REIT - May/June 2010

“Its stock price wasn’t nearly as depressed as the mall REITs, due to its properties holding up so well during the downturn and its very strong balance sheet. So it didn’t deliver the outsized returns of its peers,” Block says.

Historically, Tanger is also among the top performers in the entire REIT industry. Based on compound annual total returns, it ranked fourth for the five-year period ending in March and third for the 10-year period, according to NAREIT data.

Back in Fashion

Tanger is surely enjoying the spotlight, but outlets haven’t always been a darling among investors, or leading retailers for that matter.

In the 1980s, when the industry was in its infancy, the centers were barebones operations. Typically, they were built far away from towns and cities, where retailers and manufacturers quietly sold their excess inventory and seconds on the cheap.

“Retailers were a little embarrassed (to be in the centers) and often cut the labels out of their products” sold there, Sullivan says.

Stanley Tanger’s first project, the former Burlington Manufacturer’s Outlet Center, was a mere 35,000 square feet when it opened in 1981. It marked the first time that outlet stores, which had previously been located in manufacturers’ warehouses, were combined in a traditional retailing cluster. The center, no longer owned by the company, was so successful that within three years it had grown to more than 300,000 square feet.

“The industry was founded on a simple and elegant busi-
ness model: brand names sold directly to the consumer,” Steven
Tanger says. “The outlets cut out the middle man and the middle
man’s profit.”
Although Tanger underwent tremendous growth after its IPO,
some other publicly traded outlet center developers eventually
ran into trouble. Investors soured on the sector.

“The industry got a black eye. A lot of [the publicly traded outlet center REITs] took on too much debt, and a lot of them promised aggressive growth that they couldn’t deliver,” Block says.

Tanger Outlet Center, Park City, u T

According to Block, investors also began to wonder whether the concept itself was a fad, given that many early centers were populated by marginal retailers. They also worried that shoppers might be turned off by low-priced lines manufactured specifically for outlet centers, merchandise that is often sold alongside discounted goods formerly offered at full-priced stores.

“The whole outlet center sector was a squeaky backwater of the REIT industry,” Block recalls.

Location, Location, Vacation

Over time, though, outlet centers continued to attract steady streams of shoppers. Greater numbers of retailers and manufacturers came to view them as viable alternatives to malls and other traditional shopping centers, where rents are typically higher.

The no-frills outlet centers of earlier years eventually gave way to larger, better-designed centers populated by name-brand concepts, situated closer to metro areas. They began to house food courts, full-service restaurants, theaters and playgrounds. However, outlet centers are still typically located at least 10 miles from major markets so that retailers and manufacturers avoid cannibalizing their full-price stores.