2014 will be a year of outlet centers. In addition to the existing 10 in major regional cities, three new will open soon, all located in Poland’s eastern cities. But is the current rate of development wise?
by Beata Socha
Białystok, a city of 290,000, seems to be the hot spot for retail space investors this year. The Blue Ocean Investment Group (BOIG) is currently nearing the completion of its Outlet Białystok center, a revamp of the Galeria Podlaska shopping mall, offering some 13,000 sqm of retail space.
Meanwhile, Outlet Center Retail Management, part of ADV POR Property Investment, is developing its own 14,500-sqm outlet scheme in the city, due to be completed at the end of 2014.
And this is just the outlet segment. Białystok already has two large-format shopping centers, with strong emphasis on the fashion segment: Galeria Biała and Galeria Alfa. One more shopping mall, Galeria Jurowiecka, is currently under construction in the city center and is scheduled to deliver 25,000 sqm in Q3 2014.
These developers are looking to capitalize on the city’s location, just 50 km away from the Belarusian border.
“Statistical data show that customers from Russia and Belarus spend an increasing amount of money in Poland. If you look at cars parked on mall parking lots, you will see than many of them are from Poland’s eastern neighbors,” said Małgorzata Gęca from CBRE, which is the leasing agent for the scheme.
BOIG is also counting on cross-border trade. “Outlet Białystok will become one of the most interesting shopping destinations for the entire region, including customers from Belarus, Lithuania and Russia, who already make up a large portion of the footfall in Białystok’s shopping centers,” said Tomasz Rydlewski, deputy CEO of BOIG.
Another city in eastern Poland, Lublin, with a population of 350,000, is also seeing a major retail expansion. Atrium’s Felicity mall, due to be completed in Q1 2014, will offer 74,000 sqm, while the Tarasy Zamkowe shopping center, with 37,000 sqm of GLA, will be delivered in October this year. The two new malls will altogether feature nearly 300 stores, many of them housing fashion brands.
The expected slew of new retail space has not discouraged investors. Outlet Center Retail Management is scheduled to deliver 12,500 sqm of retail space in a new scheme, Outlet Center Lublin in Q3 2014.
Poland now has 10 outlet centers, with the Białystok and Lublin projects bringing the tally to 13.
“Currently, the outlet market is quite well-developed in major Polish cities. We have at least one outlet center in each regional city, while the Warsaw agglomeration has three at present,” said Agata Sekuła, head of retail investment CEE at Jones Lang LaSalle.
And . . . Toruń
The three new schemes scheduled for 2014 are by no means the end of the pipeline. BOIG is already working on another outlet, located in Toruń, central Poland. In 2015 the developer is set to deliver 13,500 sqm of GLA in its Outlet Toruń project, right next to a new 10,000-sqm retail park, also under construction.
Until now, Poland has seen on average one or two new outlet centers open their doors per year, with a gap in the 2008-2010 period. Why are so many interested in building outlets this year? Can the market absorb a 30 percent supply bump?
BOIG seems confident they will find tenants interested in leasing their new space. “Rent rates are much lower in an outlet than in shopping malls and their tenants often earn much higher revenues than those in regular malls, despite selling at 30-70 percent discounts,” said Rydlewski.
Interestingly, outlet construction seems to have picked up since 2011, with the construction of the 22,000-sqm Factory Kraków, while 2012 saw the delivery of two outlet centers: the 24,200-sqm Outlet Park Szczecin and the 27,000-sqm Ptak Outlet in central Poland. Last year, despite ongoing lackluster retail figures, a third outlet center was added to the Warsaw market, Neinver’s 19,800-sqm Factory Warszawa Annopol.
“The market for outlets develops even more quickly in a crisis environment, when customers become more price sensitive,” Sekuła explained.
Price sensitive – yes, but not insensitive to fashion. “Poles are becoming increasingly brand aware, which means that there are fewer customers looking to buy unbranded clothes these days. An increasing number of consumers want to buy branded apparel but still cannot afford the most recent collection,” Sekuła said.
What makes outlet centers even more attractive in the eye of the investor is the conversion rate, typically much higher than in shopping malls, which means that a person’s visit converts into much more cash for outlet center stores.
Also, “outlets have much larger catchment areas than shopping centers. People are willing to drive longer distances to get to an outlet center, which is seen more as a destination,” Sekuła explained.
The fact that Belarusian customers already cram in to long-distance coaches and flock to do their shopping in Białystok on a regular basis makes a strong argument in favor of building outlets in the city.
There are skeptics, though. “We believe there is still potential for an outlet somewhere around Warsaw but for more of them to appear we’d need some good outlet operators to enter the Polish market,” said Anna Malarczyk-Arcidiacono, managing director at Futureal. Malarczyk-Arcidiacono thinks it’s still too soon for more outlets, because people are still not wealthy enough to shop for luxury brands, even at bargain prices, and there are too few operators to fill the space.
“When we look at Western European outlets, we see that the majority of brands operating there are the likes of Armani, Gucci, Lacoste, Ermenegildo Zegna,” Malarczyk-Arcidiacono said, adding that these upmarket brands in Poland do not have enough merchandise to supply outlets.
Moreover, leftover items from recent collections are not the way to go. In Germany, Italy or France, outlet stores carry collections dedicated to outlets. “An outlet store is not a poorer quality store where the scraps unsold in a regular store are sent and sold at a bargain. Hilfiger, for instance, makes its own collections dedicated specifically for outlets, and it simply sells them at different prices than at its high-street stores,” Malarczyk-Arcidiacono explained.
Merchandise shortage is not necessarily an insurmountable obstacle and many outlet space operators have already learned to deal with it.
“About 60 percent of the merchandise in Polish outlets comes from Poland, while the remaining 40 percent comes from Italy, Germany, Holland etc.,” said Brendon O’Reilly, managing director of Fashion House Group.
“If you only took the merchandise surplus from regular stores and wanted to sell them at outlet centers, these stores would be completely fragmented, there would be nothing to buy. If you don’t have any jeans, and you need them in your store, you bring them in from abroad,” O’Reilly added.
So yes, maybe the current outlet construction level is akin to hype, but there is definitely some market up for grabs in eastern Poland. The question is who will come out on top and who will have to cut their losses?