Outlets deviate from their old formula with diversified tenant types

September 21, 2021

ICSC Article in Commerce + Communities Today

Outlets have a new outlook. Emerging from COVID lockdowns with relative grace, given their open-air and value advantages, outlet malls are kicking it up a notch by luring tenants that would have been unrecognizable in outlets even five years ago.

The strategy appears to be working. For too long, outlets retained a uniform mix of apparel and accessories, rarely deviating from the formula with other goods and services, said Lisa Wagner, principal of TORG. “It turns out that customers are not so purist and they want it all and in one location,” she said. “So, we’re playing catch up to this consumer and creating a more curated feel, which is generating a very positive response.”

How outlets are performing

Current foot traffic at outlet and value assets compares to 2019, and most sales numbers are “well above 2019,” said Wagner, who attributed a spike this spring to post-lockdown demand. That robust spend endured, indicating “more purposeful shopping trips,” she said.

After a sluggish $34.4 billion in sales at outlet centers last year, IBISWorld projects the industry will settle in at $37.2 billion this year, closer to the $38 billion it posted in 2019. IBISWorld projects a return to just over $38 billion in 2022, as sales rise at an annual 1.8% through 2026.

F&B, experiential and arts tenants

New food-and-beverage offerings like Nantucket’s Meat & Fish Market at Tanger Outlets Hilton Head are just part of the immersive customer experience outlets are offering, including grocery stores, food halls, boutiques and arts venues. At Simon’s Leesburg Premium Outlets in Virginia, northwest of Washington, D.C., one tenant has repurposed a shipping container into a food-and-beer kiosk called The Yard. For the stronger stuff, patrons are bellying up to the family-owned Smugglers’ Notch Distillery at Manchester Designer Outlets in Vermont.

Food truck operator Evolve the Burger opened a fixed location near the food court at Oklahoma City’s OKC Outlets.

Archers are bending a bow on the Oregon coast at Lincoln City Archery, new in Lincoln City Outlets, and Point Break Fitness is a tenant there, pictured at top. The arts also are getting a boost, especially in the case of Southern Vermont Ballet studios at the Manchester property. And Bird Dog Arts — featuring paintings, sculpture, glass and other work from more than 50 California artists — has taken an 11,000-square-foot space at Outlets at Tejon, north of Los Angeles.

National retailers also are active at outlets. Oklahoma City’s OKC Outlets is adding a first-to-market Adidas Outlet Store, and the Outlets of Des Moines is opening Coach Outlet, both this fall.

The hybrid center model

Portions of many centers are being demolished for rightsizing, updated uses and enhanced sight lines and access, Wagner said. The typical outlet footprint now is 250,000 square feet to 325,000 square feet, compared with the cavernous 450,000 square-foot model of yesteryear, according to Richard Frolik, executive vice president of CBRE and founding member of its Value and Outlet Centers group.

The U.S. has about 220 fully dedicated U.S. outlet malls, many in the process of morphing into “hybrid” centers melding regional, local and national merchants, he said. “Tenant losses are being recouped and centers are getting retrofitted and leased up.”

Food-and-entertainment options — BJ’s Restaurant & Brewhouses and Shake Shack each appear in multiple outlet centers, for example — are filling COVID-19 vacancies fast while attracting a broader clientele, including more families, outlet managers said.

The industry also is drawing tenants displaced from urban retail areas. “Plus, we’re using a more laser-focused leasing strategy to attract  consumers with specific point of views,” said Strategy + Style Marketing Group founding partner and chief strategist Karen Fluharty. “It’s not like the old open-to-buy days, when you’d tell prospects to just pick a space.” Moreover, the outdoor hook and the sense of place that outlets offer “present a more appetizing day out, where shoppers feel safer,” she said.

Sophisticated data analysis is also a game changer today at outlets, said Rebecca Galuppo, marketing vice president for The Woodmont Co., which manages four outlet centers. Woodmont uses real-time digital analytics to geo-target customers, “which helps us better understand the customer journey and what competing centers are doing,” she said. “Data is the new currency for us.” The result? “We’re seeing stronger sales per person per dollar at our centers,” said Galuppo. “The future of the outlet is obviously in unique, trendy and well-chosen local and regional tenants.” New at the Woodmont-managed Columbia Gorge Outlets in Troutdale, Oregon, for example, is regional favorite Pendleton, an apparel and home brand.

Tina’s Bakery, a local business, at Utah’s Outlets Park City.

Sales, rental rate and development momentum

Outlet retail sales margins that were razor thin thanks to end-of-lockdown clearance sales have given way to more standard pricing, Wagner said. In fact, profits among national tenants at outlets tend to exceed those of their other channels, “and when you combine our favorable rent structures with high sales volumes,” she added, “you have an enduring asset class.”

Rents have yet to recover to pre-COVID numbers, Tanger Outlets president and CEO Stephen Yalof said on an August earnings call. However, the variable rents that Tanger offered to struggling tenants last year exceeded previous fixed rents in Tanger’s second quarter in many cases. Tanger tenants’ average sales increased 7 percent from the second quarter of 2019 to the second quarter of 2021, he said.

Simon chairman and CEO David Simon said on a second-quarter earnings call that his firm’s outlet portfolio is still missing those “big, big overage numbers of the foreign [shopping] tours,” given restricted travel. “But at some point in the not-too-distant future, we’re going to see really good [percentage rent] growth in our high-quality tourism centers.”

While tourist-based outlets struggle, “drive markets thrive,” Fluharty said. Consumer visits to friends and relatives, or VFR traffic, drive greater sales than they did pre-pandemic, despite shorter mall operating hours, she said.

COVID-19 halted several planned developments last year, but Frolik expects a few select projects, likely hybrids, to start rising by 2023. Simon Premium Outlets’ Haven, in Connecticut, first pegged for 2020 completion, appears to be one. At the behest of Simon, the West Haven city council is creating a special taxation district to facilitate the 261,000-square-foot, $200 million luxury outlet redevelopment. “Projects targeted to underserved markets are likely to be revived,” observed Wagner. “Those that are redundant … are less likely to see the light of day.”

Outlet outlook

Challenges for outlets mirror those of other physical retail: inadequate staffing, strained supply chains and COVID-19 variants, said Fluharty. Crowded Black Friday sales appear to be a thing of the past. “Plus, we don’t have the staffing to support a big Black Friday this year,” she said.

IBISWORLD said outlets have benefited greatly from a per-capita disposable income increase this year, but concerns remain that stimulus money and enhanced unemployment benefits have disappeared just as COVID restrictions rise again.

There’ still considerable room for improvement for outlets. Closer monitoring of competition is needed to keep centers competitive on price and product, according to IBISWorld. And independents still need to find better ways to entice tenants to shop for their products online, industry reports consistently trumpet.

“There’s real work to do to stay in the lead,” Wagner said. But, added Frolik, “The outlets’ value proposition is good in good times and even better when times are more challenging.”

ICSC Article in Commerce + Communities Today

By Steve McLinden

September 21, 2021

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