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Outlet Centers Bursting at the Seams

The Home Company - Fine Furniture Direct is one of several new stores that have surfaced in the outlet sector. The upscale furniture and accessories retailer opened its first 65,000 sq. ft. outlet store in May at the Prime Outlet Center in San Marcos, Texas. The store is the first of 10 Home Company outlets slated to open over the next five years.

The Home Company is one of a growing number of retailers flocking to outlet centers. "We've added over 100 new tenants to our properties in the past three years," says Steven Tanger, president and COO of Greensboro, N.C.-based Tanger Factory Outlet Centers Inc.

Those tenants include some hot new juniors lines as well as upscale concepts such as Kenneth Cole and Ralph Lauren. "It's a very profitable business for our (tenants). They are increasing their presence and using outlets as a means of distribution for other brand names," Tanger says.

New tenants among New York-based New Plan Excel Realty Trust's six outlet centers include names such as Hoover and California Sunshine. "We've seen a number of new players enter the market," says Scott Doksansky, New Plan's assistant vice president of factory outlet centers. "A lot of tenants really se e the outlet sector as a way to expand their brand and the number of stores that they have," agrees Susan Crusoe, senior vice president of marketing for Chicago-based Horizon Group Properties Inc. Horizon Group recently added a Devold store to its Medford Outlet Center in Medford, Minn. Devold is a Norwegian-based manufacturer of wool products.

Medford marks Devold's first step into the value retail arena. "One of the reasons the company chose the outlet sector is that shoppers are looking for bargains, and shoppers in the cold northern states recognize the Devold brand," Crusoe says. "They found this as a good way to stretch the brand and offer products at a value price."

Rising retailer demand Tenant interest in the outlet industry is on the rise across the board from low-end to upscale concepts. "We're obviously seeing some of the retailers - AnnTaylor, Brooks Brothers, Zale Jewelers - focused on the outlet industry. They see it as another distribution channel for growth," says John Lane, president of John Lane Consulting Services Inc., Knoxville, Tenn.

"The tenant community has practically demanded some of the upscale, designer brands before it will make commitments and move forward to do new shopping centers," Lane says.

By the numbers Favorable outlet industry sales figures and low operating costs are attractive incentives for those upscale retailers. Outlet sales have remained strong across the country. First quarter 1999 numbers show that total sales at outlet centers for the past year have reached $249 per sq. ft., which is up 1.3% over the previous 12 months, according to the ICSC's database.

Many outlet centers are enjoying sales increases well above the industry average. The Horizon Outlet Center in Tulare, Calif., for example, reported first quarter 1999 same-store sale increases of 7% over the first quarter of 1998.

Retailers also are enticed by relatively low real estate costs. "The factory outlet channel of distribution is the most profitable retail distribution channel," Tanger says. The cost of leasing space in outlet centers is about half the cost of leasing space in a major regional center, he notes.

Entertaining mix The maturing outlet center industry is further diversifying its mix with entertainment concepts. "I have seen the industry evolve from the rack stores and the factory stores to sophisticated retailing over the past 30 years," Lane says. "It's no longer just a strip mall with a group of manufacturing outlets; now there are very sophisticated mall elements." Outlet centers are adding movie theaters, restaurants and additional services to capture shopper interest.

Tanger Factory Outlet Centers began to introduce stadium-seating movie theaters to its outlet center properties about four years ago. "We feel that is a compatible use and provides entertainment for the non-shopping family members," Tanger says.

In addition, Tanger is marketing about 200 acres of outparcels that have been zoned for hotel and restaurant users. "As the population of major metro areas expands toward our sites, these types of entertainment and food uses are appropriate," he says.

The Mills Corp. is one shopping center owner and developer in particular that has crafted its own formula that combines value retail, mainstream stores and entertainment concepts. "What we do is create a total retail and entertainment environment where retail comes first and where entertainment comes a close second," says Mark Rivers, executive vice president of the Arlington, Va.-based company. "Variety is a big part of our success. We offer a little bit of something for everyone."

Mills mixes major retailers like Bed Bath & Beyond with outlet concepts such as the JCPenney Outlet Store and entertainment venues that include Hard Rock Cafe.

So far, the formula is proving successful. The company's Sawgrass Mills megamall in Florida features more than 270 retail stores and manufacturer outlets. A 300,000 sq. ft. entertainment phase opened in June. The Oasis is an open-air addition to the enclosed center.

Sawgrass Mills is Florida's second largest tourist attraction, ranking behind only Disney World. "You're seeing more of a homogenization of retailers with luxury and value products under the same roof," Rivers says.

New hybrid emerges Jersey Gardens Value Megamall is another new project that is redefining the outlet sector. Columbus-based Glimcher Realty Trust is developing the 1.2 million sq. ft. enclosed mall in Elizabeth, N.J.

"What's unique about Jersey Gardens is that the mix of merchants here is unlike any outlet project that has been built in the country," says Michael Glimcher, an executive vice president with Glimcher Realty. Outlet stores that include Nautica, Saks and Neiman Marcus join category killers such as a 25,000 sq. ft. Footlocker and mainstream tenants like the Sunglass Hut.

"The concept isn't just outlets, but a mix of outlets and other retailers that offer value," Glimcher says.

In addition, 15% to 20% of Jersey Gardens comprises entertainment and restaurant tenants. The center will be home to a 5,000-seat theater that showcases VIP seating, valet parking and a restaurant. Other entertainment concepts include a Jeepers entertainment center and themed restaurants such as Rainforest Cafe.

Glimcher has set Oct. 21 for its grand opening, and Jersey Gardens is expected to draw 21 million shoppers a year.

Showpiece in San Diego County Viejas Outlet Center, located in Alpine, Calif., opened in May 1998 and has been widely recognized in outlet circles for its overall architectural splendor and use of environmental graphics. The 180,000 sq. ft. center features more than 25 outlet stores, including American Outpost, Big Dog Sportswear, Kitchen Collection, Black & Decker, Carter's Childrens Wear and The Cosmetic Center outlet.

Located across the street from the Viejas Casino, the outlet center was built to resemble an Indian village. "Showy waterfalls, fountains and garden art enliven the flagstone walkways that lead to the adobe-style shops," according to Sidewalk San Diego, a website entertainment guide. Native American storytellers perform on a covered stage in the center of the mall.

Expansion opportunities The influx of new retailers has not ignited a construction frenzy for new centers. Instead, developers are primarily focusing on expanding existing outlet properties.

"What we're finding is that a lot of the developers, REITs as well as independents, are trying to capitalize on top-performing properties, and where there's room to expand, they're definitely doing that," Lane says. Owners are trying to create a critical mass to maintain their business, he notes.

Charter Oak Partners is one company that is hoping to stretch its healthy sales figures to new retail space, even if it means finding creative ways to carve out additional square footage.

The developer is so strapped for space at some of its outlet centers that it is razing existing structures to make room for new stores. "Our traffic overall is up and sales are up, and that's driving these creative expansions," says Shelley Lord, senior vice president of marketing for Charter Oak Partners in Vienna, Va.

Charter Oak is in the process of expanding three properties - Factory Stores @ Lincoln City in Oregon; Factory Stores @ Park City in Utah; and Myrtle Beach Factory Stores in South Carolina. The three centers each ring up sales that top $300 per sq. ft., and those sales figures have been a strong incentive to explore innovative growth opportunities.

For example, Charter Oak is expanding its 226,000 sq. ft. Factory Stores @ Park City. Although the center is only 8 years old, tenants have been clamoring to get in to the fully occupied center. Part of the demand stems from the fact that Park City will host the Olympic Winter Games in 2002. Charter Oak plans to raze an existing store to make room for an additional 96,000 sq. ft.

Charter Oak also is planning demolition work at its Myrtle Beach Factory Stores to make way for a 96,000 sq. ft. fifth phase. Initially, the developer thought it was finished with construction after completing the third phase. "But there was so much demand that we took on additional land," Lord says.

"That is one of the top growing tourist destinations in the country right now," Lord says. Some 13 million people visit the center each year, and sales exceed $350 per sq. ft. A grand opening for the expansion is planned for mid-August, and Charter Oak has already started planning for a sixth phase.

Controlled development Some of the best news for the outlet center industry is that new development is proceeding at a conservative pace. When Tanger Factory Outlet Centers went public six years ago, one of the concerns on Wall Street was that significant capital flowing into the publicly traded outlet center REITs would lead to overbuilding. "That has not happened," Tanger says. "We only develop to meet the demand of our customers. And by not overdeveloping, we have been able - as an industry - to maintain greater than 95% occupancy."

The outlet center industry is home to 295 centers. Last year only five new centers opened, and six more are scheduled to open in 1999. To put that in perspective, the total outlet center industry comprises about 50 million sq. ft., while the retail market in Chicago alone spans 200 million sq. ft.

"This is a national industry that is one-quarter the size of retail space in just one metro area. So there is no overbuilding," Tanger says.

Those developers moving forward with new projects are putting considerable thought and planning into what they are building. "The outlet industry universally is in a mature phase. It's not the days when you could throw up an outlet center anywhere," says Janet Grady, president of Durham, N.C.-based The Prism Co. Inc., which is marketing and assisting in the leasing at Casino Factory Shoppes in Tunica, Miss.

Construction started in June on the 300,000 sq. ft. first phase. Casino Factory Shoppes is expected to open Thanksgiving weekend with tenants that include Dress Barn, Famous Footwear and Bugle Boy. "It's a state-of-the-art outlet center," Grady says. The project was designed with architectural concepts, colors, amenities and a tenant mix to give it an upscale feel.

Because the outlet center expects to draw a large number of tourists, amenities include services such as one-hour photo developing, food court, two restaurant concepts, and a visitor's lounge where guests can make reservations for transportation. "Our whole concept will be in keeping with that resort theme," Grady says.

Although the outlet center is by no means embracing marble courtyards and fountains, it is conscious of making improvements to aesthetics and services. "We are doing as much as we can with color and texture and services provided to consumers to give them a really enjoyable shopping experience," Grady resolves, "and to keep them there longer."

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