Plug in to Outlets
Land Sales and Leasing Power Brokerage Opportunities in This Specialized Retail Arena.
It’s those three little words that often are impossible to resist: What a deal.
For serious shoppers, it’s the designer overcoat marked down to $400 from its original $1,200 price tag; others may be happy with a pair of seersucker shorts scooped up for $10. No matter. Consumers’ love of a good bargain has driven the decade-long development of factory outlet malls, where manufacturers’ stores sell everything from handbags to vitamins, with plenty of high-end designer apparel and accessories thrown in for good measure.
For brokers, the niche often requires specialized knowledge and contacts, but offers opportunities in land sales and leasing as outlet centers grow in size, if not in number.
A Changing Marketplace
However, outlet retailing has changed dramatically since the late ‘80s. The number of malls tripled from 108 in 1988 to a high of 329 in 1997; the total leasable area has jumped from 13.9 million square feet to 55.3 million square feet at the beginning of 1998, according to Value Retail News (VRN), an industry trade magazine. VRN pegs last year’s sales at about $12.8 billion—roughly $217 per square foot. And the median vacancy rate for factory outlet centers is 6.9 percent, according to the International Council of Shopping Centers’ SCORE/1997, a handbook on shopping center operations. Compare that to traditional malls’ median vacancy rate of 16.1 percent (excluding anchor stores and food courts).
The total number of new centers is declining—13 opened in 1996, compared with 22 in 1995; the number of total outlet centers was down to 311 at the beginning of 1998 due to slowed growth and repositioned centers, according to VRN. However, the gain in square footage for outlets continues to climb, thanks to larger phase-one developments and expansion of existing projects.
One of the reasons for the centers’ steady growth is interest from real estate investment trusts (REITs). Ten years ago, outlet developments tended to be privately owned; today, the largest developers in the outlet industry—Prime Retail, Inc., FAC Realty Trust, Inc., Tanger Factory Outlet Centers, Inc., and Chelsea GCA Realty, Inc.—all are REITs. At the same time, consolidation has occurred.
Outlets also continue to be popular with manufacturers who find them a lucrative opportunity. Instead of having last season’s product line jammed into department store racks, manufacturers can display the merchandise using the management, atmosphere, and image that they control, says Bill Carpenter, president and chief operating officer of Baltimore-based Prime Retail.
Manufacturers also use outlets for test marketing—and simply for expanding their customer base, according to Tony McDonald, CCIM, SIOR, principal of the Boulos Company in Portland, Maine.
The Competition and Consumer Spending Habits
But despite their appeal to consumers, REITs, and manufacturers, outlet centers face the same challenges as mainstream retailing. Competition is ample— not only from other outlets, but from conventional retailers as well. Department stores "have trained the customer that the sale price is the real price. They’ve narrowed the gap between [outlets and] mainline stores’ pricing, so now you’ve got to have a big differential to get people to drive and spend time at your center," says Paul G.W. Fetscher, CCIM, president of Great American Brokerage, Inc., in New York.
Outlet center developers also are aware of consumers’ increasing expectations of the shopping experience. They continually look for ways to make customers want to spend precious time and hard-earned money at their centers—particularly because, as Fetscher points out, they’re not always in convenient places.
Both issues present challenges to outlet malls’ basic distinction. "The lines are starting to blur a little between factory outlets and conventional retailing," McDonald says. "Where it was a totally unique item eight or 10 years ago—and there were a handful of retailers doing it—now it’s being done everywhere."
The lines get even blurrier when you consider the other interloper into outlet territory: the "value-oriented" center, which incorporates not only manufacturer’s outlets, but also off-price retailers such as T.J. Maxx, Saks Off 5th, and Waccamaw. No one’s made a bigger splash in this area than the Arlington, Virginia-based Mills Corporation, whose seven megamalls around the country offer multiplex theaters, theme restaurants, virtual reality games, and lots of stores—sometimes more than 200, including 15 to 20 anchors.
Keys to Success
The value-oriented center was spawned —as were most outlet center incarnations—to attract more consumers. And as in mainstream retailing, the tried-and-true components of outlet center success are location and tenant mix.
Outlet malls originally opened in tourist areas or away from major metropolitan areas, since manufacturers didn’t want their outlet stores competing with their wholesale accounts. However, over the last 10 years, the range of sensitivity has decreased, says Joe Weinberg, senior vice president for retail management and development of the Cordish Company in Baltimore. Where the acceptable comfort zone once may have been 50 miles or more from a city, it’s now shrunk to perhaps 20 miles.
"The location business has changed dramatically," says McDonald. "It’s no longer driven by proximity to manufacturers—it’s now driven by the same demographic issues that mainstream retail is being driven by. So it’s more of a contrived concept now, rather than a true factory outlet setting."
"Look at where the customer base is," says Jon Miller, president of Leasing Resources, Inc., in Potomac, Maryland. "How secure is it? Are there customers that have longevity? Disposable income? Is it situated properly to take advantage of the customer three or five years from now?"
At the same time, Miller says, "the risk factor in outlets with an extended draw is that they have to have some type of retail that brings the customers from a longer distance, and [the customers have] to pass other things that might attract them as well."
And that’s where a good tenant mix becomes vital—but what makes a good mix is subject to the center’s intended audience as well as the variety of stores themselves. Bob Dietrich, CCIM, director of Millennium Real Estate Advisors in Newport Beach, California, says he’s seen examples of highway malls within a few miles of each other where one founders and the other does very well; the difference, he says, is in the mix.
Enhancing the Experience
However, as in the rest of the retail market these days, it’s not just demographics—it’s "psychographics," Carpenter says. What that means, he says, is a thorough understanding of what consumers want from a shopping experience—and in the case of outlet centers, it no longer may be simply to buy marked-down merchandise.
Carpenter acknowledges that retail entertainment, which has made a huge impact on conventional retailing, is affecting the outlet industry as well. (See "Retail Entertainment," CIREJ, March/ April 1997.) Like mainstream malls, outlet developers are looking at themed restaurants, movie theaters, and hands-on, interactive retailers to add to their tenant mix.
To that end, Prime Retail also has developed its centers with an eye toward making them very consumer friendly, he says. When the company first started building in 1988, he says, most outlet centers were strip malls. Prime Retail aimed to create an "outlet village" with attractive landscaping, food courts, and cafes. The atmosphere at an outlet mall, he maintains, should be no different from that at a conventional mall—and, he adds, he thinks the outlet center industry as a whole is heading in that direction.
The quantity of stores also is key, which the Mills concept has proven in a big way. "You’ve got to provide the draw," says Dietrich, who’s worked on valuation consulting projects for outlet centers. "If you’ve got one or two good stores, people might go there occasionally, but if you’ve got a lot, people will go out and make a day of it—which ties in with [the] entertainment component."
In that area, food courts probably have become the most common addition to these centers, says Fetscher, who has worked with a number of large outlet center developers on restaurant and food-service consulting. However, he says, a center’s size determines if a food court would add benefit. "You’ve got to have a minimum of 200,000 square feet before you can support a food court; more like 300,000 to have a shot at making money, and 400,000 to be on a par with a median regional mall. The more square footage you have, the longer people will stay" and the more likely they are to eat.
But the addition of movie theaters, another popular tack used by mainstream malls, brings mixed opinions. Large REIT developers, such as Prime Retail and Tanger, are adding them. Tom Hill, III, CCIM, says theaters are going into a 105,000-square-foot outlet development that he’s working on in Southington, Connecticut. "Competitive pressures are everything now," says Hill, owner of Tom Hill Realty & Investment in Waterbury, Connecticut.
"It’s appropriate in some centers, but not in others," Weinberg says. Centers facing audience competition in major movie markets may want to consider adding screens, but more-distant malls—whose main attraction is the shopping—may find that customers may not want to add a movie at the end of a long day of buying.
Opportunities for brokers not already involved in outlet retailing may be limited to land sales and possibly leasing. Publicly owned companies tend to have in-house staffs for development, Carpenter says, but they still look to outside brokers for land sales. "And we’re always looking for land," he adds.
Hill concurs. He suggests brokers with an interest in working in the outlet industry gain access through "the right piece of land in the right location" or by working with tenants with whom they’ve established relationships. But, he adds, "it’s definitely a specialized industry," and he advises doing as much homework about outlet centers as possible. For Hill, that included joining the International Council of Shopping Centers as well as doing on-site research.
Finding the right land for outlets, though, has become more difficult as centers have increased in size. "It used to be [the] minimum was about 150,000 square feet." says Dietrich. "But that seems to be moving up—most people are talking about 200,000 square feet." VRN’s numbers bear him out; the average size of an outlet center has grown from 119,000 square feet of gross leasable area (GLA) in 1988 to 165,000 in 1996. In 1996, expansions accounted for 2.4 million square feet of GLA; new development added 2.3 million square feet.
"Access is important," adds Fetscher, noting the prime location for Mills’ new Grapevine Mills in Texas. Besides being close to a metro center with a 3.4 million population, he says, "you come out of the north exit of the Dallas-Fort Worth Airport—one of the largest in the country—and it’s there. It could not be more conveniently located to tourism and the airport than any other point in the Dallas-Fort Worth metroplex."
Growth has "put some downward pressure on rents," McDonald says. "Before, if a retailer decided to run an outlet location, it had relatively few locations to choose from that were established as an outlet-type district or area. We hear from retailers that they’ve got more options now, so they’re not as quick to jump on a space in some of the older, more established factory outlet areas."
Brokers also can consider working with tenants on leasing deals; however, Dietrich says, lease terms differ in outlet malls. "Most are typically five-year max on newer [centers]. If it’s one that’s been around a while, and it’s a hot mall that everyone wants to be in, the landlord can get longer lease terms. And most leases have—if not shorter-than-typical terms—escape clauses so that if [retailers] are not doing well, they have the option to terminate." Because of the shortened terms, he adds, typical outlet mall tenants often want more improvements, or special decorating provisions, whereas in longer-term leases in a typical retail mall, "you look at minimal tenant improvements."
While growth in the number of outlet centers opening has slowed, growth in size has not. "Most of the growth seems to be in existing market centers," Dietrich says. "If you’ve got a great location, there’s going to be expansion." But, he adds, "it’s not a wild, unending growth industry."
"It’s a business that will continue to grow, but it will grow in different ways," Carpenter says. "Each center will come to terms with its particular marketplace." Citing heavy competition for prime locations, Carpenter is reluctant to name specific areas for expansion, although he does say that Prime Retail has pinpointed at least 20 spots on the East Coast—and will open the first outlet mall in Puerto Rico next year.
Overall, California currently leads the United States in the number of outlet centers (35 as of September 1997) as well as in the GLA of outlet centers (a little more than nine million square feet). Florida ranks second in both counts—21 centers and seven million square feet of GLA. Maine, Texas, and Georgia follow in the number of centers; Pennsylvania, New York, and Texas follow in total GLA.
"There’s opportunity there, not to go out and build a lot more, but to get more productive with what we have," Fetscher adds. Let’s put in other goods or services that are sold off-price that would drive the value equation to bring back the consumer." He suggests, for example, adding bridal outlets, which could lead to related services such as for flowers and music.
Dietrich also sees some opportunities in repositioning failed traditional regional malls as outlet malls. But he also proposes alternatives to the standard stand-alone mall. "Right now we’ve got a Main Street revival going on in retailing," he says. He cites Freeport, Maine, as a good example of how to combine that trend with outlet retail: "It’s a tourist destination, a quaint downtown area, and [has] tons and tons of foot traffic." In areas with such downtowns, he says, "a little outlet store can fit in with all the other boutiques." He cautions that established nationwide chains can present competitive problems with local retailers, "but any time you’ve got an area that’s struggling and wants some economic vitality—and has tourists or foot traffic—you should be looking at [outletters]."
Miller—who says it’s important to focus on "what the customers’ needs are rather than what’s a given in the retail environment"—is concentrating on a variation of Main Street. He’s currently working on an all-new "town center" development on an interstate about 27 miles outside of Washington, D.C. The project will be a blend of manufacturers’ outlets, off-price stores, and traditional retailers—laid out on a grid, in a streetscape setting. Miller calls it "reinventing old downtown, adding amenities and convenience."
Miller’s brother, Herb, created the Mills mall concept in the mid-1980s, and Jon Miller handled leasing for the centers. In the Mills "value-oriented" malls, he says, a lot of the anchors aren’t manufacturers. "The best [tenants] are merchants in themselves, whether it’s an arm of the manufacturer or whether it’s a retailer with value-oriented goods. As far as I’m concerned, the best retailer is a retailer."
In any event, outlets’ growth in the next five years will look much different from the last 10. Says Fetscher: "I’m not going to go out there to Wall Street and tell them that the number of factory outlet centers in America and the GLA can be doubled over the next five years. We did it in the regional mall industry, but we cannot do that with factory outlets and still maintain the distinction, and that’s what’s important."
"The factory outlet is going through a metamorphosis," Carpenter says. "Are there going to be fewer centers built? Of course—there are fewer centers being built in the retail business today, whether it’s full price or strip centers." Instead, he says, what is being built today is "a high-quality, well-thought-out plan with a good merchandising venue, which is really important." With customers traveling 30 to 40 minutes to get there—and then spending half of their day there, he adds, "we’re providing a nice atmosphere that’s safe, that’s got convenient parking. This is Development 101."