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CRE Finance World, Winter 2014

A publication of Winter issue 2014 sponsored by CRE Finance World Winter 2014 51 Chart 3 U.S. Mall and Outlet Center Sales Productivity Sources: ICSC and Tanger Factory Outlet Centers Inc. To further review operating performance, we also did an analysis of property-level servicer-reported NOI to see how outlet center and mall collateral performed in the recent cycle. Based on this review, and using a representative sample of 2006 vintage year outlet and mall center loans, from securitization through 2012, outlet center NOI increased by 41% compared to mall NOI growth of 9%. During this period, the only year when there was negative NOI growth was 2010, when mall collateral NOI declined by 3% (see Chart 4) . Chart 4 U.S. Mall and Outlet Center NOI (% change) Source: Standard & Poor’s Outlet Centers Compete with Each Other Outlet centers began as shops attached to manufacturing plants, designed to provide a place where manufacturers could sell their overruns and excess stock directly to the consumer. To take advantage of traffic patterns, manufacturers opened stores that were not directly attached to their factories. Outlet centers started to be developed in rural locations, sometimes as far as 60 miles away from any major metropolitan center. Rural locations enabled manufacturers to take advantage of lower land costs and avoid direct competition with retailers that carried the manufacturer’s products. Manufacturers later adjusted their strategies by being more aggressive in doing business closer to their big retail customers, especially in locations near major metropolitan areas. As a result of this shift, outlet center developers built sites closer to the major cities and areas of permanent population. The development of outlet centers in infill locations impaired the existing outlet centers that had their traffic cut-off by a new and usually larger center. Today, developers are competitively placing outlet centers within a short distance from each other. Standard & Poor’s has heard about quite a few battles brewing, including scheduled projects in Chicago, IL; Louisville, KY.; and Baltimore, MD. Simon’s St. Louis Premium Outlets and Taubman’s Prestige Outlets have been generating headline news because they are both located in Chesterfield, Mo., they both opened in August, and they are within less than one mile of each other. The two properties have a total of about 800,000 sf. Outside of these two new outlet entrants in the St. Louis area, there is also more than 6 million sf of primary/secondary retail/ mall GLA that are within an easy drive of each other. Included within these properties is St. Louis Mills. This REO property (now called the St. Louis Outlet Mall), which is in the Morgan Stanley Capital 2007-IQ13 transaction, has a current balance of $79.0 million. An appraisal reduction amount (ARA) of $45.5 million was taken on Oct. 8, 2013. The two new outlet centers mentioned above will likely bring additional competition to the already-hurting St. Louis Outlet Mall. There are two schools of thought for these newly competing outlet centers. Skeptics believe that the trade area might not be able to support both outlet centers, while others are of the opinion that Chesterfield could become a retail mecca and attract shoppers beyond its typical trade area. Outlet Centers Take on Malls, and Each Other


CRE Finance World, Winter 2014
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