In order to make prudent commercial loans in the sector, many lenders are trying to sort out surviving retailers that will continue to be successful in brick-and-mortar retail stores. Some results are easy to see. Class B and C malls pretty much cannot be financed on a non-recourse basis, and they are struggling to borrow even on a recourse basis. On the other hand, neighborhood retail centers with good grocery stores or service-oriented tenants appear to be reasonably safe loans if leverage is not stretched.
The sector of retail property that has industry pros scratching their heads is factory outlet shopping centers. One the positive side, the thinking goes that the sector is safe because there are no department stores in any outlet shopping center. In addition, the majority of the tenants are clothing related and shoppers still prefer to try on clothing. To thwart the “try it on and if it fits buy it online” mentality, the outlet price, in theory, would provide enough discount to warrant an immediate purchase.
But investors in outlet shopping centers appear to think the future of outlet centers is not bright. Tanger Factory Outlet Centers, Inc. (NYSE: SKT) operates as a Real Estate Investment Trust (REIT) and is the only “pure play” REIT that owns solely outlet centers. The North Carolina-based company owns 44 outlet centers in the United States (22 states) and Canada. The company commenced operations over 34 years ago in Burlington, North Carolina, when the outlet industry was unknown. The company and its stock has performed very well, rising from roughly $20 per share prior to the financial crisis to over $40 per share in the fall of 2016. Coinciding with all the store closings, retail bankruptcies and related concerns, the stock price has plummeted, hitting a 52-week low of $23.03 during trading on August 30, down 50% from its 2016 peak. Clearly, investors are concerned about the outlet center sector.