Real estate investment trust (REIT) Tanger Factory Outlet Centers (NYSE:SKT) lost roughly a third of its value in 2020. After that drubbing, switching the calendar to 2021 would seem like a welcome relief -- but the problems it faces won't get much better in the new year. Here's why Tanger's business will likely start to bounce back in 2021, but why it will still be a tough year all the same.

The setup

Tanger Factory Outlet Center entered 2020 facing headwinds. That's because it effectively owns a collection of outdoor malls. Indeed, the so-called "retail apocalypse" was already causing problems for the real estate investment trust's tenants before the year had gotten underway. Essentially, retailers -- especially those with leveraged balance sheets that had failed to keep up with customer trends, from fashion styles to internet shopping -- were struggling, closing stores, and even going bankrupt. However, until 2020, this was a slow-moving trend that Tanger was handling relatively well.

Three women with bags shopping in an outdoor retail area.

Image source: Getty Images.

When the government closed down non-essential businesses and people started to socially distance during the 2020 coronavirus pandemic, however, the retail apocalypse sped up. The phenomenon was finally living up to its name, which was terrible news for Tanger and other retail landlords. Tanger's outdoor centers were effectively shut down, and when they eventually reopened its tenants were struggling mightily. That said, Tanger managed to muddle through 2020 in one piece, something that can't be said for all mall REITs -- CBL & Associates and Pennsylvania REIT both ended up declaring bankruptcy.

As 2021 gets underway, however, investors need to take a realistic look at the new year and what it will bring for survivors like Tanger. It's going to be a mix of good and bad.

Better, but...

At one point in 2020, Tanger was offering all of its tenants rent holidays to help them get through the pandemic shutdown. That meant the REIT was willing to accept zero rent coming in the door for a brief period of time to ensure it maintained good relations with the retailers in its properties. By the end of the third quarter, however, virtually all of the tenants in its properties were reopened, and it was collecting around 92% of the rent it was owed.  

Although the coronavirus is on the upswing again, it is likely that Tanger will have a better year operationally in 2021 than it did in 2020. Renewed widespread economic shutdowns are less likely given the pain caused by the first round, and vaccines are being distributed that should change the direction of the pandemic at some point later in the year. So in some ways, 2021 will definitely be a better year, even if targeted economic shutdowns result in weak performance at some of Tanger's properties. 

The bigger problem is what's going on in the retail space, which is pushing the REIT's tenants to close stores and, in some cases, declare bankruptcy. At the end of the third quarter, Tanger's occupancy had fallen to roughly 93%, around the lowest levels in its history. This is a big deal, and a major headwind to consider. 

First, Tanger will have to find new tenants, and it takes time to find the right retail partners and get them into an outlet center. It's a slow process that really can't be rushed if Tanger wants to maintain the desirability of its assets for consumers. Second, with occupancy relatively weak, Tanger is likely to offer up rent concessions to new and existing tenants to keep its properties occupied. That will put further pressure on the top and bottom lines, perhaps for several years. 

SKT Chart

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To be fair, none of this is terrible, it's just how the business works. The problem for investors is that it will simply take time for Tanger to muddle through. So 2021 will be a better year in some ways, but a still-troubled one in others. All in all, however, Tanger's business probably won't snap out of its funk until at least 2022. 

Don't get too excited

The big thing that investors will likely want to see happen in 2021 is for Tanger to reinstate its dividend, which was suspended during the pandemic. There's a good chance that will happen, but less certain is the level, which is likely to be lower as the REIT basically resets its business.

All in all, Tanger is facing down another hard year, and it won't be pretty. But that's not unique to this mall REIT, as all its peers are dealing with similar issues. Indeed, investors shouldn't go into 2021 with high expectations for Tanger, even though the year will likely be better than 2020. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.