With a new, value-minded consumer in mind, traditional retail developers are getting in on the outlet game by partnering with established players.
While mainstream retail is just picking back up after the Great Recession, outlet centers have made it through unscathed. In fact, they are shining stronger than ever.
“Outlets are good in good times and great in bad times,” says Lisa Quier Wagner, with EWB Development. “As it turns out, they are fantastic in horrible times.”
The outlet industry has seen increased sales as Americans turned to value in the recession, and they’ve also seen continued development, as the sector proved to be recession proof over the past few years. Mainstream developers have steadily moved in to the sector, forging a new drive that is creating stronger outlet centers that outlet retailers appreciate.
The outlet industry started as a method for manufacturers to dispose of excess inventory that their traditional retail channels couldn’t or wouldn’t sell. Centers sprung up in places outside of wholesale agreement circumferences and thrived as value conscious consumers flocked to find deals. In the 1980s, outlets grew on the word-of-mouth of these consumers, making retail meccas out of rural areas like Burlington, North Carolina, Boaz, Alabama, and Kittery, Maine.
Since then, the outlet industry has outgrown its roots in unique ways.
“It is much more than what it started out to be,” says Wagner. “It has solved the excess inventory problem and along the way become an actual channel of distribution that is highly profitable for many brands.”
In the good times of the late 1990s and early 2000s, consumers became very loyal to brands. As the economy weakened, they began looking for those brands at value prices.
“They still wanted the brand, they just didn’t want to pay full price for it,” says Wagner. “When consumers visit an outlet, they find their brand’s store, but they also find an expanded selection in depth and breadth of merchandise of that brand — and the value is great. It’s the perfect combination.”
During the good times, the outlet center industry experienced a lot of mergers and acquisitions.
“The outlet industry has gone through a significant consolidation over the past 10 years,” says Karen Fluharty, president of Strategy + Style Marketing Group. “There are a handful of dominant players who own multiple outlet centers in the U.S.”
Over the past few years, EWB has seen a resurgence at a number of its centers as many consumers rediscovered outlets. As they visit different centers, they discover one of the secrets of the industry.
“Outlet centers are not cookie cutter or uniform from market-to-market,” says Wagner. “That’s one of the reasons that they are so successful and that they continue to attract tourists. It’s what makes them exciting and refreshing.”
Outlet Challenges and Specialty
While the push to outlets has drawn attention to the sector, there have been some misconceptions that these specialty centers can be a cure-all for broader retail challenges.
“Developers who have an existing property that is not performing think it should be an outlet center,” says Fluharty. “This could be a traditional retail center in need of a remerchandising or repositioning. We’ve also seen, most recently, some big box centers co-mingled with outlets.”
In some cases, these repositionings have been incredibly successful. Vornado Realty Trust was one of the first to combine outlet and big box at its remodel and repositioning of Bergen Town Center in Paramus, New Jersey, which combines retailers like Whole Foods, Target and Nordstrom Rack with factory stores from Guess, Nike, Banana Republic, Gymboree, Tommy Hilfiger and others.
While some of these projects are a fit for outlets, every site can’t be an outlet center.
“Everybody thinks that if they have a center that isn’t working that it should be an outlet center,” says Linda Miller, president of LM Global Retail Services LLC, who consults with many outlet developers. “It’s not true. It is much more difficult to develop an outlet center than it is to build a full-price center.”
The sensitivity of the brands with their wholesaling business to other retailers is one of the chief reasons for this. Outlets also draw shoppers from a larger trade area, so there can only be so many in a given market. As well, outlets draw heavily on tourism business.
“In the outlet business, most of the centers have at least 60 to 70 percent of their business that is tourism generated,” says Rosemary McCormick, president of the Shop America Alliance. “Most shoppers are coming from 50 miles or more. In order to get these shoppers, centers have to become astute at marketing to tourists.”
Some developers go so far as to hire tourism representatives in other countries to help get the word out about their centers to foreign markets. Center owners also develop strong relationships with major tour operators. And many centers make shopping as convenient and easy as possible for tourists. Craig Realty Group launched a shop-and-shuttle program for its Citadel Outlets in California last year that takes guests at six Anaheim-area hotels to and from the center.
A large part of drawing that tourism is the marketing strategy that is applied to an outlet center. “Outlets are the most creative, robust marketers right now in the shopping center industry,” says McCormick. “They are always looking for new and creative ways to generate business.”
So specialized is marketing for outlet centers that it now has its own association, Outlet Marketing Alliance (OMA). The alliance has not only outlet developers as members, but also many brands who join to market their presence.
“[Outlet marketers] understand that sharing these ideas and collaborating is a good way to build their business,” says McCormick.
One trend in outlet development is clear: developments do not need to be 50 miles from a metropolitan area.
“There is a movement toward densely populated metropolitan markets,” says Wagner. “There is a move to bring the outlets closer to the population. Putting outlets close to the city has been done in a few places very successfully. We have seen that the proper location does not take away from traditional retail; it actually creates incremental business. In a recent study, 81 percent of consumers surveyed said they would visit outlets more often if they were located closer.”
EWB is developing St. Louis Premium Outlets with Simon Property Group and Woodmont Outlets in Chesterfield, Missouri, just a few miles from downtown St. Louis. Similarly, EWB has a joint venture with LNR Property to develop the 430,000-square-foot Boulevard Outlets LA at the junction of the 110 and 405 Freeways in Los Angeles County. The company is also working on the Outlets at Assembly Row with owner Federal Realty Investment Trust in the Boston area, scheduled to open in 2013. That property will incorporate outlet retail into a large-scale mixed-use development.
Onex Retail has partnered with JSS Advisors to add outlet retail to the recently opened Shops at Skyview Center in Queens, New York. The outlets at that center would be among the most urban of any in the United States. The center opened at the end of 2010 with big box anchors like Target, Best Buy, Marshall’s, Bed Bath & Beyond and BJ’s Wholesale Club. Miller, along with JSS Advisors, is working on filling about 200,000 square feet of smaller shop space with outlets and factory stores.
Fluharty’s company, Strategy + Style, is working with The Daniel Corporation, which recently opened The Outlet Shops of Grand River just outside Birmingham, Alabama. The center, one of the few large-scale projects to open last year, is Daniel’s first entry into the outlet category.
The Peterson Companies and Tanger Outlets have partnered to build an outlet center at National Harbor, a mixed-use project minutes from Washington, D.C.
While outlets are being developed closer to major metros, they are also being added to traditional retail projects in some cases. The Pyramid Companies is adding 850,000 square feet of retail, including outlets, to its Carousel Center in Syracuse, New York, in a project known as Destiny USA. The center began construction in May 2011 and Destiny USA will open this year. When complete, the entire center, including Carousel, will be 2.4 million square feet, making it the sixth largest shopping destination in the United States, according to The Pyramid Companies. Travel & Leisure magazine predicts that after the opening of Destiny USA, the center will be the second most visited shopping destination in the U.S., just behind the Mall of America.
New England Development and Eastern Retail are developing a 450,000-square-foot open-air outlet center on 80 acres in West Palm Beach, Florida. The project will also contain a traditional big box retail component. The companies plan to open the center, called Palm Beach Outlets, in fall 2013.
“This is a prime site right along Interstate 95 that is distanced from traditional enclosed malls to make it a viable location for an outlet center,” says Carol Carbonaro, executive vice president with New England Development.
Miller, who is consulting with a number of developers, says a good outlet site has accessibility to a well trafficked highway, strong demographics of a major metropolitan area within a reasonable drive time, and being away from other retailers who have wholesale contracts with outlet retailers. Also, distance from other outlet projects must be considered.
Meanwhile, traditional outlet development continues to be the strongest sector of multi-tenant retail development right now.
“There are 30-plus outlet centers in the pipeline,” says Fluharty. “In the next year, five outlet centers will open.”
Because of the nuances of outlet development, leasing, marketing and operations, developers new to the sector have been seeking consultants and executives who have a track record of successful projects. Outlet retailers, as well, prefer to deal with owners and operators they know and trust.
Baltimore-based Paragon Outlets, headed by former Prime Outlets executives, has seen leasing success because of its pedigree. The company has two centers set to open in the next year: Paragon Outlets Livermore in the San Francisco Bay area and Paragon Outlets Grand Prairie in the Dallas-Fort Worth market.
For those entering the outlet business for the first time, outside expertise is often called in to aid in leasing and development.
Newport Beach, California-based Eclipse Development, is breaking ground on Maui Outlets in Hawaii this month and has engaged Strategy + Style to handle a number of facets of the project.
“Many developers entering the business understand that you need experienced people on the ground for leasing, marketing and operations,” says Fluharty. “While many developers are extremely talented in strip center and lifestyle center development, they are bringing on experienced people to handle the specialized leasing and marketing of the project. The tenant community demands it.”
Old Name, New Player
While the outlet industry consolidated heavily in the early 2000s, a lot of familiar names are entering the sector. Most of the top traditional shopping center owners are now in the outlet business. Simon Property Group, through its holdings of Mills and Premium Outlets, is the largest outlet landlord. Taubman has a strong outlet center with its Great Lakes Crossing and Dolphin Mall, and has recently launched a partnership to build more outlet centers in the United States. Macerich acquired the Fashion Outlets of Niagara Falls, in Niagara Falls, New York, in 2011, and has partnered with the former owner, outlet owner-operator AWE Talisman, to lease and manage the property. CBL & Associates has partnered with Horizon Group Properties to develop The Outlets at Atlanta, which will be the closest outlet center to the city when it opens in 2013.
“Outlets have a tendency to perform better than traditional retail in difficult economic times,” says Fluharty. “Coupled with the capital crunch that has led to a number of traditional retail companies who have not been in the outlet category to look to it for growth. At the same time, retailers are entering the category, while others who have been in outlet retail are remerchandising.”
Many traditional mall developers are attracted to outlet development because of the high potential for profitability.
“Outlets cost less to build,” says Miller. “They are typically one-level projects and have surface parking because of location.”
The low building costs and the operational costs of the centers’ open-air format equate to lower occupancy costs. If a developer builds a successful center with good marketing and traffic, the potential is strong for profitability.
Miller is currently working on Spring Creek Outlets in New Lenox, Illinois. The project is a partnership between Center Creek Development and Urban Retail Properties LLC. This is Urban’s first entry into the outlet center. The reason for traditional mall retailers partnering with established players to enter the sector is two-fold. Outlets are one of the few areas of retail still developing, and larger companies have the capital, while the traditional outlet operators have the expertise.
“Full-price developers have failed at outlets in the past because they don’t understand the outlet business,” says Miller. “These partnerships have been successful because the outlet retailers are in tune with how strong and experienced each developer is. The retailers want people who know what they are doing, whether it’s through leasing, marketing or development. The partnerships bring in the experience of the developer and the outlet operations.”
EWB Development is working on 14 outlet projects currently, about half of which are existing centers. The other half are development projects that are delivering in 2013 and 2014.
With today’s shoppers demanding what they want and the price they want, outlets themselves are becoming a traditional sector of the shopping center business, and more of a part of consumers’ regular lives.
“Shoppers today are looking for value,” says Miller. “Whether they find it at a full price mall or an outlet, they are looking for a bargain. The outlet centers have maintained and sustained during this tough economic climate.”
— Randall Shearin