Outlet centers are showing tremendous growth, and investors are starting to see the benefits of investing in the niche market. While outlet centers are still in the early-stages of growth, consumers are showing a strong interest in the value-focused product and traditional mall model—and investors can benefit from the healthy upside these assets offer. We sat down with Phil Voorhees and Richard Frolik, both EVPs at CBRE, for an exclusive interview to talk about the growth in the asset class and how it compares to other retail investment classes. GlobeSt.com: How would you characterize the outlet/off-price anchored property sector right now? Frolik: From the tenant side: extremely active from all brands. The brands are figuring out the full spectrum of the omni-channel and there is tremendous growth on the outlet side. New industry-standard racetrack designs and locations closer to urban populations allow for an ease of shopping. A focus on technology has helped to attract shoppers from all generations. Millennials receive the one-on-one interaction they demand through tailored marketing approaches that include social media while baby boomers can conveniently navigate among stores with interactive display directories and well-planned layouts. These features have contributed to increased sales seen across the outlet sector while retail sales in other venues have stagnated. Even though outlets have become a preferred retail choice among consumers, the investment community has been slow to enter the arena. This phenomenon is changing course. An influx of new players is beginning to broaden the sector and spark conversations about its key attributes. I've seen multiple private equity groups and pension funds underwriting outlet offerings. Institutional capital is warming up to the sector. This momentum is creating massive value and will only continue to make the asset class stronger. I've spent over 20 years in the outlet industry and have never seen opportunities as positive as they are today. I believe we are still in the early innings of outlets as an investment class and am excited to see what the future has in store.

Phil Voorhees

GlobeSt.com: Overall, how does this sector compare with other types of retail shopping center / regional mall investments? Voorhees: Outlet centers are very much a retail sub-category. Clearly, enclosed malls and power centers have faced the strongest headwinds since the Great Recession. Department stores, the traditional mall anchors, failed to evolve with a compelling value proposition for consumers, and many of the "box" retail tenants have shrunk to just one to two tenants per category. These scenarios are not easily fixed. At the same time, Americans feeling the financial pinch of the Great Recession spent money on necessities and at value-focused retailers. Outlet centers offer consumers the opportunity to buy name brand products at substantial discounts in price, without a discount in quality, which resonates with consumers. Cap rates on non class-A regional malls are double digits or higher in many US markets, and, in some cases, there is no liquidity for malls with incurable challenges. Cap rates for power centers have expanded 150–300 basis points since the second half of 2015, the most robust half-year ever for retail investment sales. However, outlet centers with strong sales seem to be holding value. Interest rates remain at historically low levels, providing excellent cash-on-cash returns. Most investors see the "value" component of retail soft goods as being more resistant to Internet competition, which bodes well for the category going forward. GlobeSt.com: Are new outlet centers getting built? Frolik: New development projects have pulled back over the past year. First generation outlets saturated the market in the late '90s, with the industry growing to 300 centers. The new century saw a retrenchment in supply with the total outlet count dwindling to 193 centers by 2014. By then, second-generation outlets, which are delivered in a racetrack design that encourages cross shopping and are located close to major metro areas, became the new norm. New development from 2014-2017 added an additional 20+ offerings. Three years ago, 50 new proposed sites were being announced annually. We've seen no new development announcements since RECon 2017. Three to five new outlet centers will be delivered over the next two years and both developers and retailers are much more selective on new supply. Retailers now self-police oversupply and are selective about new sites. This supply constraint is healthy for the market, fueling demand for well-located and efficiently operated centers that provide the proper customer experience for the retail shopper. Now more than ever landlords and retailers are focused on the end consumer and both are discovering how they must work together to drive traffic and sales. GlobeSt.com: What challenges does the sector face, and how is it facing them? Voorhees: Like all of retail, and office, too, to an extent, retail needs to be relevant and compelling. What customers wanted 10, 20 or 30 years ago is not the same as they demand today. Outlet centers are inherently value-oriented, a key component to the modern retail equation. Though, with fewer soft good "national brand" retailers operating stores, the tenant mix for outlet centers - like all retail centers - is shrinking. The solution for traditional open-air retail has been to add food, beverage, light medical, dental, fitness, office and lifestyle uses that benefit from retail traffic to well-located projects. CBRE expects that outlet centers will add quick-casual restaurant, beverage and even service uses, over time, blurring the line between traditional outlet centers and conventional retail. Furthermore, the contained site plans of many outlet centers are conducive to placemaking and creating experiential retail. Frolik: With all the negative retail headlines, retailers are coming up with innovative ways on how they communicate with consumers, and outlet owners recognize they too need to assist in proper marketing to create loyalty. Many e-commerce only brands are now entering the brick and mortar space, confirming a full omni-channel approach is where retail is heading. Bankruptcies are clearing the weak players out of the space. Historically, outlets have had this forced pruning that weeds out unproductive retailers with low sales. New tenants, both outlet and value (e.g., Express, H&M, and TJ Maxx, to name a few), are entering the space to backfill lost players. Ultimately, this only leads to strong, higher-performing assets.