NEW YORK (Reuters) - Retail outlet centers -- long a hit with consumers, retailers and property owners -- could stumble as consumers see their discretionary dollars sucked up by higher gasoline prices forcing them to rethink the cost of every mile they need to drive to get to the stores.
Largely tucked outside densely populated suburban centers and away from more expensive real estate, retailers loved the outlets as a way to sell their wares, and consumers thought little about driving an hour or so for a good deal.
Over the past four years, outlet malls have been a top performer among commercial retail real estate and have fattened the profits of their owners -- such as Simon Property Group(SPG.N) and Tanger Factory Outlet Centers Inc (SKT.N).
The outlet centers -- spread throughout the country in places like Ellenton, Florida; Huntley, Illinois; and Hagerstown, Maryland -- feature clothing and home goods companies that offer lower prices on last year’s styles and cheaper merchandise made especially for outlet sales. In order not to compete with the department and mall-based stores, outlet centers are often located about an hour away.
Traditionally, outlet centers do better in economic downturns because of their discounts. But some economists warn that with cost of fuel being the source of many of the economy’s problems, that may not happen this time, as the cost of getting there consumes the savings.
“It’s going to be a challenging environment for the outlets,” said Sam Chandan, chief economist of real estate research firm Reis. “It’s not going to follow the same logic in terms of them being more competitively priced. The transportation cost is greater.”
As of April, there were about 217 U.S. outlet centers totaling 57 million square feet of space, where about 305 outlet chains operate 11,546 stores, according to Value Retail News, published by the International Council of Shopping Centers.
Thirty-five more outlet centers totaling 11.8 million square feet are planned to be open by 2010.
With 601 stores, Jones Apparel Group Inc JNY.N operated the most outlet stores. Phillips-Van Heusen Corp (PVH.N) was second at 553 outlet stores.
California was home to 33 outlet centers, the most of any state, followed by Florida, 14; Texas, 13; and Georgia, 10.
Chelsea Premium Outlet Centers, which Simon bought in 2004, has been a great profit producer for its parent. In the first quarter, Chelsea’s average sales per square foot rose 5.4 percent, compared with 0.8 percent at Simon’s regional malls. The outlets’ average rent was up 6 percent to $26.32 per square foot compared with 4.3 percent or $37.73 percent at the malls.
Tanger, the only publicly traded pure-play outlet center owner, saw its net operating income at centers it has owned for at least a year rise 5.7 percent in the first quarter of 2008, up from a 3 percent rise a year earlier.
With food and gasoline prices soaring, outlet centers and their retail tenants may feel a double punch from the economic downturn, as consumers cut back on spending for all but necessary items.
“Because people are feeling their wallets pinched by filling up at the pump, now they feel like they have less money to go out and spend, and ... it’s going to cost them more to get there,” said Suzanne Mulvee, senior real estate economist, at research firm Property & Portfolio Research.
“If you can get your sales, you’re probably going to drive three miles to the mall, instead of driving 55 miles to the outlet center,” said Kris Cooper, Jones Lang LaSalle Inc(JLL.N) managing director, and head of its retail Southeast investment sales team.
But outlet malls are trying to counter the gas gouge. At the end of the month, Tanger will roll out its “Shop with Friends” program, and offer extra discounts to shoppers who car pool to their outlets.
“You’re saving money on gas. You’re helping the environment,” Tanger Spokesman Mike Buescher said. “We’re going to reward you for doing that.”
At the same time, the cost of airline travel also has soared and many Americans are thinking about vacations closer to home. With locations in resort areas such as Myrtle Beach, South Carolina, and Orlando, Florida, a trip to an outlet center may be this year’s vacation for many consumers.
Reporting by Ilaina Jonas; Editing by Patrick Fitzgibbons and Gerald E. McCormick