource Group. “In May, we announced a full program to redevelop the existing mall into an outlet mall.”

Lisa Wagner, principal of The Outlet Resource Group, notes that this project was distinct in that The Marketplace Mall was not distressed prior to the conversion. “It’s not taking a distressed property and trying to breathe life back into it, it’s taking a robust property and making it a mall for the future,” says Wagner. “Wilmorite has just added a Dave & Busters and a Field & Stream -they’re trying to keep the mall fresh, and keep it a strong offer in the market.”

The Outlet Resource Group is also lending guidance to The Pinnacle Outlets at The Pinnacle mixed-use development in Bristol, Tennessee. “The Pinnacle was roughly 750,000 square feet of existing retail, and was launched with a Bass Pro Shops and a more traditional power center,” says Hinkle. “They blended in specialty retail to go along with restaurants, and reached out to us to help make a unique outlet offering to serve the five-state area.”

Hinkle believes this project is indicative of a greater trend to come. “We feel like this is another that we’re going to see in the outlet sector where you go through an existing retail trade area, and add outlets to make that shopping experience all encompassing and unique to the consumer,” he says.

Also on the East Coast, Steelpointe Harbor in Bridgeport, Connecticut, by Bridgeport Landing Development LLC is moving towards completion. The $750 million, mixed-use waterfront project will contain 2 million square feet of retail, dining and entertainment space, a 12-screen Cinepolis dine-in theater, a 120-key Hampton Hotel, 1,100-1,500 mid-and high-rise residential units and 30,000 square feet of Class A office space.

The project is set to include The Outlets at Steelepointe Harbor, which will encompass a large portion of the development’s retail component. Doug Jerum, principal of Ferrara Jerum International, is handling leasing for the space.

“I think that outlet projects today are becoming more hybrid, particularly the ones that are in urban environments,” says Jerum. “Adding additional elements like experiential entertainment and dining options is proving to be beneficial for outlet centers – it turns them into places that can be frequented more often because there’s more at the center than just shopping. With the diversity of things to do, it’s more appealing to a larger group of people or an entire family, so you can make more of an outing to it.”

Following the mixed-use trend, EB Development is currently providing third-party work for Empire Outlets, a joint venture development between Goldman Sachs and BFC Partners set to open next year in Staten Island, New York. The project – located at the base of the Staten Island Ferry Terminal – will be adjacent to The New York Wheel, and will include a 200-room, 140,000-square-foot hotel; a 1,250-space parking garage; 330,000 square feet of outlet retail; 30,000-square feet of dining; and a 5,000-square-foot rooftop event space.

“I see more developments blurring the lines between outlet, value, food and entertainment,” says Andrew Boyle, partner of EB Development. “The project at Empire has a whole separately branded food and beverage deck with award winning chef-inspired concepts, It is also right next to the Yankees baseball stadium and adjacent to the New York Wheel – which will be the world’s largest observation wheel – creating an environment where you can shop, eat and play. I think that is really the future of outlets.”

EB Development is also currently working on The Outlets at Corpus Christi Bay in Robstown, Texas, which will be opening in March 2017; the 300,000-square-foot Columbia Capital Outlets near the University of South Carolina Columbia; and Fargo Outlets at Timber Creek, a 325,000-square-foot outlet center located in Fargo, North Dakota. New England Development is currently under construction on a 300,000-square-foot outlet center called the Outlets of Des Moines in Des Moines, Iowa; and a 392,000-square-foot joint venture project with Simon called Clarksburg Premium Outlets in Clarksburg, Maryland, that will open this fall.

Following the trend of adding experiential elements to outlets, the Clarksburg Premium Outlets will include food offerings, landscaped promenades, children’s play areas and outdoor gathering spaces for community events and performances.

On the West Coast, Terra Brokerage is currently finishing up leasing the first phase Gran Plaza Outlets in Calexico, California. The development is located on the border of Mexico, and is currently home to tenants including Tilly’s, Michael Kors, Levi’s Outlet Store, Converse, Coach Factory, H&M and U.S. Polo Assn. The first phase of the project is nearly 280,000 square feet, and the second phase is planned to come in just under 100,000 square feet.

The Los Angeles Outlets by Majestic Realty Co. – set to include approximately 90 designer and brand names at completion – is another burgeoning project in California. “Outlet centers are being developed closer in than ever before, and we see that with the Los Angeles Outlets project, which is right in the heart of the Los Angeles market,” says Karen Fluharty, partner and chief strategist of Strategy+ Style Marketing Group. “We have an enormous amount of tenant interest and I think the interest is predicated on the density size and affluence of the market.”
The 400,000-square-foot project is set to open in the fourth quarter of 2017.

EVOLVING TRENDS
Trends in outlet development – from the addition of new players to the tenant mix, to the incorporation of experiential and food elements – continue to evolve as the sector grows. One of the most prominent themes seen in development today is the movement of outlet centers closer towards the rooftops.

“As an industry, we benefited so much from the economic downturn. It brought so many new consumers that had never shopped at an outlet center before,” says Janet Grady, president of The PRISM Co. Inc. “Now those shoppers want outlets close by. Where traditional retail might be rolling back, outlets are rolling in. It definitely seems to be more and more part of the overall mix that you don’t have to expect to drive 30 to 45 minutes to get to the closest outlet center – particularly if you live in a major metropolitan market.”

Grady notes that this move closer to metropolitan markets has had an effect on the way brands choose the locations for their outlet and full price offerings. “Brands are actually realizing that they can open, for example, a Nordstrom Rack directly across the street from their full priced Nordstrom and find that sales go up in both,” says Grady. “I think there is a tendency fro some of the major retailers to look at it as a natural bridge between concepts. They are able to expose a new group of shoppers to their brand in the outlet concept. Then, when their full-priced location is, running an anniversary sale, they’ve got all of these new customers coming in who learned about the brand in outlets.”

Wagner of The Outlet Resource Group notes that the move towards cities has a lot to do with the living and shopping preference of millennials. “Millennials are our fastest growing group of outlet shoppers,” she says. “They have embraced the concept of brands and value, and they often don’t have cars and don’t want to travel to exurban sites for anything. Millennials are much more drawn to centers that they can access readily with public transportation. That’s another flavor that we’re seeing in outlets as millennials become a more significant customer.”

Millennials are also driving a change in the way outlet products are researched and purchased. “Millennials have been raised on brands and the understand the value that outlet centers bring to them,” says Fluharty of Strategy+Style. “I think all of the consumers of outlet goods expect a branded value experience – the millennials are just more sophisticated in understanding pricing, researching it and having all of that information in their pocket on their phone.”

Currently, of the portfolio of outlet centers in which Strategy+Style Marketing Group represents, 75.4 percent of website visitors are on smart phones and tablets, representing a 45 percent increase since January 2014.

Hinkle notes that the rise in popularity of athleisure – or the trend in fashion in which clothing designed for working out is worn during social occasions – is a driver for younger crowds into outlets today. “The evolution of athleisure has had an impact on the changing demographics in outlet centers today,” says Hinkle. “Brands like Nike, Under Armout and Asics are serving dual purposes; they’re catering not only to athletic consumers, but they’re also now very much a fashion plate. When you talk to certain tenants in this category, they’re as interested in the co-tenancy of some of their peer groups as they are women’s fashion. It’s really that millennial customer who is now the leading consumer in our sector, and they want great brands and great prices.”

The addition of elements that keep the shopper at centers longer continues to be touted as a top priority for new development. “You see a lot more restaurants on pad sites in outlet centers today,” says Was of The Was Group. “You have nicer, better quality restaurants in these centers today that obviously offer other amenities to the customers. A number of centers today have bowling alleys, movie theaters and places where you can drop the kids and shop and there are entertainment centers where kids can play videogames. These are designed to keep the family there longer and shopping.”

Another trend in outlet retail is a switch-up with regard to tenants. As the economy continues to improve, high-end retailers have begun to question their prevalence in the outlet sector. “It’s a little challenging right now in the outlet world; a lot of retailers that were hot and heavy in the outlet market a few years ago have really cut back,” says Jeannie De Fazio, president of Terra Brokerage. “Some of the higher end tenants have decided that outlets are not good for their brand so they’ve rolled back or closed as many of them as they can and will continue to do that.”

Michael Garner, president and CEO of Athena Management, notes that more retailers that sell a variety of brands are moving into the space. “You see a lot of main line retailers that are coming in that aren’t a single brand,” he says. “In the old days, you would have Coach and Guess and Levi’s, but now you look at Tilly’s – Tilly’s just doesn’t sell their brand, they sell all sorts of brands and you see them going into outlets.”

Fast fashion concepts offering their full price merchandise are also making a play for space in outlets today. “We’re seeing change in the industry,” says Boyle of EB Development. “Some of the legacy brands are having trouble and they’re trying to figure themselves out – whether it’s from an operational standpoint or a design standpoint. Fast fashion retailers like H&M and Forever 21 are really making a push into the outlet centers. As we see the millennials become a very important part of the retail consumer world, being able to have cost-conscious, fashion forward brands and apparel is really where I see a lot of the industry going.”

Benno Rothschild, partner at Hartman Simons & Wood LLP, believes the outlet sector will continue to see the entry of new tenants. “I know that there is movement towards new players right now,” says Rothschild. “A lot of people are going to be testing the outlet market over time. The high-end market seems to be tapering off a little bit, and I think that you may see some of the higher end players looking at whether or not they can do an outlet concept and not dilute their brand. I think more retailers are going to start to see outlets as a means to which they can grow their business.”

LOOKING FORWARD
The view of outlets moving forward is mixed. While most agree that the outlet sector continues to be ripe for development, many question the longevity of the trend.

“It’s hard to say what the future will hold,” says Garner of Athena Property Management. “In the past few years, outlet development was still going full steam ahead while other development was slowing down. You’re actually starting to see outlets slow down now too. I think a lot of tenants are rethinking their outlet position, and some of the higher end brands are deciding to focus more on their full priced concepts.”

Douglas Karp, president of New England Development, agrees that the next few years will be interesting for outlets. “I think there’s probably a limited amount of sites left for outlets,” he says. “I’m not sure how many more developments there will be. I think you’re going to see this kind of recreation of outlets over the next few years. You hear from the outlet tenants they don’t want to jeopardize their existing stores that are full priced, and they don’t want to impact their department stores.”

Jerum of Ferrara Jerum also notes a prevalent slowdown in outlet development. “We’re starting to see some slowdown,” he says. “Projects are being delayed or cancelled; I think it’s going to be interesting to see what happens over the next few years as outlets seem to be the current flavor of the month. More owners and developers are looking at converting traditional projects that are underperforming into outlet projects.”

Jerum believes that the Wilmorite redevelopment in Rochester, New York, will be a telling sign of the future of outlet development. “It will be interesting to see how the Marketplace Outlets perform, and how that may influence others to evaluate their properties and consider them for outlets,” he says. “It raises a question of when do you have too many outlets, and does it stop being outlet and start just being discount.”

Overall, the current outlook for outlets is bright. “I think that we will continue to see development in high-density markets,” says Fluharty. “It will be more challenging because there is a longer development window for the top markets like New York, Los Angeles and San Francisco, but I do think the future of outlets is optimistic and is certainly moving closer into the permanent population.”

Jeffrey Was also sees growth in the outlet industry over the next few years. “The outlet industry is still strong and far exceeds the performance of full priced malls,” he says. “Outlets have consistently preformed well since the Great Recession in 2008 and 2009. There is still plenty of new development. It’s been a hot sector, but what I think we’ve noticed here is there is certainly a pullback in the number of new openings that the outlet retailers have. Steve Tanger (president and CEO of Tanger Outlets) has said this in the last year, and I agree with him completely, there is something in the vicinity of 30 or 40 centers that are proposed to open in the next two or three years, and best case scenario, we will see have of that.”

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Mitchell Brown

Mitchell Brown

Chief Operating Officer & Senior Vice President of Marketing