Room to Grow (1/29)
Jan 29, 2009 8:53 AM, By Elaine Misonzhnik
There is a reason why outlet center owners should be wary, despite the solid performance of the sector so far. Retailers tend to close outlet stores last, so a wave of closings at outlet centers may still come. Furthermore, outlet center developers have not pulled back on new projects as quickly as developers of other types of retail properties, which could lead to some issues if occupancy levels do begin to drop dramatically.
However, many outlet center owners say that there remains room for growth even in the face of the recession. One reason is that unlike regional malls, outlet centers have not yet become ubiquitous, according to Quier Wagner. For example, a handful of states, including Arkansas, Nebraska and Wyoming, don’t have any outlet centers at all, she noted.
Prime Retail plans to break ground on two outlet centers this year, in Grand Prairie, Texas and Livermore Valley, Calif. “We look at this as a period similar to the early 1990s,” Brvenik says. “It was a difficult time for retailers also, but it was one of the greatest growth periods for outlet properties.”
Value proposition
Among the primary reasons outlet centers have been able to maintain occupancy levels at a time when the retail sector has been overrun with bankruptcies, store closings and liquidations, is the unique rent structure employed at outlets. In enclosed malls, tenants have to pay steep common area maintenance (CAM) charges, in addition to helping pay for store build-outs. Since outlet centers tend to be open-air and employ minimalist designs, buildout and CAM expenses are lower, says Brett Robinson, vice president of development with Continental Retail Development, a Columbus, Ohio-based developer.
In addition, the base rental rates for outlet centers tend to be 20 percent to 50 percent lower than those at regional malls in the same trade area, depending on the age of the property and proximity to a major metropolitan center, notes Green. As a result, outlet center stores often become the most profitable locations for retailers, so even if Gap or Ann Taylor are closing stores, those companies would look at outlet centers last, not first, Green says.
Also, developers of outlet centers tend to have less trouble securing tenants for new projects than those of regional malls or lifestyle centers. Prime Retail, for example, has already signed leases for 50 percent of its 485,000-square-foot development in Grand Prairie, Texas. This during a time when many developers of other retail formats have been forced to postpone or scrap some projects altogether because of inadequate leasing levels. During the boom years, lenders were willing to grant loans on properties built entirely on speculative demand, says David L. Wing, vice president and general manager with Graycor Construction Co., Inc., a Homewood, Ill.-based construction firm. Now, concerned about a severe contraction in the retail sector, they require pre-leasing levels no lower than 50 percent before even considering a request for financing.
Prime Retail (a subsidiary of New York-based Lightstone Group) is still in the process of securing financing for Prime Outlets Grand Prairie, but it has already found an equity partner for the project. The company plans to break ground for the center this summer.
Still, outlet center owners have had some troubles. During the second quarter of last year, sporting goods retailer Camp Coleman, apparel seller Geoffrey Beene and sportswear store Big Dog notified Tanger they were exiting their leases early. With a total of 32 stores, those tenants accounted for 92,000 square feet of Tanger’s 9.1-million-square-foot portfolio.
Moreover, the credit crisis and recession are global phenomenons. As a result, the flow of foreign tourists coming to the U.S. has waned. During October 2008, the most recent month for which data is available, the Office of Travel and Tourism Industries reported the number of U.S. tourists from abroad totalled 4.0 million visitors, down 2.4 percent from the 4.1 million visitors during October 2007. With foreign visitors likely to stay home and domestic consumers focused on necessities, the amount spent at outlet centers has dropped and is expected to continue to decline in the coming months, says Green.
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