Shopping Centers Today | Outlet Update

Outlet update | ICSC SCT

9/19/17, 9:56 AM

Outlet update Innovative upgrades give projects an edge in a competitive market

An economically cautious retail environment and rising construction costs are double-teaming new outlet center openings for the second year in a row, but developers seem confident that these properties will continue to stand regardless. Three projects have already opened this year: EB Development’s Outlets at Corpus Christi Bay, in Robstown, Texas; Horizon Group Properties’ Outlet Shoppes at Laredo, Texas; and Simon’s Norfolk (Va.) Premium Outlets. Meanwhile, New England Development and Tanger Factory Outlet Centers are scheduled to open centers this fall in Des Moines, Iowa; and Fort https://www.icsc.org/sct/shopping-centers-today/september-2017/outlet-update

Page 1 of 4

Outlet update | ICSC SCT

9/19/17, 9:56 AM

Worth, Texas, respectively.

These five plus the three openings of 2016 represent a significant pullback in number from recent years. By the end of this year, the total number of outlet centers will be about 220, up from 174 in 2012. But demand drivers continue to be in evidence, despite the vigilant atmosphere. Unlike the past, when many outlets were built in far-flung locations, developers continue to gravitate toward larger population centers. They are still targeting tourist destinations too. Observers anticipate that outlet centers, like other retail properties, will be exploring food-and-beverage and other entertainmentoriented options as traffic drivers.

“There has been a lot of outlet development in the last eight years, and it has been a lot to absorb, given that it’s such a small universe,” said Lisa Wagner, a principal at The Outlet Resource Group, a Chicago-based consulting firm that also invests in these properties. “We’re at a point of reset and are taking stock of these cookie-cutter, racetrack-designed centers that have worked well for a long time but that are becoming more difficult to execute.”

Among the development adjustments to date are outlet centers that max out at about 325,000 square feet, versus the more traditional 350,000 to 400,000 square feet, says Gary Skoien, chairman, president and CEO of Norton Shores, Mich.–based Horizon Group Properties. In another break from the past, notes Skoien, developers are more inclined to build two-story projects, particularly at locations inside or near metro areas. But the practice whereby developers have customarily granted retail tenants favorable leases to make up for a poor location raises difficulties, he says. “We’ve been fighting that with retailers who got great deals in basically crummy properties and are expecting them elsewhere,” Skoien said. “At the same time, construction costs have risen pretty significantly, which adds to the stress.”

https://www.icsc.org/sct/shopping-centers-today/september-2017/outlet-update

Page 2 of 4

Outlet update | ICSC SCT

9/19/17, 9:56 AM

Nevertheless, industry professionals remain bullish on the format’s upside.

Boston-based New England Development opened its first outlet center in 2014, in Palm Beach, Fla., after years of developing neighborhood retail, mixed-use, office, hotels and other properties. The Outlets of Des Moines will be the company’s fifth outlet. And what New England Development found appealing in 2014 — namely, the opportunities to provide outlet retailers with space in new, metro-oriented markets — remains appealing to the firm today, says Michael Barelli, a company vice president who is the Des Moines outlet project manager.

Landlords are also redeveloping and expanding existing projects to meet retailer demand. Simon was finishing redevelopments and expansions of outlets in Central Valley, N.Y., and suburban Dallas over the summer. And at press time Tanger was anticipating the August completion of renovations to its Myrtle Beach, S.C., property, as well as the opening of the 123,000-squarefoot expansion of its Lancaster, Pa., project, early this month. The firm is also spending some $24.3 million to remerchandise six outlet centers. CEO Steven B. Tanger acknowledges the challenging environment, but also notes that retailers still covet quality space.

“We are taking advantage of this demand to retenant underperforming retailers with higher-volume, more-popular brands,” said Tanger. The firm has invested some $300 million to upgrade, renovate and expand its centers over the past decade. “This redevelopment strategy should strengthen our future sales and cash flow.”

Few outlet centers have traded hands recently, but capitalization rates indicate healthy investment demand for higher-tier properties — ranging from 4 percent for class-A-plus properties, to 7.1 percent for ‘B’ properties, according to Green Street Advisors, a real estate research firm that began covering the sector in October of 2016. This is roughly in line with cap rates https://www.icsc.org/sct/shopping-centers-today/september-2017/outlet-update

Page 3 of 4

Outlet update | ICSC SCT

9/19/17, 9:56 AM

for regional malls along the same quality spectrum, Green Street says. It also justifies the optimism among industry insiders.

“It’s obvious that a typical 350,000-to-400,000-square-foot racetrack outlet center is difficult to develop and lease in today’s retail climate,” said David Hinkle, an Outlet Resource Group principal. “But we also believe that when the dust settles, the outlet sector will be one of the leaders in brick-andmortar retail.”

https://www.icsc.org/sct/shopping-centers-today/september-2017/outlet-update

Page 4 of 4