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New California Project Bucks the Odds and Attracts Retailer Interest (3/18)

Even as most retailers are cutting back on new development, one new project has seemingly piqued the interest of a growing list of retailers. The California project, called Prime Outlets-Livermore, has been in the works for about five years and will cost Baltimore, Md.-based developer Prime Retail about $156 million.

The outlet center will be located about 44 miles from the heart of San Francisco and 33 miles from San Jose and will be anchored by a 24,000 square foot Neiman Marcus Last Call. Nearly 20 other retailers, including Coach Factory, J. Crew Factory Store and Barneys New York, have already signed on. Prime Retail expects that list to include about 120 outlet stores once it's finalized. “This is one the tenant community is very, very excited about,” says Prime Retail president Bob Brvenik. “The buzz word today is value. Everyone today is looking for value.”

Brvenik declined to say whether the tenants received lower rents or more favorable leasing terms to be a part of the project, saying only that “fair market terms” were negotiated. Many developers have started offering incentives to help convince retailers struggling with slow sales to lease. Sales are holding up well for the retailers at his Prime Outlets locations despite the drop in consumer spending, according to Brvenik, making a new location a more enticing prospect. In 2008, same-store sales were flat at Prime Retail's outlet centers compared with declines for the broader retail sector. That trend continued in January. “The traffic is holding up well,” he says.

But not everyone is convinced that outlet centers will continue to outperform other types of retail properties. C. Britt Beemer, founder of consumer behavior research group America’s Research Group, says outlet malls have become far less popular in recent months. In February, just 3.9 percent of consumers went to an outlet mall, according to his firm's research. That’s down from 6.9 percent in February of 2008 and 8.9 percent in February of 2007. “The numbers are the lowest in six years,” he says.

In surveys conducted by America's Research Group, consumers say they stopped shopping at outlets because prices at other retail venues now rival the discounts typically available at outlet centers. By the end of 2008, many retailers chopped prices to appeal to recession-weary consumers and clear out inventory. He adds that outlets are also used most frequently by vacationers who enjoy shopping and want to get high-end brands for less during their time off work. With unemployment soaring and money tight, fewer workers are taking time off. The strengthening dollar has also cut into international travel to the United States.

But Brvenik isn’t worried, saying he looks more closely at long-term demographics in an area. “I’m not doing this project based on 2008, 2009 or 2010,” he says. “A couple of years out, the economy will be humming again and everything will be better.” Brvenik pointed to the demographics of the region, saying eight million people live within a 60-mile radius of the project. With San Francisco less than an hour away, the center could benefit from the city’s popularity as a tourist destination.

In its 2009 annual report, Encino, Calif.-based commercial real estate investment firm Marcus & Millichap Real Estate Investment Services said San Francisco’s retail market will likely outperform much of the country during the year, with demand remaining high. Although smaller retailers may struggle due to reduced foot traffic, the firm said tourism spending and affluent neighborhoods surrounding San Francisco should support the city’s “potential for a swift recovery.”

The Livermore project is slated to open in 2010, although Brvenik says a delay is possible if the environment worsens. It has yet to break ground, although Brvenik says he has received all major approvals to begin construction. He says he hopes to start building by the end of this year.

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