Panel Ponders Private Equity

"They seem to be operating in the best intent of the merchandising," says Daniel Hurwitz, senior executive vice president and chief investment officer at Beachwood, OH-based owner Developers Diversified Realty, pointing out that his firm usually sees few negative results when a major tenant is taken private or acquired. Sometimes those chains, which might have been struggling in the public markets, perform better under private ownership, he says.

"A lot of it has to do with who is the group executing the buyout," says Adam Ifshin, president of developer DLC Management Corp., of Tarrytown, NY. Some buyers, like the consortium that bought Michaels Stores, look to run the business as an operating company. Others want to purchase chains simply for their real estate or to use the leverage of potential store closures to get better leasing rates from landlords, he says.

But the threat of store closures isn't likely to impact larger real estate owners as long as they have a quality portfolio, Hurwitz says. "Every one of us is at historical highs in occupancy," he says. "There's plenty of tenants to fill space in good shopping centers."

Other than having good real estate, landlords can prepare for such buyouts by understanding their tenants' merchandise mix and the intentions of the firms acquiring the stores. "The business is getting more complex on a lot of levels," Ifshin says. "It's really incumbent on you to protect your own equity."

Regardless of how landlords react, private-equity interest in retailers isn't slowing down, says Michelle Tan, a department-store analyst at UBS Investment Research. Retail has accounted for 10% of all private-equity investments over the last two years, up from 5% in the previous three years, she says.

Possible candidates for acquisition could be department-store chains, like Nordstrom and Federated Department Stores, and warehouse clubs, such as Costco Wholesale and BJ's Wholesale, according to Tan. "Our view is that it will continue over the next several years," Tan says.