“Outlets are one of the property types most impacted by COVID, with very low rent collection in second quarter, though rent collection has improved since stores have reopened,” notes Ana Lai, senior director and real estate sector lead at S&P Global Ratings.
With many stores reopening at limited capacity, COVID-19 is upending much of the retail sector as landlords, in general, are still only collecting less than 80 percent of rent.
S&P covers Tanger Factory Outlet Centers Inc.—one of the biggest players in the outlet center space—and recently revised the REIT’s outlook to negative.
“The negative outlook reflects our concerns about the potential negative effects of the coronavirus pandemic on Tanger’s sales and cash flow,” according to S&P’s research. “We believe Tanger… could face material top-line headwinds in the next few quarters because of the coronavirus pandemic impacting outlet operations and growing exposure to tenant distress.”
However, outlet centers’ and other retail centers’ woes started before the pandemic.
For U.S. retail, in general, there’s too much gross leasable area and not enough retailers to fill that space, says Frederick J. Meno, president and CEO of asset management and asset services for The Woodmont Co. The firm takes over management of outlets centers, regional malls and open-air centers that have been taken back by lenders.
Additionally, online shopping continues accelerating and competing with bricks-and-mortar retail, and many retailers have extremely over-leveraged balance sheets, Meno notes.
“If a mall or outlet center were at a tipping point when COVID hit, then that was kind of the last straw,” he continues.
“In the past six months, we’ve taken over more mall and outlet center third-party management assignments than we have in the previous two and half or three years. It’s only going to increase in the next couple of years,” Meno says.
Since March, Woodmont has taken over receiverships of three outlet centers located in Oshkosh, Wis., Freemont, Ind.; and Burlington, Wash. The first step for the company is to stabilize the rent roll. In order to do that in the middle of a pandemic that has brought with it widespread shutdowns, it required lease negotiations and modifications with almost every tenant, Meno says.
However, typically, Woodmont will not abate rent without getting something in return, perhaps, an extended lease term. “We will not waive rent without making it a win-win situation for both [landlord and tenant],” he notes. But the company will defer rent for retailers needing rent relief, which can be paid back over an extended period of time.
The challenge with distressed outlet centers, according to Meno, is getting the vacancies leased, and they’re looking for multi-regional and national tenants, as well as local and in-market opportunities.
“Pre-COVID, our playbook was strongly tilted toward going after food and beverage and entertainment concepts like movie theaters, escape rooms, trampoline parks and laser tag, and strong food court and sit-down dining options. Those were key drivers,” he says. COVID-19 and social-distancing protocols have changed that, at least temporarily.
Outlets under pressure, but better positioned than malls
“Like most of retail, outlet centers are under pressure,” says Neil Saunders, managing director at research firm GlobalData Retail. This is especially so because outlet centers tend to focus on discretionary goods like apparel, and consumers have cut back on the amount they spend on clothing during the pandemic.
“That has reduced footfall and revenue,” Saunders notes.
Apparel is overrepresented in outlet centers, and “it’s the one category that has just got hammered the last couple of years,” Meno points out.
That said, Saunders says outlet centers are in a better position than most regional malls for several reasons. The value focus is one of them, in tune with frugal consumers, he notes. Second, is that outlets feature well-known brand names, which are still attractive to shoppers. And third, most outlet centers are outdoors, which helps instill confidence in consumers regarding lower infection risk and helps with social distancing compared to enclosed malls, Saunders adds.
Outlets ‘check that box’
“The consumer wants a clean, safe, open-air environment, which is what they feel most comfortable in, so we definitely check that box,” says David Hinkle, a principal with Outlet Resource Group, a Chicago-based outlet center consulting company. “And while the industry typically has done well in good times, when times get a little troubled, it does even better.”
It definitely seems like outlets are in a better position than malls due to their outdoor nature, as well as the discount merchandise they typically carry, agrees Nikki Baird, vice president of retail innovation at Aptos, an Atlanta-based retail technology solutions provider.
“Outdoor helps protect against the physical impact of COVID, and their discount reputation helps with the economic impact,” Baird says.
Foot traffic increasing faster at outlets than malls
While the pandemic has negatively impacted malls and outlet centers financially, foot traffic has been increasing for both sectors since May, according to an August S&P Global Market Intelligence report. Outlet center foot traffic is climbing faster, however.
S&P utilized data for its report from AirSage, which collects and analyzes real-time mobile signals, GPS and other location data to track movement patterns.
AirSage data shows foot traffic to U.S. malls owned by publicly-traded REITs was down around 15 percent year-over-year during the week ending Aug. 9, while foot traffic at outlet centers was slightly higher than 2019 levels.
The analysis included properties owned by Tanger, Simon Property Group Inc., Taubman Centers Inc., Macerich Co., Brookfield Property REIT Inc., Washington Prime Group Inc., Pennsylvania REIT and CBL & Associates Properties Inc.
Tanger's portfolio showed the fastest foot traffic recovery, likely attributed to the outlet centers’ open-air environment. Stores at Tanger's outlet centers steadily reopened throughout the second quarter as states started lifting closure mandates. By the end of July, 95 percent of Tanger's occupied stores had reopened.
“Basically, when the mandates were lifted, people were excited to get out of their houses and go to shop," said Tanger CEO Steven Tanger during the REIT's second-quarter earnings call.
Meanwhile, properties owned by Simon saw a similar trend, with the REIT’s outlet centers showing a faster recovery than its enclosed malls.
“I do think the consumer generally feels a little more comfortable in the outdoor environment," said Simon’s CEO David Simon during the company's recent earnings call. Simon added, however, that increased foot traffic was also correlated with a lower prevalence of COVID-19 cases in a given location.
What about outlets’ lack of e-commerce?
The lack of investment in e-commerce is “definitely a disadvantage” to outlets, Baird points out.
Any retailer or property without an online offer will find it much harder to generate trade now that so many consumers are shopping digitally, Saunders agrees. That said, Saunders notes that there have been attempts to put the outlet experience online, including from Simon, which has built online portals for some of its outlet centers.
It’s not all doom and gloom for outlets, Saunders continues.
“Many people still want to shop physically, especially to browse for bargains, and many still like visiting centers for enjoyment or leisure,” he says. “Online can’t completely replicate all aspects of the physical experience.”
Some retailers in outlets struggle
Some brands with stores in outlet centers are filing for bankruptcy, including Children’s Place, Brooks Brothers and Justice.
“I wouldn’t look to outlets as the driving factor in these bankruptcies,” Baird notes. “Those retailers filing early in the pandemic, and pretty much … right up to the month of December, were already financially weak and vulnerable to a shock like a pandemic.”
What will be more interesting to watch is what happens coming out of the holidays, she notes.
“Retailers who can keep tight control of their inventory and find creative ways to expand their effective selling capacity to meet typical holiday demand, but with social distancing, etc,. are the retailers who will be well-positioned for spring, and hopefully, the beginning of recovery.”
The collapse of some large brands could hurt outlet centers, especially if they opt to shut stores there, Saunders notes. “However, outlet stores can be good performers for many brands, so these locations may be more sustainable as distressed retailers work out what their store strategy should look like,” he says.
In the case of Brooks Brothers, Simon now partly owns the brand, so they’re in control of which stores will stay open and which will close, Saunders says. Simon owns a lot of outlet centers, so this move will help it keep stores open in its locations.