Taking their cues from value-seeking consumers, more retailers and manufacturers are looking beyond their traditional store formats and considering outlet stores. At the same time, outlet centers, once exclusively destinations in far-flung rural areas and the suburban fringes, are moving closer to major metropolitan areas and competing with regional malls for tenants and development sites in some markets.
Last week, two of the outlet center segment’s largest operators, Tanger Factory Outlet Centers, Inc., (NYSE SKT) and Simon Property Group, Inc., (NYSE:SPG), which together own about two-thirds of the outlet niche’s total gross leasable area, announced a joint venture to develop and operate a new outlet center on a 55-acre site south of Houston.
The firms said they expect to announce tenants and break ground this month on the project, which will total 470,000 square feet at build out. Initial tenants will include more than 90 brand name and designer outlet stores and delivery of the first 350,000-square-foot phase is expected next summer.
While Simon has already carved out a dominant share of the outlet market, traditional mall operators such as Taubman Centers, Inc. (NYSE: TCO), The Macerich Co. (NYSE: MAC) and CBL & Associates (NYSE: CBL) are exploring jumping in. However, major players in the space caution about the barriers to entry.
"It’s much more difficult to build than it is to announce," Tanger President and CEO Steven B. Tanger said at NAREIT’s REIT Week in New York City last month, estimating that perhaps 5-10% of the centers that are planned will actually get built.
Private developers find the going particularly tough due to financing challenges and the specialized nature of developing, leasing and operating outlets. However, a private company, Baltimore-based Paragon Outlet Partners,recently began grading work on a 420,000-square-foot outlet project near Dallas-Fort Worth.
"We’re not dealing with mom-and-pop nail salons and local entrepreneurs, we’re dealing with the largest brand name companies in the world, with business units that demand we deliver what we say," Tanger said.
The deal with Simon is the third major strategic partnership of the year for Greensboro, NC-based Tanger, the leading REIT focused exclusively on outlet centers. In May, the company announced a joint venture with The Peterson Companies to build a 350,000-square-foot Tanger-branded center at National Harbor in the Washington, D.C. metro area. The company expects to break ground late this year on the 12-15-month project.
In January, Tanger announced a $1 billion venture with RioCan Real Estate Investment Trust, Canada’s largest retail REIT, to introduce American-style outlet centers to Canada, potentially building up to 15 outlet centers over the next five to seven years.
In the U.S., tenant interest is strong as pre-leasing continues at Tanger development sites in Houston, west Phoenix and Scottsdale, AZ. The company, which owns or has ownership interests in 35 upscale outlet shopping centers in 23 states totaling approximately 10.7 million square feet, has flagged 14 other markets for site selection "that are either not served or are underserved by the outlet industry," Steven Tanger said.
The company's core retail tenant partners plan to grow their outlet stores as a percentage of total retail offerings, he said. Five years ago, if tenants said they planned to open 10 stores, three would be outlet stores and seven would be full-price stores. Today, the ratio is seven outlets and three full-price stores for every 10 stores opened, Tanger said.
Tanger’s occupancy for its wholly owned stabilized properties was 96.7% at end of first-quarter 2011, up from 94.8% at the same time last year. But most Tanger centers are 98% to 100% occupied with tenant waiting lists, he noted.
"It’s probably the only sector of retail in the country that’s under-retailed," Tanger said. "The market is under supplied and there is demand for new space [built] responsibly."
Outlet centers comprised less than 1% of the approximately 24 square feet of shopping center space per capita in the U.S. as of 2010, compared to more than 31% for neighborhood shopping centers, noted Chris Macke, senior real estate strategist for CoStar Group, Inc. At the same time, shopping frequency is likely to be less at destination outlets.
But the greatest determinant of how much additional outlet space the market can bear rides on how many of the 8 million lost U.S. jobs don’t come back -- and how many potential shoppers are forced to take lower paying positions with less financial security.
"Consumers have become more value-focused due to the weak economy and shrinking middle class," Macke said.
CoStar Real Estate Strategist Suzanne Mulvee is skeptical of the claims of undersupply, noting that outlet centers sell the same merchandise categories as malls, lifestyle centers and many of the big boxes --- segments which remain far from undersupplied.
"If the traditional centers are losing traffic, they will alter the tenant mix to get that traffic back," she said.
The interest by the major mall players might have more to do with securing operational advantages than with undersupply, Mulvee said.
"Simon and other big players may be targeting the outlet sector because they believe they can create value by bringing their mall operation model to the outlet center concept, realizing efficiencies across a portfolio of outlet centers."
Steven Tanger said the outlet industry in total is small relative to other retail types, with only has about 150 quality centers totaling about 50 million square feet of existing supply. By comparison, Chicago alone has 176 million square feet of total retail space.
"There’s lots of room for our industry to grow domestically and accretively in a smart manner without overbuilding," he said. "We feel these are non-replaceable world-class assets that, should they ever come to the market ... there would be a feeding frenzy."
Macke noted that other retail types are far more saturated with supply. Malls, power centers and most recently, lifestyle centers, have already gone through their high-growth phases, and it's outlet centers' turn.
The threat of overbuilding is a concern as players jump into the space. In a market with limited supply, "developers will flock to the few perceived opportunities" and each trade area will have winners and losers as one outlet center secures the best brands at the expense of subsequent developments, Macke said.
With the retail sales pie growing at a tepid rate, the increase in outlet center square footage will also impact other retail types, siphoning off shoppers who might have otherwise spent their dollars to another retail format, Macke said.
"When your population isn't growing at a rapid rate and job and wage growth is minimal to non-existent, it means the pie is just being split up differently," he observed.
The other key risk for other retail formats is if some of the new outlet centers end up becoming ‘inlet’ centers built closer to traditional trade areas," Macke said.
"That would have a very real impact for more traditional retail formats."
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