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Americans Love Outlet Shops; So Do Real Estate Developers

All glammed up with trendy stores and a strong customer following, retail outlet centers are grabbing the attention of mall operators and developers.

Interest in outlet centers has heated the last couple of years as real estate investment trusts and developers look to expansion opportunities, at a time when the major markets are saturated with regional malls.

Consumers drive to outlet centers, often on the edges of town, for discounts on top designer name brands. Real estate companies will shell out to buy these retail properties when available, or they'll build.

"This remains the strongest sector of the market in terms of shopping center types when it comes to developer interest," said Garrick Brown, director of research for Cassidy Turley, "Anything in this market moves quickly at top pricing.

Higher-end apparel and accessory brands such as Michael Kors (KORS), Coach (COH) and Ralph Lauren (RL) have outlet stores. So do upscale retailers such as Nordstrom (JWN) and Saks (SKS).

Big Names In The Business

Mall operator Simon Property Group (SPG) is the biggest owner of outlet centers, followed by Tanger Factory Outlet Centers (SKT), according to data from "Value Retail News." Other shopping-center REITs, such as the Macerich Co. (MAC) and Taubman Centers (TCO), which tend to have more full-priced properties, have entered the outlet center arena in the last couple of years.

The reason: "The outlet sector is performing well and regional mall expansion is nil, given the major markets are saturated," said Steve Ferris, senior vice president, national retail tenant services at commercial real estate firm Jones Lang LaSalle. "Outlet centers create a new opportunity, with less than 200 in the U.S. in existence.

Outlet centers are leading the pack in ground-up development, with developers having no problems getting construction loans for the right sites, Brown adds.

"No one is speculatively building regional malls or lifestyle centers, but people are willing to speculatively build outlet centers," he said.

Regional-mall development has slowed because it's a pretty mature property type with established trade areas, says Ryan Severino, senior economist at real estate research firm Reis.

"You need a lot of customers to support a mall, so you're not going to go into an existing trade area and try to take customers away," he said. "It is too big of a bet. Therefore, if you're going to do development, it is better to do it in an area that's growing that doesn't already have a mall. But there's only so much of that caliber of growth to go around.

Only one enclosed regional shopping center has opened in the U.S. since 2006. That was Taubman's City Creek Center in Salt Lake City, which debuted last March.

Linda Humphers, editor of "Value Retail News," says six outlet centers have opened nationwide this year and another three are expected. There were eight outlet center openings in 2012, and two in 2011.

Outlet centers have gained momentum the past couple of years as retailers have moved to feed the consumer's strong hunger for value in a slowly improving economy. Retailers such as Coach, Nordstrom and Saks have expanded their outlet-store operations as they look to draw a new customer base and expand their multichannel efforts.

"Retailers have found that outlet centers only make their brand more profitable," said David Ober, president of the Council of Developers of Outlet Centers & Retailers. "In many cases, they're now representing major portions of their bottom-line profits.

Developers are following where retailers and their shoppers are headed, Humphers says.

"If you are a developer known for building regional malls, and no one is building them, the next step is to go where the consumer goes," Humphers said.

When consumers go outlet mall shopping, they go big.

"A lot of people only shop at outlets every so often," said Severino. "But they treat it like an excursion, spend a lot of time there and gorge themselves on shopping when they go.

People spend an average of three hours and 21 minutes shopping in an outlet vs. 52 minutes in a regional mall, Ober says.

The average outlet center performs better, with higher sales per square foot than regional malls, he says. Vacancy rates are low for outlet centers, with occupancy north of 90% for years, Humphers says.

Simon acquired a Portland, Ore., outlet property in May that it called a very productive center with sales in excess of $600 a square foot. The center, now called Woodburn Premium Outlets, was purchased for $147 million and was 99% leased at the time.

As the outlet segment has grown, it's evolved and matured.

"The biggest shift we've seen in outlets is their desire to be near major metro areas," said Todd Caruso, senior managing director for retail properties in the Americas at commercial real estate giant CBRE. "In the past, the format seemed to be limited to a focus on tertiary markets.

Now, he adds, they seem to have overcome the issue of having their brands sold in locations in the immediate vicinity of where they have full-priced stores.

Outlets Go Urban

Outlet centers were historically in remote areas far from regional malls with fashion department stores, Ferris adds.

"That sensitivity barrier has been broken down," he said.

Outlets are now willing to locate much closer to department stores, allowing developers to go into new markets in central locales.

Take the Fashion Outlets of Chicago, a luxury retail center that opened Aug. 1, minutes from Chicago O'Hare International Airport and 15 miles from downtown Chicago. The center is developed, owned and operated by AWE Talisman and Macerich.

Outlet centers are now being built with more amenities and more attention to details than they used to be, says Ferris.

"The outlet centers are becoming more of a sense of place like the regional mall vs. a tourist destination to buy something at a discount," Ferris said.

Retailers, he adds, are also doing a better job of building out the store fixtures and merchandising.

The idea is to build a "first-class shopping experience," he said.

No retail REIT currently gets a high Composite Rating from IBD. The Finance-Property REIT industry group is sitting in 188th place of 197 groups that IBD tracks, partly as rising interest rates impact the cost of financing projects and diminish the attractiveness of REIT yields.

With REIT prices in the stock market down, however, Stifel Nicolaus analysts this month upgraded Tanger Factory Outlet Centers to a buy from hold, citing a potential pricing upside amid continuing demand for quality outlet space.