Value retail sector continues to surprise and impress.
It is a property type that was refined in the 1990's, expanding rapidly nationally and internationally with the creation of new centers, and then it experienced contraction and consolidation that culled more marginal properties from the industry. More recently, the outlet sector has attracted growing attention among investors seeking solid cash flows combined with the potential for growth.
Outlet centers are characterized as retail properties tenanted by a preponderance of manufacturers, and some popular discounters.
These centers are located on major highways and are typically situated an hour's driving distance from one or two growth generators, such as urban areas and/or major tourist attractions. For manufacturers, these centers offer a highly profitable distribution channel, with occupancy costs as low as 5% to 10% of sales, as well as an opportunity to control their merchandizing and product image. For consumers, these centers offer proven year round values as well as, in many cases, a selection of merchandise that rivals that available at more traditional shopping malls.
In fact, in some markets, outlet centers serve as de facto regional mall substitutes. Investors are drawn to the centers' credit tenancy; the continuing sales growth of established "anchors" at these centers, such as Liz Claiborne and Nike; and the potential for expansion through additional development phases. Furthermore, experienced operators can drive revenue growth by supporting the marketing and promotional efforts of growing and successful "inline" tenants, such as Coach and Polo Ralph Lauren, and by enhancing and tailoring their leasing mix for their target market.
Despite its attractions, value retail is a challenging industry that favors experienced owners with specialized leasing and management experience in the sector. A highly fragmented industry in terms of its ownership, the industry is dominated by a handful of owners, including Chelsea Property Group, Prime Retail, Tanger Factory Outlet Stores, and more recently, Prescott Capital Management, which acquired this year a national portfolio that operates under our value retail management and leasing platform and brand, Ariel Preferred Retail Group.
As in the traditional retail sector, it has proven difficult for "one off" owners to exert sufficient clout with tenants to optimize their lease terms and tenant mix. Portfolio owners with critical mass can more readily spread overhead costs across their properties.
Furthermore, manufacturers are a highly specialized tenant universe and leasing relationships tend to be long term. Strong tenants, furthermore, understand the value they bring to owners through their tenancy, the structure of their leases, as well as through their proven draw among shoppers. Owners who can negotiate leasing arrangements across multiple properties, demonstrate leasing synergies through a complementary mix of tenants, and who can offer tenants marketing support are best able to attract strong tenants on favorable lease terms.
The value retail sector is supported by serious and growing interest in the capital marketplace. Increasing numbers of banks and other lenders are willing to finance the cash flows generated by strong outlet centers on terms competitive with those available for more traditional retail products. These lenders are also are supported by the securitization market, which has shown a proven appetite for strongly performing, and often cross collateralized, loans to this sector as well.
Equity investors, including private equity groups, funds, and REITs, have been drawn to the attractive cash-on-cash returns that can be found in value retail properties. They also like the potential for income growth at the best properties through physical expansion and active enhancement of the leasing mix.
New construction has been effectively limited by self-policing among tenants who do not want to compete with themselves. As a result, growth typically occurs phase-by-phase, and new phases start only when close to fully pre-leased with new and accretive tenants. The most successful centers own or have access to prized expansion parcels.
The value retail sector reflects, and benefits from, broad trends among traditional retailers. In recent years, traditional mall owners have worked hard to identify and attract new and exciting tenants to differentiate their centers from others.
Tenants such as Ferragamo, Burberry's, Chanel, and others are now not only offering full price retail stores, but outlet shops as well. Entertainment is an important draw at retail properties, and both mall and outlet owners are increasingly adding new restaurant and entertainment venues.
Furthermore, the value retail sector has spawned inventive new retail concepts such as Cabela's and Bass Pro Shops, sporting goods discounters and lifestyle retailers that draw hordes of regional shoppers. Savvy outlet owners have further seen the merits of branding pioneered by such owners as the Westfield Group and Simon Property Group. Ariel's traditional marketing tactics and dynamic web-presence, designed to inform shoppers, tenants and the financial community, have proven to be valuable branding and promotional tools as well.
Many value retail assets have demonstrated rising sales in recent years, benefiting from the strength of consumer spending experienced by traditional retail centers. As a sector, outlet centers have proven themselves to be steady performers across economic cycles, as consumers become more value conscious in more difficult economic times.
With investment capital increasingly receptive to attractive real estate concepts that offer desirable risk adjusted returns, the value retail sector is well positioned for solid growth and expansion among its most experienced owners and operators.
BY SUSAN L. STUPIN,
PRESCOTT CAPITAL MANAGEMENT LLC
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|Author:||Stupin, Susan L.|
|Publication:||Real Estate Weekly|
|Date:||Nov 29, 2006|
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