There’s big and there’s small, but is there any room left in the middle?
Of the dozens of mid-sized outlet developers that used to build outlet centers in the U.S., only two major players, Tanger Factory Outlet Centers and Prime Retail, remain today as their own independent entities. Tanger is the only real estate investment trust in the segment. Other companies either ate each other up, collapsed under poor management, or both.
Chelsea Property Group, for example, acquired Konover Property Trust for $180 million in 2001, only to then be acquired by Simon Property Group in 2004 in a blockbuster $3.5 billion deal. It is currently the largest operator of outlet malls, with 14 million square feet domestically and an additional 3 million square feet of outlets internationally. In the past few months, Simon, which is the country’s largest mall REIT, has also snatched up The Mills Corp. for some $7.9 billion, taking control of the ailing company and its portfolio of mixed entertainment-retail and outlet centers.
“I wouldn’t eliminate the acquisition of Tanger as a possibility,” said Craig Schmidt, vice president of Merrill Lynch. “There’s a real possibility that General Growth or Macerich could do the same thing that Simon’s done.”
Tanger, which did not return calls for comment, was also a contender for the Mills portfolio. Though the company kept mum due to confidentiality issues, it completed due diligence “and submitted our proposal to acquire a significant portfolio from a public REIT that was exploring its strategic alternatives,” said Frank Marchisello, chief financial officer, on a conference call with Wall Street.
“We always look at every portfolio that comes available, particularly in an area that might be closely aligned with ours where we feel we can add value,” said Stanley Tanger on the call. “We feel that’s our responsibility to our shareholders and also to ourselves.”
But even as Tanger seeks out new acquisition opportunities, it and Prime are likely targets for shopping center and mall REITs hungry for growth and attracted by their strong redevelopment and development pipeline.
“Consolidation is a trend that’s going to continue,” said Josh Podell, vice president of real estate for Jones Apparel Group. “I wouldn’t be surprised at all if the traditional developers expressed interested in the Primes and the Tangers of the world. It creates a sense of being vertical.”
That verticality can of course help an owner grow in a number of ways, not the least of which is capturing tenants for one format while leasing them for another. According to Philip Ende, vice president of leasing at Chelsea, the company is often introduced to brands from Simon. Tourneau, for example, is opening its first outlet in Chelsea’s Desert Hills Premium Outlets in Cabazon, Calif.
It may also encourage retailers who don’t have an outlet center to open one.
“Simon has some of the best malls. Chelsea has some of the best outlets,” said Podell. “If you can get into the top tier of both the full price and outlet centers, why wouldn’t you? If you can go into the Forum Shoppes and Woodbury Common, it’s the best of both worlds.”
Other observers don’t believe that the verticality in ownership could lead to more stores for retailers.
“The outlet industry is extremely retailer driven,” said Linda Humphers, editor in chief of Value Retail News, an International Council of Shopping Centers publication. “If they don’t want to open a store, they won’t open a store.”
Consolidation has other ripple effects, one being the proliferation of individual landlords that own just one or two outlets.
“As Chelsea and Prime and Tanger beef up their tenancy, they spin off centers that don’t fit their high profile,” she said. “Those centers are bought by the little guys – because of consolidation, we’re seeing more owners, not fewer owners.”
The numbers show how disparate outlet ownership is despite the consolidation of the past decade. Chelsea, the largest operator of outlet space, controls only about 25 percent of the 55 million square foot outlet market and Tanger has only about half that. In the mall industry, by contrast, some 80 percent of the malls are owned by just a handful of the major REITs.
As they spin off their properties, major developers are focused on growing their core asset base, which are often focused on luxury vendors and target aspirational shoppers. Chelsea, for example, recently broke ground on its Houston Premium Outlets, which will open in 2008, and expects to open centers in Rio Grande, Philadelphia, Seoul, and Osaka this year. It is expanding its Orlando, Las Vegas, and Gotemba projects. Tanger plans to break ground soon on a project in Long Island N.Y.
Like mall owners, they are also significantly reinvesting in their existing properties. Prime Retail completed a 200,000-square-foot expansion of its marquee property in San Marcos, Texas, and is currently revamping a older outlet center in Orlando. The first, 500,000-square-foot phase of Prime Outlets Orlando is expected to open in August. Chelsesa is also expanding its Orlando project, as well as centers in Las Vegas and Gotemba. Tanger has plans to invest up to $36 million to expand four of its existing centers in Barstow, Calif., Branson, Mo., Gonzalez, La., and Tilton, N.H.
“Shoppers don’t want to shop a number of outlet centers,” said Schmidt. They want to go to one that offers as much as possible. Smaller outlet centers are disadvantaged just because they can’t offer a broad enough variety of retailers.”
Owners are also beginning to incorporate lifestyle elements into their centers. At Prime Outlets Gaffney, in South Carolina, for example, Prime Retail added a family entertainment center that includes a movie theater and bowling lanes. The outlets themselves are changing. Chelsea has vastly increased the number of specialty tenants and kiosks on their properties, and considering how to best improve their food mix.
“It just depends on where the outlet is, and how much local traffic there is,” said Bob Brvenik, president of Prime Retail. “But some outlets operate more like a local mall, and in those situations you clearly want to add more amenities.”
Still, all of this activity may not be enough for some vendors.
“Because there are so few outlet centers being developed, a lot of traditional outlet retailers are going to non-traditional outlet venues to open up stores,” said Podell. “Some alternatives are power centers, downtowns, even some lifestyle centers.
“I think it’s an incredibly important part of any real estate strategy,” he continued. “You can reach new customers, shed merchandise, and grow your bottom line. From a growth standpoint, there are only so many malls you can go to so you need to look to different avenues. Outlet centers are that avenue.”
For a detailed look at related headlines, see the following archived articles:
Feb. 16, 2007 Done Deals & In Development: M&As, Projects Drive Real Estate
Feb. 15, 2007 Done Deals & In Development: REITs Post Higher Sales in Quarter
Feb. 14, 2007 Done Deals & In Development: General Growth’s Second-Quarter Earnings Drop