Retailers, beware hopping on outlet bandwagon: Pro

If all of your friends jumped off a bridge, would you?

It's that sort of bandwagon mentality that has Andy Graiser, co-president of A&G Realty Partners, skeptical about retailers' rush toward outlet centers.

"I'm a little concerned that a lot of these full-priced retailers are jumping into these outlets … too fast and taking too many locations," he said.

With consumers hungry for deals, brands from high to low are rapidly adopting these discount stores to whet shoppers' appetites with deals, without slashing prices at their full-line stores and destroying their margins. But Graiser warned the "herd mentality" that sent many of these retailers into outlet centers may end up backfiring.

The Outlet Shoppes of The Bluegrass in Simpsonville, Kentucky, July 30, 2014.
Luke Sharrett | Bloomberg | Getty Images
The Outlet Shoppes of The Bluegrass in Simpsonville, Kentucky, July 30, 2014.

The commercial real estate expert said A&G has started to receive calls from retailers who are either looking to downsize their outlet stores or are being forced to exit the centers—the result of demand becoming so high that they can no longer afford the rent at what were traditionally lower-cost locations.

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In some cases, landlords are trying to raise rents 10 percent a year on renewals and new tenants, and over the past three years, rents have increased between 20 percent and 30 percent at the top outlet centers, Graiser said.

"Those numbers don't work anymore," he said.

Although new shopping center supply grew at its slowest pace in more than 40 years in 2013, according to ICSC, demand for outlet centers has led to increased square footage in the category over the past few years. At Nordstrom, for example, the company's off-price stores now outnumber its traditional locations in the U.S. 162 to 118.

The strategy appears to be paying off for the luxury department store. Last year, its full-line stores posted a same-store sales decline of 2.1 percent; its off-price Rack stores, on the other hand, saw the same metric gain 2.7 percent.

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But it's not just Nordstrom that's poised to continue seeing benefits from the channel. A recent Moody's study predicted even as the economy shows signs of improvement, the channel can sustain above-average growth rates in the 6 percent to 8 percent range over the next five years.

"Whether it is a lower-income household trying to stretch their dollars or a middle- or upper-income consumer finding value as 'chic,' we think consumers that shift to this category become increasingly loyal," the report said.

The future of shopping
The future of shopping   

As it pertains to outlet stores, Graiser said the off-price sector's success isn't simply the result of bargains. He said Simon Property Group and Tanger Outlets, in particular, have done "a great job" with the properties, by building them as outdoor centers equipped with restaurants and other entertainment.

"They're creating an experience," he said.

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Although outlets do offer a value to many retailers, Graiser warned these stores aren't one size fits all. He pointed to Wet Seal's new CEO Ed Thomas, who said in September that the company's outlet stores are "underperforming," and that he "would not expect [them] to be a major expansion strategy going forward."

Graiser anticipates that in the next year or two, A&G will start receiving more calls from brands that are looking to exit the centers, which could potentially lead to the creation of mini-strip centers located just outside of the higher-cost outlet centers.

It's worth noting, however, that these issues are not exclusive to outlet centers. Because of the slowdown in construction, increased demand—and occupancy rates—are also squeezing retailers at the country's top full-line malls.

As a result, Michael Burden, a principal with Excess Space Retail Services, said ever since the recession, retailers are no longer just giving the "rubber stamp" to stores as their leases expire.

"They're really taking a look at the markets," he said.

CORRECTION: This story has been corrected to reflect that Graiser said Simon Property Group and Tanger Outlets have done a good job with their outlet centers.