Room to Grow (1/29)
Jan 29, 2009 8:53 AM, By Elaine Misonzhnik
In an industry that has been flooded with an avalanche of bad news in the past 12 months, including sales declines, store closings and stalled or scrapped projects, the outlet center sector has proven to be one of the few bright spots.
For most of the U.S. retail universe, the Black Friday weekend of 2008 turned out to be a disappointment. During the three days starting Nov. 28, foot traffic at all U.S. retail establishments fell 19.3 percent compared to the same period in 2007, according to ShopperTrak, a Chicago-based provider of shopper traffic counting information. During that same weekend, however, traffic at the 21 outlet centers owned by Baltimore-based Prime Retail was up 8.3 percent, according to president Robert A. Brvenik. That story was repeated throughout the outlet center industry, which saw an influx of new shoppers in November and December, according to Lisa Quier Wagner, president of Quier Target Marketing, Inc., a Washington, D.C.-based consulting firm that specializes in outlet center marketing, and partner in EWB Development LLC, a Vermont-based developer of outlet centers.
“We are a truly counter-cyclical industry and I think it’s been borne out more than ever,” during this holiday season, Quier Wagner says. “We are hearing there are many people coming into outlet centers and saying this is the first time they’ve outlet-shopped. Traffic has been very strong every day since Black Friday.”
The trend of outlet centers outperforming regional malls and lifestyle properties began in the first half of 2008, when a barrage of negative news on the U.S. economy coincided with a precipitous decline in the value of the dollar. U.S. consumers, hit with a triple whammy of rising layoffs, drops in home values and vanishing retirement accounts, cut back on discretionary spending and altered where they spent those dollars. Discount stores and outlet centers gained a boost as a result. At the same time, foreign tourists, many of them Europeans, booked quick trips to buy discounted designer items in the U.S., to take full advantage of the favorable currency exchange rates. The Euro to dollar exchange rate, for example, reached $1.59 in July 2008 (althought it has since retreated to below $1.30).
As a result, outlet center operators have been posting same-store net operating income (NOI) increases while regional mall operators’ have seen declining NOI. For the third quarter of 2008, Tanger Factory Outlet Centers, a Greensboro, N.C.-based outlet center REIT, registered a 4.7 percent in NOI compared to the same period in 2007. Chelsea Property Group, the outlet center division of Indianapolis-based Simon Property Group, reported an NOI increase of 7.7 percent for its centers, while the NOI for Simon’s regional mall portfolio grew only 1.9 percent.
On Oct. 23, 2008, the Standard & Poor’s rating agency upgraded the corporate credit rating for Tanger to a BBB from a BBB-, marking its first upgrade that year for the credit rating of any retail REIT. Part of the reason for the change was Tanger’s conservative balance sheet—at the end of September, the company had a debt to total market capitalization ratio of only 31.2 percent and it had managed to secure a $235 million three-year loan facility which effectively extended all of its debt maturities to 2011.
But the fact that Tanger, which owns 9.1 million square feet of space, concentrates on outlet centers also played a role. “We expect Tanger’s operating performance to remain relatively stable, as the company benefits from offering a value-oriented product to consumers and a relatively low-cost venue for retailers,” wrote Standard & Poor’s analyst Linda I. Phelps in her Oct. 23 note. (Tanger officials did not return calls seeking comment.) The company’s sales rose 0.3 percent in the third quarter (the most recent period for when figures are available), to $341 per square foot, and even as retailer after retailer has announced store closings, Tanger’s occupancy level rose 50 basis points from the second to the third quarters of last year, to 96.7 percent. Meanwhile, Chelsea’s sales rose 4.2 percent year-over-year during the third quarter to $520 per square foot. And although occupancy at Chelsea centers fell 80 basis points, its properties remain almost completely full with a 98.8 percent occupancy rate.
“We always say outlets are good in good times, but great in bad times,” says Quier Wagner. “A lot of people are trading down from the high-level department stores or specialty stores because they still want that brand, but they want to achieve better value. And of course we are working for it—every developer that understands the value of marketing is out there aggressively advertising. This is the time for us to remind people we are out there.”
As a result of the steady consumer traffic over the holiday season, the real estate industry has begun to view outlet properties as the silver lining of the massive cloud hanging over the sector. But how long will this outlook last? Going forward, outlet centers won’t be immune from what could be the worst recession since World War II, says Jeff Green, president of Jeff Green Partners, a Mill Valley, Calif.-based consulting firm. There might be a slight decrease in occupancy levels across the sector, as well as flat growth on rental rates. Brvenik, for example, expects that for the fourth quarter of 2008, same-store sales for outlet properties will be flat compared with last year’s, due to heavy discounting by many retailers. That may be worse than the sector is used to, but it would still be better than the retail universe as a whole where same-store sales dropped overall during the holiday shopping season.
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