State of the U.S. Outlet Industry
by Larry Weinstein | August 13th, 2024
U.S. Outlet Centers - State of the Industry
On the eve of a new Simon Premium outlet center opening this week in Tulsa (which I was a part of for much of it’s leasing and development including many trips to the market), I thought a state of the outlet industry would be very topical. And with this center opening on the heels of Tanger’s new Nashville outlet center which opened this past year, it is as good a time as ever to highlight this very productive retail platform. How many other commercial real estate sectors have opened 2 new centers within the last year?
For those that don’t know my resume’, I most recently spent over 20 years at Simon Premium Outlets, starting as a leasing executive and ultimately as President of the largest outlet portfolio in the world. Along with many talented colleagues, I helped orchestrate the leasing activity of a highly productive and active portfolio of over 30 million square feet for several years. And over the last 30 years (with Prime Retail prior to Chelsea/Simon Premium) I have also been involved in the ground-up development of over 50 new outlet centers and expansions, and 10’s of millions of square feet of lease transactions. I have also personally walked the vast majority of outlet centers in North America.
With that in mind, now that I am no longer on the in-house Landlord side, I thought it would be beneficial to many for me to provide an unbiased, data driven snapshot of the outlet center landscape in the U.S., as well as some thoughts in a series of posts. To read the entire article you can click link below.
Today there are approximately 186 operating outlet centers in the U.S. consisting of approximately 89 million square feet of GLA. This includes some centers that are currently in the midst of evolving into hybrid retail centers which may include any combination of outlets and other mixed uses. It also includes some distressed centers that will ultimately evolve into other higher and better uses. So going forward these numbers are subject to change, but this is where things stand now.
Simon owns almost 50% of the outlet centers in the U.S., but more than 63% of the total outlet GLA (broken down as follows) -
89 Total centers containing approximately 56.3 million sf
68 Premium Outlets in U.S. (including the new Tulsa Premium opening 8/15/24)
14 Mills
5 Outlet Marketplaces
2 Taubman Outlet centers
Tanger owns 34 Tanger Outlets in the U.S. containing approximately 13.3 million sf.
So between Simon and Tanger they own almost 70 million of the approximately 89 million square feet of outlet centers in the U.S., which is almost 80% of the U.S. outlet center landscape.
Craig Realty owns 11 outlet centers consisting of approximately 3 million sf. Horizon owns 5 outlet centers consisting of approximately 2 million sf. And Macerich owns 2 outlet centers consisting of approximately 1.2 million sf.
The balance of the U.S. outlet GLA is comprised of an assortment of owners totaling approximately 13 million sf (less than 15% of the total U.S. outlet GLA).
Outlet Center Sales Performance
Simon owns 13 of the top 15 performing outlet centers (sales per square foot) in the U.S. This does NOT mean that the top 15 outlet centers are necessarily the best or only 15 alternatives for every brand. The outlet business serves multiple purposes for brands and retailers. Site selection for tenants should not simply be limited to "what are the highest sales performance centers" (although that is a huge factor). Other important variables include market demographics consistent with the brand, existing market penetration of brand, inventory levels, distribution logistics and wholesale sensitivity among others.
Further, the biggest common denominator of these top centers is tourism, including a significant international component. Beyond most of these top centers being in major population or tourist markets, the international tourist cycles are what puts these centers incrementally over the top. Not all brands/retailers in the U.S. resonate internationally. And the cost to "play" in these centers includes such a premium (directly correlated to the center sales performance) that does not make economic sense for all retailers.
That said the two major players (and public companies) that report sales are Simon and Tanger. Simon does not break out the sales between their Mall and Premium platforms, however according to their Q2 2024 reporting their sales per square foot average for the combined Mall/Premium Outlet portfolio is $741/ft. The Premium Outlets portfolio is likely below but relatively close to that average. Tanger’s recent Q2 2024 reporting has their portfolio sales average at $439/ft.
And for further context, of the 186 operating outlet centers in the U.S. approximately 6 currently exceed sales of $1,000/sf, approximately 20 exceed $700/sf and approximately 75 exceed $500/sf.
Stay tuned for the next post with more industry metrics, trends and further context!
Outlet Center Occupancy Rates and Occupancy Cost Ratios
Both Simon Premium and Tanger portfolios (combined they are 80% of the U.S. outlet center GLA) report very healthy occupancies north of 95%. These are at or even above pre-Covid rates.
Each of these Landlords have a component of “temp tenants” within those numbers with each of them defining what a “temp” is, in their own way. Tanger recently reported that their temps comprise approximately 10% of their 95%+ occupancy. The Simon Premium temp component is known to be closer to the mid-single digits. As many of the Covid-era “space fillers” get absorbed by permanent retailers, this component of occupancy will continue to reduce, obviously dependent on positive economic conditions. And as that occurs, you will see incremental positive rent spreads for these owners by replacing (where they can) temp local or even national pop-up tenants with long term national brand leases.
And for a key profitability metric for retailers, Tanger reports an average total rent/sales ratio of it’s tenants at 9.4%. Simon Premium does not regularly report on occupancy cost ratios for it’s outlet properties, but it is known to be traditionally above 10% and even into the low teens in certain centers. And of note with the higher sales per square foot performance of many of it’s centers, there are economies for retailers to be profitable (to an extent) at a slightly higher occupancy cost ratio.
Outlet Center Trends
Landlords have been much more flexible in recent years especially post-Covid to include non-traditional outlet uses in their centers. This has allowed them to keep their occupancy and revenue up when pure outlet demand isn’t always up to the supply. This is especially prevalent outside the top 15 or so centers.
In the last few years traditional strip center players and off-price retailers such as Marshalls, TJ Maxx, Burlington, Five Below, Ulta and others have expanded into the outlet channel. The stores they have opened are generally the same concepts that they operate in other retail venues. The allure of high traffic in outlet centers (which previously were not made available to these tenants by those LL's) was until recently an untapped channel of growth for them (many are public companies). Outlet LL's have accommodated them where it makes economic sense for both parties (not in the best performing centers).
Additionally retailers such as Victoria’s Secret, H&M, Bath & Body and more recently Sephora have opened many full line stores in outlet centers over the last several years. Outlet shoppers have generally accepted these uses even though they are not discount concepts because of the strength of the brands and the ability to combine outlet and convenience shopping on the same day. LL's will hang their hat on “diversifying the tenant mix”, or giving the shopper what it wants, but there still remains a fine line regarding what is the acceptable discounting within each store and for an overall outlet center. What should not be lost in the discussion is this has certainly boosted occupancy rates in the industry. In essence the demand of these non-traditional outlet retailers has picked up the occupancy slack from the pure outlet play. So logically the higher performance the center is, the lower percentage of non-outlet uses there will be.
Further, outlet LL's have also realized that food courts are generally not the highest and best F&B offerings for their shoppers and have pivoted away from these to sit down restaurants, QSR’s and even food trucks. Economically these deals are typically not advantageous to LL's, however their view has changed regarding these uses to being a shopper amenity rather than necessarily the best economic deal on a space. What has helped this cause is that these centers have either been built in recent years closer than ever to populations, or the population growth in many markets has extended to older centers that were once considered remote and not sustainable other than weekend traffic for food operators.
Outlet LL's have also recognized that their centers have become a central part of the hyper-local communities that they serve, and have added uses such as spa, medical, recreation and other complimentary service uses.
Again, don’t lose sight that in many cases (of equal importance to LL) is that these are occupancy/revenue plays as well!
The Luxury Component
The outlet industry for years has been a brand positive and very profitable channel for Luxury retailers (despite these companies keeping that presence well under the radar). For example Kering brands such as Gucci, Saint Laurent, Bottega Veneta, Balenciaga, Alexander McQueen, all have outlet center presences. LVMH brands including Celine, Christian Dior, Fendi, Givenchy, Loewe, Loro Piana, and Tag Heuer do as well. Prada, Burberry, Balmain, Brunello Cucinelli, Golden Goose and Tom Ford just to name some others.
Most of these brands are relatively exclusive within this channel, with their presence limited to major market, top performing outlet centers with a critical mass of other luxury. Objectively, there are approximately 10 of these centers in the U.S. that can be considered to contain a luxury component (I can provide details offline if you’d like to discuss!). And most of those centers over time have continued to build upon that foundation.
Many of these brands have shown to be cyclical in their requirements, and at least for some short term fixes you can find some stretching their footprints deeper into the outlet landscape. In some cycles brands choose to have fewer outlet locations in order to focus on their full price retail and on pushing the brand more up-market and exclusive. Other times a brand may be chasing top line sales and profits, and they know the outlets provide this (in the right centers) in a high-velocity way. And other times there may be excess inventory issues, and clearing them in outlet centers where they control their own brand-positive environments is the most ideal channel to do this.
This was especially true during Covid where many of these brands opened pop-ups or even multiple new permanent stores. And there were some outlet centers that thrived during Covid due to the additional presence of luxury brands given their need to clear worldwide inventory, including some centers that otherwise would not have gotten such tenant mix “love” under normal circumstances. The resulting benefit of luxury brands to these centers were incremental traffic and sales, the opportunity in many cases to extend these leases further out, and the opportunity to “lease around” such sexy brands.
Outlet Center vs. Full Line Retailer Sales
Did you know that most retailers that operate stores in both outlets and full price centers are significantly more productive (top line sales per square foot) in their outlet stores than they are in their full price stores? Margins will obviously vary between retailers, and the “purpose” of their outlet businesses will also dictate profitability.
However the actual top line sales in retailers outlet stores are typically on average higher, in some cases by multiples. This is especially true among the accessory brands such as Coach, Michael Kors, Kate Spade and Tory Burch among others.