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CRE Finance World, Winter 2014

Chart 2 Number of U.S. Malls Source: CoStar Realty Information Inc. Operating Metrics Stimulate Development Strong operating metrics continue to support new outlet center development, while lackluster mall performance points to very little growth for that segment. According to Value Retail News, U.S. outlet centers are expected to increase to 196 by the end of this year from 185 in 2012. Value Retail News only includes centers with an outlet tenancy of at least 50% by gross leasable area (GLA). The average GLA of an outlet center has increased by 40% to over 383,000 square feet (sf) at the end of 2012 from about 271,000 sf. in 2009 (see table). Some of the earlier centers had GLAs of only about 20,000 sf compared with the largest existing non-anchored U.S. outlet center, Woodbury Commons Premium Outlets in Central Valley, N.Y., with 845,000 sf. Over the last five years, the number of retail stores participating in outlet centers has also grown by about 14% to 14,793. Table 1 Five Year Comparison of U.S. Outlet Centers *2009 average. Source: Value Retail News. CRE Finance World Winter 2014 50 Malls, on the other hand, have seen limited growth over the last five years, with 1,506 centers that opened in 2009 and 1,515 that opened as of Sept. 30, 2013, according to the International Council of Shopping Centers (ICSC). Regional/super regional malls, as defined by the ICSC, have at least 400,000 sf with two or more anchors, an anchor ratio of 50%-70%, and a primary trade area of five miles for regionals mall and extending out to 25 miles for super regional malls. The two largest outlet center portfolio owners are Simon Property Group Inc. (Simon) and Tanger Factory Outlet Centers Inc. (Tanger). As of June 30, 2013, Tanger is the largest publicly traded exclusive operator of factory outlet centers and the second-largest owner of outlets after Simon. In the U.S., Tanger has interests in 40 centers (including four held in joint ventures) totaling 12.5 million sf Simon has 65 premium outlets with 27.3 million sf and 13 Mill-branded mega-centers with 19.0 million sf which totals 78 outlet/value centers with 46.3 million sf as of June 30, 2013. For this report, Tanger — with its 100% outlet center portfolio — was used as a proxy for the industry, as Value Retail News had less of a reporting history. Tanger’s occupancy rate was 98.7% at the end of third-quarter 2013. This compares with a traditional mall occupancy rate of 91.8% for the same period, according to REIS Inc. As outlet centers are typically one-level projects with surface parking, they usually cost less to build than traditional malls. In addition, outlet centers have low occupancy costs compared with enclosed malls, reflecting most centers’ open-air format. Tanger’s occupancy cost rate based on June 2013 results was 8.4% compared with a 12%-13% average for mall REITs, according to Greenstreet Advisors. Outlet center sales productivity has also grown more quickly than the mall sector and with less volatility (see Chart 3). Tanger reported sales per sf of $384 at the end of second-quarter 2013. This was an increase of about 20% from year-end 2005. Mall sales, which ended June 2013 at $460 sf, experienced an increase of 13% during this same period. During the recessionary period between 2007-2009, outlet center sales declined by less than 1% compared with a decrease of 12% for malls. Outlet Centers Take on Malls, and Each Other


CRE Finance World, Winter 2014
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