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Outlet Center Leasing Appears Strong Enough to Withstand Nine West Closures

Apparel Chain Bankruptcy Hits Simon Property Group, Tanger Outlets Hardest
April 13, 2018
Shoe and apparel wholesaler Nine West Holdings Inc.'s Chapter 11 bankruptcy reorganization filing this week focused the retail spotlight on the outlet center segment of the commercial real estate industry. Despite the bad news that Nine West is closing all 70 of its stores, the good news is that leasing demand for outlet store space has been outpacing availabilities.

Privately held Nine West's filing seeks to restructure about $1.6 billion in debt, much of it racked up when private equity firm Sycamore Partners Management acquired the company and affiliated brands in the 2014 for $2.2 billion.

While 80 percent of Nine West's sales come from wholesale operations, it also operates 70 brick-and-mortar retail stores - all of which it has now closed and is asking the court to cancel the leases on those locations. Sixty-seven of those locations were in outlet centers.

The store closures hit two publicly traded retail landlords hardest. Simon Property Group (NYSE:SPG) will lose 35 stores. Simon owns and operates a portfolio of 91 centers through Simon Premium Outlets.

Tanger Factory Outlet Centers (NYSE:SKT) will see 19 stores closed out of its portfolio of 44 upscale outlet shopping centers.

The stores typically ranged about 3,000 square feet in size on average, which means about 105,000 square feet of newly vacant space for Simon and 57,000 square feet for Tanger.

That is a bigger chunk of space comparatively for Tanger. During 2017, Tanger recaptured 201,000 square feet within its portfolio. The 2017 amount is nearly double the amount it took back a year earlier. Overall occupancy declined from 98% in 2016 to 97% last year.

In talking about his company's 2017 results earlier this year, Steven Tanger, CEO of Tanger Outlets, said the REIT's guidance for 2018 included half of the store closings that it received last year, which is back to our 2016 and 2015 levels of about 100,000 square feet to 150,000 square feet.

In his 2017 results David Simon, chairman and CEO of Simon Property Group, estimated the REIT took back about 1 million square feet last year compared to about 300,000 the year before. However, Simon Property Group does not break out its outlet numbers separately, so that total includes its entire portfolio of 234 properties. Overall occupancy declined from 96.8% in 2016 to 95.6% last year.

Simon also said he expected space recapture this year to return to 2016 levels.

Vacancy and lease signings have not been much of problem for outlet center operators, according to CoStar data.

Through the last 15 full months, about 3.7 million square feet of available space was added to the CoStar database for outlet centers. Significantly though, more than 4 million square feet of available space was removed.

Vacancy in the sector is trending downward, and in fact, has been doing so for a few years -- from 7.8% in 2013 to about 4.6% currently. Absorption has been outpacing even new deliveries for the last three years.

In the past year, retailers signing new leases in the 3,000-square-foot range have included Columbia Sportswear, Go! Calendars & Games, Mexican food restaurant LaFrontera, Nike, OshKosh B'gosh, Rainbow Shops, and Zales Jewelers.

Tanger's leasing renewal activity has held up pretty evenly, however the pace of filling vacant space has slowed down. Tanger signed about 440,000 square feet of new leases in 2015, 384,000 in 2016, and 247,000 last year.

"2017 was a challenging year for retailers characterized by multiple bankruptcy and brand-wide closing announcements, including 22 of our tenants," Tom McDonough, president and COO of Tanger, told analysts in a conference call earlier this year. "Faced with these market conditions, we decided to execute short-term renewals for about 15% of the renewal space that commenced during 2017 to provide the flexibility necessary to preserve upside opportunity, while accommodating our tenant partners and maintaining high occupancy."

A lot of the short-term leases [one year or less] were with troubled tenants hoping that business would rebound, the company pointed out.

"While these short-term renewals will continue to impact our 2018 results, retailer sentiment in the leasing environment have improved considerably since our last earnings call driven by among other things positive holiday sales increases, improved margins and the tailwind recent tax reform is expected to provide the retailer community," McDonough said.

On that same analyst call, Steven Tanger added that, "We have been through this before. This is not our first downturn in the 37 years we have been in the business. "In times of the cycle when underperforming brands have shuttered stores, we have capitalized on those opportunities to enhance our tenant mix by filling the space with fresh new brands that our shoppers tell us they want in our centers.

"Enhancing the tenant mix in this way has historically increased shopper traffic, driven demand from other new tenants and increased future renewal spreads and overall tenant sales productivity," he added.

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