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‘Plugging in’ to Outlets

It seems like everybody wants to get in the outlet business these days. In particular, there are a growing number of “traditional mall” developers that seem to be seriously considering -- or in some cases, actively pursuing -- the development of outlet centers or the conversion of existing traditional mall assets into outlets. On the heels of Gap’s announcement to close 200 of their full-price stores by 2013 and concentrate on expanding their Gap outlets and Banana Republic Factory Stores, I understand why developers are seriously thinking about outlet centers. After all, consumers are still hungry for brand-name goodies at discounted prices. I don’t think there’s anything inherently wrong with retailers or developers repositioning toward value, but I do have some reservations about this latest industry trend.

The retail real estate community has a tendency to dive into a trend head first before anyone really fully understands its potential or limits. Sometimes our enthusiasm can be self-defeating. My big concern right now with the outlet phenomenon is the limited number of markets that can actually support outlet centers. Developers need to beware of converting or building outlet centers too close to major metropolitan areas. Because most retailers have radius restrictions on the distance between outlet locations and full-price stores, the number of tenants for future outlet or full-price projects could be limited. While I haven’t conducted a detailed national analysis on this, I believe there are markets that will be able to support some of these outlet centers but the space for these certainly will not be infinite. My gut instinct is that there are probably fewer than 50 viable/supportable outlet center opportunities nationwide.

What makes them viable? I’d say far suburban or exurban areas at least 15 miles or so from the nearest regional retail core; areas that are typically under-served from a national chain perspective and probably cannot support a traditional retail format. Right now it’s a balance between getting as close as you can to the major metropolitan area, but not so close that you limit your future tenanting flexibility.

Another concern is that traditional developers are just not set up to coordinate outlet development with their traditional centers. Many retailers actually have an entirely different real estate division responsible for outlet projects. I really think traditional developers would be smart to consider joint venturing with some of the stronger outlet developers or even selling their properties to those specializing in outlet center development.

A project to watch: Taubman-owned Great Lakes Crossing Outlets in Auburn Hills, Michigan. In 2010, Taubman revamped their Great Lakes Crossing mall and added a number of outlet tenants, including restaurants, that had no other presence in Michigan. While it’s too early to tell if the project has been a success (I’ve found that it typically takes two to three years to get a center fully repositioned in customers’ minds) it’s certainly a good example of this latest trend. It will be interesting to watch this project over the next couple of years to see if the transition was successful.

My advice for traditional retail developers would be: don’t get lost in the outlet center excitement and potentially sacrifice your big-picture strategic vision. Think carefully about the long-term and choose your next step wisely.

What do you think? Email me at jgreen@jeffgreenpartners.com.

Jeff Green is president and CEO of Phoenix-based Jeff Green Partners (jeffgreenpartners.com), a leading consulting firm specializing in retail real estate feasibility, retail expansion planning, medical retail planning, location analysis and commercial land use.

Addendum

I recently received some feedback on my latest column, “Plugging in to Retail Outlets,” and found that I need to clarify something I wrote. I used the term “radius restriction” when referring to the limitations retailers place on the distance they allow between their outlet locations and their full-price stores. For those of you in the retail leasing business, you know that radius restrictions are common lease terms used by traditional and outlet center landlords to preclude the tenant from opening similar stores in nearby locations. I should have used the phrase “distance limitations” to make my point.

Thanks to the reader who contacted me to set the record straight!

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