As private equity firms have been gobbling up office and residential REITs over the past two years, the conventional wisdom in the shopping center industry has been that retail REITs were too complex for even the most gung-ho buyout investors. And, with retail REIT shares trading at or near their highs (mostly), there seemed few opportunities for the private-equity players to snap up assets on the cheap, restructure and flip, their preferred modus operandi.

But this week’s $36 billion buyout of Equity Office Properties Trust by the Blackstone Group changes the rules. Experts are singing a new tune, not only saying a retail REIT buyout is possible, but now it’s likely.

“I think this deal shows that there is no size restriction for a private equity buyout and anything is possible,” says Morningstar analyst Akash Dave. “People knew that Equity Office was going to trade, but now they realize that private equity still has a lot of money.”

REITs of all stripes have performed well in 2006 – the total return on investment in the industry is 32.19 percent year to date, according Morningstar. The expectation among investors is that rental rates in the hospitality, office and retail sectors will continue to climb, according to Michael Straneva, head of transaction advisory services for real estate with Ernst & Young, which is why private equity players continue to be eager to buy up REITs. But the Equity Office deal sets a new precedent for this trend – the transaction is the most expensive private equity buyout ever, taking down the previous record of $33 billion that Kohlberg Kravis Roberts & Co. agreed to pay for the hospital chain HCA.

With 590 buildings and more than 105 million square feet of space, Equity Office is also the largest office building owner and manager in the country, proving that private investors are getting bolder in taking on large, complex enterprises.

In addition to sheer size, the transaction is proof that private investors are seeing potential for fat returns on even the most stable, high-quality portfolios. Indeed, despite the strong performance of REIT shares lately, REIT executives have complained that market prices don’t reflect their companies’ true value, which explains why they are so receptive when private equity investors call.

Blackstone’s offer of $48.50 per share for Equity Office stock, for example, represents a 20.5 percent premium over the company’s average price over the previous three months.

“Equity Office is one of the highest profile REITs in the industry and you would expect less difference between its share price and the underlying value of its assets,” says Mark G. Dotzour, chief economist and director of research at the real estate center of Texas A&M University. “If Blackstone perceives that there is more value in Equity Office, it would make sense that there is more value in other REITs.”

(For more coverage of the Equity Office deal, check out Retail Traffic’s sister site, NREI Online, http://nreionline.com/news/Office_Bombshell/)

Still, the major mall REITs represent a more complicated property class than office or multi-family and typically carry a high level of secured debt, which makes refinancing prohibitive, according to Dave. General Growth Properties, for example, has a 62 percent debt/capital ratio, while office REIT Boston Properties’ ratio is only 30 percent. And mall owners are still wrestling with the consolidation of the department store industry, on which they still depend. So, Dave figures that most likely target of takeout deals will be regional players that don’t rely too heavily on enclosed malls. “It would make a little more sense for people to focus on REITs that build lifestyle centers,” he says.

Stock market sentiment certainly points to REIT deals. At least eight retail REITs reached their 52-week highs this week, after the Equity Office announcement, including Equity One, Inc., Cedar Shopping Centers, Inc., Ramco-Gershenson Properties Trust, Developers Diversified Realty, Simon Property Group, Federal Realty Investment Trust, Taubman Centers, Inc. and the Macerich Company. Still, according to UBS, many mall REITs are trading at discounts to net asset value--including PREIT, CBL & Associates, Taubman and even Simon Property Group.