By: Liz Wolf | Sep 13, 2018
While many CRE pros agree that outlet centers are today’s best-performing retail asset, some say the sector may be losing some of its appeal.
As regional malls continue to grapple with tenant bankruptcies and store closings, outlet centers by many accounts have been thriving.
Shopping centers offering an “experience” and value retail are faring well overall. Outlet centers boast both the “bargain hunting thrill” and deals that are often difficult to find through e-commerce channels.
“Because of the bargain hunting of outlet centers, you cannot necessarily get that same experience on your computer or smart device,” says Mark Hunter, managing director of retail asset services leading CBRE’s mall business. “When you walk into Ralph Lauren or Coach, they may only have one of those purses or jackets, and you’re not necessarily going to find that at the price or value that you would want to pay via an e-commerce channel. That’s an important factor as to why you see the growth of outlet centers.”
Outlets centers also continue to be a significant source of profits for retailers. Sales at outlet centers doubled to approximately $50 billion in the past five years, according to Newport Beach, Calif.-based research firm Green Street Advisors. Overall occupancy for outlets centers averages 96 percent.
The sector really took off after the Great Recession, which changed the way people shopped, with a slew of developers building outlet centers around the country.
That was a “really strong growth period for the sector,” says David Hinkle, a principal with Outlet Resource Group (TORG), a Chicago-based outlet center consulting company. “What we learned through the Great Recession was that the outlets flourished even more, and I do believe there’s a correlation between great brands and the ability to buy those brands at a value.”
Outlet centers was the only segment of the shopping center industry that was growing during the downturn, adds Jeff Green, a partner with the Hoffman Strategy Group, a Lincoln, Neb.-based national commercial real estate advisory firm. “The problem was that everybody was getting into outlet centers—even major regional malls were trying to convert their tenant mix to outlet. There were many on the drawing board—some of which have been built.” Green says many other projects never got built.
Today, there are 216 outlet centers in the U.S., with the most recent one opening at year-end 2017, ICSC reports. Forty-seven centers opened in the last six years. Two are scheduled to open this year: Denver Premium Outlets at the end of this month and Empire Outlets in New York City in November.
More outlet centers continue to be developed closer to major population centers and more are being built as part of mixed-use developments.
Meanwhile, only a handful of regional malls opened since the recession. Reis Inc. reports that the vacancy rate for regional malls is 8.6 percent—the highest since 2012.
One big reason that outlet centers are weathering the retail sector’s current challenges better than regional malls is they don’t have to deal with distressed department stores such as J.C Penney, Sears and Macy’s shuttering locations.
“The U.S. and global retail brick-and-mortar industry have been under pressure from online sales,” says Milena Petrova, Ph.D. associate drofessor, Department of Finance at the Whitman School of Management at Syracuse University. “This has particularly affected large department stores where struggling anchors have contributed to the retail centers’ financial distress, or significant difficulties in filling out the space left vacant by the anchors.”
Outlet centers are at less risk from “ailing large tenants, as they don’t have anchor tenants.”
The ability to adapt and adjust is easier when you’re not dealing with four anchors that may own their own pads with “lots of restrictions on what goes on in the small-shop space,” Hinkle says. He also notes that a landlord is in a “far better place” to re-tenant a 6,000-sq.-ft. space vs. 60,000 sq. ft.
“No one was immune to some of the bankruptcies, but the most profitable segment in some of these retail bankruptcies was the outlets,” says Richard Frolik, executive vice president and founding partner of CBRE’s value and outlet centers group. “Every [outlet center] owner went through a series of bankruptcies in 2017, but they’re backfilling these very well.”
Other reasons for outlets’ success
With cheaper rents and fewer common area maintenance (CAM) charges, outlet centers can be profitable for retailers, Hinkle says, and shoppers also tend to spend more time at outlets.
“It’s the art of the hunt to try and find that deal, and they stay longer,” Hinkle says. “And they usually bring people with them.”
Also, more millennials are shopping at outlets. Now that the shopper is a little younger, Hinkle says landlords will continue to change the dynamics of the centers’ amenities and mix of retailers.
“Our industry has changed to stay interesting to the consumer, because new brands come into the sector and revitalize it all of the time,” Hinkle says. “For example, 15 years ago, there was no Michael Kors outlet, no Under Armour outlet. Lululemon is starting to do outlets. These newer brands coming out that are important to the consumer didn’t have outlet stores.”
Many outlet centers are also expanding food and entertainment options.
“That’s another way to keep the consumer intrigued,” Frolik says. “It keeps the millennials and their buying power at your center.”
Is there room for growth?
Compared to the overall retail sector, the outlet sector has a small footprint and some experts say there’s room for growth. Outlet centers represent just over 1 percent of U.S. retail space.
“When you look at the map of the U.S., I think there are still under-served areas,” Frolik says. “Where I see this evolving over the next five years is that there used to be a huge sensitivity with brands, so Polo wanted to be X miles away from its full-price store. There were 50 to 60 brands that wanted to be further away; those restrictions are pretty much gone now. Now we see infill redevelopment. That’s going to be a big wave coming up. And you will see different-sized formats. It won’t be the 500,000-square-foot center going forward. You may be seeing 200,000- to 300,000-square-foot centers and a little bit closer to the population base or in it.”
Currently, development has slowed significantly even for the biggest operators, including Simon Property Group and Tanger Factory Outlet Centers. Neither has plans for openings in 2019—a big departure from their previous development activity.
“There was a pullback—not necessarily on consumer demand—but on tenant demand about 18 months ago, and we see that slowly changing and getting more favorable on the outlet side,” Frolik says. “There was some cautiousness… Also, the larger public companies are reinvesting in their current outlet centers and upgrading them. That’s how they’re using their capital at least over the next 12 to 24 months.”
Some believe outlet centers are getting overbuilt
Some markets already have two or three outlet centers and can only support one, Green points out.
In St. Louis for example, Simon and Taubman Centers built outlet centers five miles apart from each other. The Taubman center didn’t survive and the property was sold earlier this year.
“And there were a lot more centers planned that never got off the ground,” Green adds. “That just means the retailers weren’t willing to go into either the size of the market or [were concerned about the] competitive nature of that market.”
The outlet center sector “appears to be plateauing,” Green notes.
“Between the continued growth of online retail, as well as the repositioning of some of the major malls, that has got to affect the kind of overbuilt outlet industry,” he says.
Another sign of a possible slowdown has to do with the fact that outlet centers are competing more with office-price retailers.
“That’s having a huge impact on outlet retail,” Green says. “Off-pricers—T.J. Maxx, Marshalls, Ross, Steinmart—all see sales continue to climb. Their store counts are off the charts. To me, it has been about value retail and not necessarily about outlet retail.”
According to Petrova, “Outlets also face competition from luxury discount stores such as Century 21 and Saks Off 5th, which are conveniently located in the city and have also developed an e-commerce channel, similar to other retailers.”
Also, foot traffic is down at outlet centers. A consumer-tracking survey by Cowen & Co. in 2017 found regional malls, off-price stores and outlet centers all saw declines in foot traffic. However, traffic at outlet centers tumbled the most.