print header

# 1 Commercial Real Estate Information Company

  • Find Properties 
  • Market Properties 
  • Analyze Properties 
Products
Commercial Real Estate News

QUICK DRAW: Outlet Center Developers Aim to Outduel Rivals To Land Brand-Name Tenants

Rival REITs Pursue Multiple Outlet Developments, Some In the Same Market - Can They All Survive?
October 31, 2012
Outlet centers have been among the few stand-out retail formats to pursue new construction since the Great Recession, and the notion of attracting bargain-minded shoppers to large centers well-stocked with nationally branded retail tenants and built on cheap dirt has proven irresistible to mall and outlet center REITs.

In fact, so many developers have jumped on the outlet retail bandwagon, that some are asking how much is too much?

The level of support from retailers is being put to the test in two markets. In both the Charlotte, NC, and St. Louis, MO metro areas, major mall developers are planning to go head to head with new developments just a few miles apart.

Tanger Factory Outlet Centers, Inc. and a joint venture of Simon Property Group, Inc. (NYSE: SPG) and Baltimore, MD-based Paragon Outlet Partners last week announced competing outlet projects within the greater Charlotte area. If both projects move forward to see a ribbon cutting, they will bring a total 750,000 square feet of outlet center space to the Charlotte market.

In another outlet center duel playing out halfway across the country in the St. Louis submarket of Chesterfield, MO, Taubman Centers and OutletPartners LLC are building the 310,000-square-foot Taubman Prestige Outlets Chesterfield on 50 acres at the Boone's Crossing exit off of Highway 40. The new center is scheduled for delivery in August 2013.

Just five miles away, Simon Property is building the St. Louis Premium Outlets, which anchors the Chesterfield Blue Valley mixed-use development on 131 acres at Olive Street. Simon said the 350,000-square-foot mall will have 85 stores.

Mall operators and developers understand that, while such projects have yielded tidy returns, the specter of over-development looms over some markets. Bobby Taubman, chairman, president and CEO of Taubman Centers, acknowledged in an investor call last week that Taubman's returns could be 100 basis points lower if Simon's center opens.

"Obviously, if two projects are built that’s going to fragment the market, it will reduce sales productivity, which would modestly impact the returns," Bobby Taubman said. "But the returns would still be attractive."

Retailer interest is extremely high and "there’s wide recognition that the market is superb and that our site is vastly superior," Taubman said, adding that St. Louis is the 18th-largest market in the county.

Walls already are raised on nearly half the buildings in the new retail center, and Taubman has moved up the announced opening date to Aug. 2, 2013 to take advantage of Missouri back-to-school tax-free holiday weekend. Taubman also said it has signed at least 40 of the 80 shop tenants that will comprise the first phase.

Quentin Velleley, REIT analyst with Citigroup, noted that some tenants have signed leases for space in both projects and asked Taubman in its recent conference call how easy would it be for tenants to exit one project and stay in the other development under their co-tenancy clauses.

Each tenant negotiates its own co-tenancy agreement based on which other tenants it believes are most important to be close to in a given outlet center, Taubman responded.

"They’re very complex clauses. So it is correct to say that they are important clauses and they are being negotiated with a great deal of intensity," Bobby Taubman said.

"Rest assured, we know what we're doing," said David E. Simon, chairman and CEO of Simon Property, in a conference call last week, adding that the company has opened 19 premium outlets in the U.S. and Asia since acquiring Chelsea Property Group.

"We will not make any outlet mistakes... The reason we won't is because we're the leader in the business," Simon said in response to an analyst's question about potential overbuilding in St. Louis and other markets. "We have the best franchise in this business, and I just know that we won't make a mistake."

"Undoubtedly, there will be development mistakes made. They've been made in the lifestyle business, in the power center business, in the mall business, but they won't be made by us," stated Simon. "They'll make mistakes; we won't."

Simon said he does not think as much outlet space as developers have proposed will actually get built.

"There's been a list of 50 potential deals that have been kicked around, and there are still going to be three or four [outlet centers] built a year, maybe, and not as much as you think.

Chesterfield Mayor Bruce Geiger has told local media he’s concerned that two new outlet malls in the area may be more than local shoppers can support.

"Two national developers have announced their intention to open high-end premium outlet malls in the Valley. Realizing that the market can only support one, we will wait to see which prevails," Geiger wrote in a letter to constituents last December, before both Simon and Taubman announced plans to proceed with their projects.

The economic development section of the city of Chesterfield’s web site touts that the "endless shopping opportunities include Chesterfield Mall and the Chesterfield Commons with most big box and specialty retailers represented."

While outlet center development is being driven by explosive demand among a number of retailers that want to get into the outlet business, "there's got to be a finite end to the arc of new development. There's a limited number of new opportunities," said Richard S. Sokolov, president and COO of Simon Property in the company's last conference call in late July.

Complicating matters is the fact that outlet center tenants have begun looking beyond traditional outlet centers. Shopping center REIT, DDR Corp. (NYSE: DDR) said it is increasingly seeing outlet tenants consider taking space in its power centers and shopping centers.

"While these centers offer lower cost, in part because of the lower marketing costs, one does have to consider if the outlet expansion may over-saturate itself by locating beyond traditional outlet centers," wrote Alexander Goldfarb, REIT analyst with Sandler O’Neill, in a recent note to investors.

Simon and Paragon’s letter of intent to jointly develop Charlotte Premium Outlets entails a 400,000-square-foot center proposed for Stallings, NC, at Interstate 485 and Idlewild Road to house about 100 designer and name-brand stores. The venture is hoping to break ground next spring and open in 2014.

Simon and Paragon's plans came two days after Tanger announced plans for a 350,000-square-foot center eight miles southwest of uptown Charlotte at the interchange of I-485 and Steele Creek Road, with plans for a possible 50,000-square-foot extension.

Tanger is developing the 90-store outlet project in conjunction with Childress Klein Properties and Steele Creek Limited Partnership, a long-time owner of land in Steele Creek created by Charlotte civic leader Sarah Belk Gambrell, who will be developing ancillary uses surrounding the outlet center.

The Tanger project is also slated for completion in 2014 subject to the securing of development approvals. The center will be the fourth outlet shopping center in North Carolina for Tanger.

Simon said he expects only one center will get built in Charlotte. With three very experienced developers between Simon, Tanger and Paragon, "it will be a competition of who gets the retailers, and the experience will ultimately dictate that somebody will get the project and somebody won't."

 Find us on 

Welcome To CoStar's
Industry-Focused,
Award-Winning News

Winner of three Journalism Awards from the National Association of Real Estate Editors (NAREE)

Award-Winning News