This piece was originally published in Forbes by retail legend Walter Loeb. It’s a very important piece, especially for those of us who might not have been around during the Campeau era of the 1980’s and in light of Sears Holdings Company ostensibly profitable quarter (driven by its REIT activities).

By Walter Loeb, Guest Contributor

In my opinion, most department stores units cannot successfully be packaged into Real Estate Investment Trusts (REITs). Many store locations have limited lifespans. Plus the retail business is cyclical and subject to any number of outside forces beyond management’s control. These are not the ingredients that make an attractive REIT.

The retail scene is constantly changing. Right now retailers are struggling to maintain sales momentum in their brick and mortar stores. They have done everything they can come up with to generate traffic. In sharp contrast, Internet retailing has strong sales momentum by appealing to consumers who shop at any hour of the day. Promotions are implemented with ease on the Internet. There is an abundance of value promotions along with free delivery of online purchases. In the bricks and mortar world, the strongest consumer response has been to in-store value promotions. Off-price formats like TJX, The Rack, Ross Stores, and soon Macy’s new Backstage, are the best performing stores. This is not the backdrop against which a REIT will be successful.

With the exception of New York City, and maybe five other U.S. cities, the formation of department store REIT’s containing stores outside these locales are unlikely to work. Under the current operator ownership structures, department stores have reasonable store operating costs; they only need worry about generating a return that exceeds their cost of capital. Under a REIT structure, stores will have to pay substantial rent to the new REIT owners. The REIT “craze ” that has been initiated by Eddie Lampert (Sears), Jeff Smith of hedge fund Starboard Value (Macy’s), and Rickard Baker (Hudson’s Bay) is not a good thing for the retail companies that would underpin the REIT.

A successful REIT operates and redevelops its real estate in order to sustain a portfolio of high quality properties. The reinvestment of funds from operation (FFO) has to be disciplined and property management has to be based on solid demographics. The value of a REIT is increased if the properties are properly maintained and developed. Let’s consider that the Saks 5^th Avenue store is valued at $3.7 Billion, and, according to Mr. Smith, Macy’s Herald Square complex of buildings are worth $4 Billion. To form a REIT and then shout about the value of a property does not assure the location remains valuable or even viable. Valuing suburban store locations can be even more dubious.

As Robert Campeau, a real estate guru, found out in 1990 when the leverage takeover of Federated (owner of Macy’s) and Allied Stores ended in bankruptcy, the underlying assumptions when it comes to retail real estate are easy to get wrong. Financiers are not well equipped when it comes to understanding the ins and outs, ups and downs, of retailing. Conservatism is warranted, and financiers are not often in the business of being conservative when justifying a transaction. The fun for a financier is in doing a deal, not in running a REIT or a retailer.

Saks 5^th Avenue has long depended on strong foreign customer traffic. Chinese, Japanese, Brazilian, European or Russian, many of these foreign travelers are not travelling. This is hurting sales in luxury stores like Saks 5^th Avenue in New York City. Given slower customer traffic, and uncertainty as to when or if it will pick up again, FFO could fall off leading to luxury properties losing some of their value. This would render a REIT holding such luxury retail properties less valuable. It could dissuade the property managers from investing adequately in the store properties thereby starting a downward spiral in the retailer’s sales productivity. It is clearly better for the retail operator to be making the store investment decisions and not an outside property manager or financier who answers to a REIT Board and REIT shareholders.

The future of retail is a big question mark. Luxury stores are lamenting the loss of foreign visitors who were big spenders. Mid-tier department stores are very competitive but cannot operate without sale events. Discount stores fight it out with the deep discount food retailers as well as low price Internet retailers like Amazon. As I recently wrote, Aldi and Lidl will add a more competitive tone to food pricing soon. As I think about what role REITs would play, it is clear to me that raising rents would hurt the position of the retailers renting the stores. They would have to raise prices, which won’t work in a hyper-competitive industry like retailing. There is little doubt; REITs would hurt consumers, associates, and investors, by hurting the underlying retail company.