Fundamentals “So Strong” for Outlet Centers

Phil Voorhees, EVP, CBRE National Retail Partners – West

Now is the time to buy outlet centers. The fundamentals are so strong, and consumers are showing fervent interest in the off-priced retail market, and as a result, there is strong upside for investment capital. Last week, we sat down with Phil Voorhees and Richard Frolik, both EVPs at CBRE, to talk about the outlet center market. Now, we sit down with them again to get a deeper look at the investment activity for outlet centers, how capital is responding and where the market is heading.

GlobeSt.com: Why is this a good time to buy outlet/off-price anchored properties? Frolik: Fundamentals are so strong. Consumer demand and occupancy are up. Tenants’ cost to operate and profitability are the best out of any retail format. Outlet centers typically have a very low health ratio compared to other retail offerings. A health ratio, also known as an occupancy cost ratio, is the relationship between a retailer’s sales and total occupancy costs. A retailer’s health ratio for a given location is calculated using the formula of total annual rent (inclusive of reimbursements and marketing costs) divided by its gross annual sales. Higher sales and/or lower occupancy costs drive a low ratio and normally infer higher profitability. Voorhees: Presently, the definition of “core” retail is tighter than it’s ever been. From an institutional perspective, it’s “fortress” malls with exceptional tenant gross sales production in primary or coastal markets, and the top several grocery-anchored centers in the same markets. Cap rates for non-grocery-anchored centers generally expand 75-125 basis points without an owned grocer. For example, if a Whole Foods-anchored center in coastal San Diego County would sell for a 4.50% cap rate, the best non-grocery-anchored open-air center would likely trade between a 5.25-5.75%; a generalization, but nonetheless true. For outlet centers, location is less important than tenant sales production. In fact, using the Southern California market as an example, some of the best performing outlet centers are in locations like Barstow, Cabazon, and San Ysidro at the US/Mexico border.