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CRE Finance World, Winter 2014

It is our belief that the St. Louis market will likely not be able to support all of this retail. According to the U.S. Census, St. Louis City exhibited a population decline of 0.4% from April 1, 2010, to July 1, 2012, while St. Louis County’s population increased by 0.1% during the same period. The 2010 census also reported that the population of St. Louis has dropped by 8.3% since 2000 and is at its lowest point in 141 years. With limited population growth and a market that appears to be over-retailed, there could be additional victims. That’s not to say that multiple outlet centers cannot compete in the same market. In some markets, they have a history of coexisting. There are multiple centers that are doing fairly well in Las Vegas, Orlando, and Lancaster, Pa., but those are major tourist destinations and have a captive audience. Outlet Centers Invade Mall Territory In addition to the St. Louis Outlet Mall ARA, a more prominent CMBS casualty occurred in Credit Suisse First Boston Mortgage Securities Corp. 2005-C2. The Tri-County mall, which is located in Cincinnati, Ohio, was the first CMBS loan that realized a principal loss and affected an originally rated ‘AAA’ AJ tranche. In 2009, Cincinnati Premium Outlets opened 14 miles from the mall, which has been under financial distress. The Tri-County mall was transferred to special servicing in August 2009 and was most likely a casualty of the premium outlet center development. Because of the profitability of the outlet channel, mall store retail vendors are opening stores in outlet centers. In the past, retail chains typically wanted to make sure that their outlet distribution channels didn’t compete directly with their wholesale operations. Many goods now are being produced specifically for outlet centers and are not leftover items or goods damaged or returned at fullprice stores at the malls. But as retailers shifted their product mix, they removed one of the major barriers to outlet development: radius restrictions, where vendor conflicts prevented outlet stores from locating too close to an existing regional mall. As a result, outlet centers have invaded trade areas once dominated by malls. CRE Finance World Winter 2014 52 Major department store retailers — such as Nordstrom, Bloomingdale’s, and Saks — have expanded their outlet store operations as they look to draw a new customer base and expand their multichannel efforts. These retailers seem to have overcome the issue of having their brands sold in locations in the immediate vicinity of where they have full-priced stores. The argument has been made that full-price stores and outlets draw different customers. However, there is also the view that outlet center stores could siphon sales from the full-service department store. One example of these opposing views is the Gallery At Westbury Plaza (900 Old Country Road) property, a value-oriented center in Long Island, N.Y. The property, which is in lease-up, is within walking distance of the Roosevelt Field Mall (630 Old Country Road) and has a strong department store outlet presence, including Bloomingdale’s The Outlet Store, Nordstrom Rack, and Saks Fifth Avenue OFF 5th. The Roosevelt Mall property has a Bloomingdale’s and a Nordstrom’s. In addition, both centers have outlet and fullservice versions of several stores, including Banana Republic, The Gap, and Lane Bryant. Nordstrom Rack and Saks Fifth Avenue OFF 5th relocated from the nearby Source Mall (1504 Old Country Road) to the Gallery. The Source Mall, which is in the Commercial Mortgage Asset Trust 1999-C1 transaction, is REO with a balance of $124.0 million. In October 2013, an $87.4 million ARA was taken. The Source ran into problems when it lost several major tenants, including Fortunoff’s, Circuit City, and Steve and Barry’s. In this market, as opposed to the St. Louis and Cincinnati examples, it is our view that both the Roosevelt Field Mall and The Gallery can coexist, as Old Country Road is a highly dense residential area and an established retail destination. Tenant and shopper demand, however, will ultimately determine whether multiple retail centers can peacefully coexist within the same trade area. Outlet Centers Take on Malls, and Each Other


CRE Finance World, Winter 2014
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