Outlet Center: Moving Dirt

After nearly a decade of stalled growth in the shopping center industry, 2014 finally saw progress being made on the new development front. While it’s true that much of the ground-up construction was of the outlet center ilk, the value sector wasn’t the only new-build push. Mixed-use properties and open-air destinations continue to come out of the ground, albeit stingily, as do hybrid centers that defy current standard definitions.

Stingy growth, as everyone knows, wasn’t always the case. Between 1956 and 2005, some 1,500 malls were built; in the mid-1990s, malls popped up to the tune of 140 a year. We hit the recessionary brakes in 2007 and, ever since, have waited for the moment when we could shout, “We’re baaaaack.’

We’re not back by any stretch of the imagination, but the shopping center development movement is closer to decent health than it’s been in seven years. Taubman led the charge with the opening of City Creek Center in 2012, the Salt Lake City mega-center that features a one-of-a-kind retractable glass roof, a creek that runs through the property, and a host of other bells and whistles that may not have signaled anything close to a pre-recessionary climate but still managed to buoy an industry hungry for good news.

More recently, The Howard Hughes Corp. in October opened the first phase of the mixed-use destination Downtown Summerlin (Las Vegas), billed as the largest retail development to open in the U.S. since the economic downturn. Shelved by the prior developer during the recession, the 1.6 million-sq.-ft. complex is slated to have more than 125 stores and restaurants when complete, including Macy’s, Dillard’s, Trader Joe’s, Wolfgang Puck and Regal Cinemas. Its significance cannot be overstated.

“Downtown Summerlin serves as a link between a storied Las Vegas legacy and the 21st-century downtown experience that will engage both local residents and visitors from around the region,” said David Weinreb, CEO, Howard Hughes Corp. Even more, the opening has signaled an economic resurgence of southern Nevada, which was hit hard by > the downturn but has rebounded in the past few years.

Smaller projects have gained traction as well. Irvine Company (California) is building a 125,000-sq.-ft. specialty center, Santa Clara Square Marketplace, which will feature a 50,000-sq.-ft. Whole Foods, as well as the slightly smaller Los Olivos Marketplace in Irvine that will also house a Whole Foods anchor. These two projects, just a small sampling of what is opening or underway in the U.S., represent a type of shopping center that doesn’t necessarily conform to a pat definition.

“The old definitions of a neighborhood and community and regional center don’t really fit anymore,” said Jeff Green, president and CEO of Phoenix-based real estate consultancy Jeff Green Partners. “Now and in the future we will see hybrid centers coming out of the ground, combining power, convenience, specialty and entertainment.” A sure way to build a successful hybrid is to add in grocery, a model that our neighbors to the north > have mastered. “Canada has long incorporated supermarkets into its more traditional shopping centers, thereby combining convenience and destination,” said Green. “Here, we are only just now starting to combine the two, but that’s where the industry is clearly headed.”

In the meantime, however, the format getting all the love is the outlet center. As many as a dozen new outlet centers will have opened for business in 2014, following on the heels of 11 openings in 2013. It’s the biggest thing to a development boom in recent memory — and not all openings are by the major players.

Sure, Simon has been busy, opening Charlotte (North Carolina) Premium Outlets (in concert with Tanger), breaking ground on Gloucester (New Jersey) Premium Outlets (in concert with PREIT), and opening Premium Outlets Montreal (in Mirabel, Oregon, in concert with Calloway and SmartCentres) and Twin Cities Premium Outlets (in Eagan, Minnesota, in concert with Paragon Outlet Partners). And Tanger, besides its joint venture with Simon, opened Tanger Outlets Ottowa (in Kanata, Ontario, in concert with RioCan). The pair is in the throes of another joint venture outlet, this one near Columbus, Ohio, and approved for construction although currently mired in infrastructure red tape, according to local newspaper reports.

But developers less known in the outlet arena are also seeing their share of action. Howard Hughes Corp. unveiled its Outlet Collection at Riverwalk in New Orleans earlier this year; the company is also eyeing a new development — the Outlet Collection at Elk Grove (California) — currently in the infancy stages. Ivanhoe Cambridge opened Outlet Collection at Niagara (Niagara-On-The-Lake, Ontario), and Federal Realty opened its Assembly Row project in Somerville, Massachusetts.

There’s plenty more in the planning stages. Tanger and WS Development announced an upscale outlet center in Cheshire, Connecticut. New England Development has launched site work for an outlet mall in West Little Rock, Arkansas, slated to open summer 2015. Behemoth Simon has broken ground on Tucson Premium Outlets in Marana, Arizona, with a fall 2015 opening date.

These are just the tip of the outlet center iceberg. Which begs the question: Can North American consumers possibly support this many outlet centers?

The near-term answer is likely “yes,” as value shopping continues to trend upward. According to Jeff Edelman, director of retail and consumer products advisory services at McGladrey LLC, New York, outlet malls should benefit from a value-conscious customer base that will be seeking deals this holiday season. But beyond that? “Up to this point the outlet malls have been very profitable venues, with high sales productivity, reasonable gross margin and low occupancy costs,” said Edelman. “If overall sales continue to trail plan for most retailers post-Thanksgiving, there could be even sharper price cuts than anticipated, potentially narrowing the gap with outlet centers. Department and specialty stores can promote more aggressively to generate traffic. The option for factory outlet stores would be to offer additional in store discounts to increase transaction size.

“While outlet centers could be the volume winners, it might be at the expense of profitability,” Edelman added.

And yet, at least for now, the love affair continues. “Outlets have captured consumer, and developer, attention,” said Jeff Green. “And the love affair is two-fold: perceived value and perceived quality. To maintain both perceptions beyond the next two to three years will be a real challenge for outlet retailers and outlet centers.”