Sunday, November 20, 2011

Surge in outlets seen as next big thing for REITs

Steven Tanger

To hear it from the perspective of retail-sector real estate specialists, it might be easy to assume that the U.S. economy is moving full-steam ahead. And that bodes well for investors in retail properties, particularly outlet centers.

“Retail sales are holding up well because consumers are still spending,” said David Henry, president and chief executive of Kimco Realty Corp. “People are tired of being scared, and 90% of them are still working.”

Mr. Henry was part of a panel discussion this morning in Dallas at the National Association of Real Estate Investment Trusts' annual convention.

Panel moderator Jeffrey Donnelly, managing director of equity research at Wells Fargo Securities LLC, kicked off the session by pointing out that the retail segment has been one of the strongest sectors of the REIT space since the recovery began in March 2009.

The NAREIT conference, REIT World 2011, has attracted more than 1,200 attendees, including real estate investment trust executives, portfolio managers and investment bankers, all seeking nuggets of information on the real estate market.

While the story for the retail sector is rosy on the surface, a closer look does expose some unique challenges for REITs and REIT investors, according to Sandeep Mathrani, chief executive of General Growth Properties Inc., who also sat on the morning panel.

Elaborating on a reference to a barbell situation, which underscores strong retail sales at both the high end and at the deep-discount end of the market, Mr. Mathrani pointed out that luxury goods continue to do well because unemployment is still relatively low for better-educated consumers.

In terms of where consumers are spending their money, panelist Steven Tanger, president and chief executive of Tanger Factory Outlet Centers Inc., said outlet shopping centers have plenty of momentum. “In tough times like these, people like a bargain, but they also gravitate to brand names,” he said.

Mr. Tanger also suggested there is an evolution coming to the outlet space, which continues to create investment opportunities for real estate investors. “It used to be that outlet centers were located two hours away from metropolitan areas, but now they're sometimes as close as 10 miles away,” he said.

He added that the total U.S. footprint for outlet centers is around 50 million square feet in 150 outlet centers.

By comparison, retail-shopping space in Chicago alone covers 170 million square feet. “I could see the number of outlet centers growing to 250 in the next two years,” Mr. Tanger said. “Any [retailer] trying to grow has part of the focus on the outlets.”

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