Department Stores Have One Thing Left to Sell: Real Estate

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In 1914, legacy department store Lord & Taylor opened a giant flagship on Fifth Avenue. The building was the work of celebrated interior design firm Starrett & Van Vleck and featured a men’s-only entrance, three dining rooms, and an equestrian section equipped with a mechanical horse on which shoppers could test the merchandise.

The extravagance of the New York City destination was in part because, as the New York Times notes, department stores were “largely places to pass the hours,” and shopping was a “consummate theatrical experience.”

Just over a century later, the Lord & Taylor flagship is hardly a cathedral of American retail. S tores in general are shuttering by the hundreds in what’s now widely called the “retail apocalypse.” Foot traffic is down, and Credit Suisse predicts a quarter of American malls will be gone by 2022. Department stores, once a shopper’s paradise, are getting hit hard: As of September 2017, according to the Census Bureau, sales are at $12.6 billion, down from $14.2 billion in September of 2013.

As a result, Hudson’s Bay Company, which bought Lord & Taylor back in 2015 and also owns Saks Fifth Avenue, has taken some headline-making measures. Last week, it announced a deal to sell its legacy Fifth Avenue building to tech startup WeWork for $850 million. The exact details are being worked out, but Lord & Taylor will likely rent one or two floors from WeWork, which will turn the rest of the building into its global headquarters and shared office space. HBC said it’s also looking to sell another building in Vancouver, which Reuters reported could be worth as much as C$900 million.

Photo: Ben Hider/Getty Images

Selling off valuable real estate might indicate that HBC is in trouble, but to Garrick Brown, Cushman & Wakefield's director of retail research for the Americas, it looks more like a lifeline. “The reality is that some department store companies have real estate holdings that are more valuable than the retail business itself,” says Brown. “Selling off real estate to get capital is the way to ride current challenges, upgrade stores, or try to innovate.”

Department stores are pulling out all the stops to battle their many adversaries, including shoppers’ dwindling interest and, of course, Amazon. Kohl’s recently inked a deal to sell the tech giant’s gadgets and actually process Amazon returns in-store. Nordstrom’s fighting back by pushing into uncharted territory, like Canada, and experimenting with alternative store formats like small concept stores that don’t stock inventory. There is nothing Macy’s, which laid off more than 10,000 employees this year, won’t try: It’s attempting to push into off-price by rolling out its discount concept, Backstage, into more stores, and it’s also jumping on the tech train by teaming up with Samsung for what it claims is a “unique experience.” Meanwhile, J.C. Penney and Sears are closing stores nonstop in the face of imminent bankruptcy.

Brown sees only one way forward for department stores, and that’s reducing their footprints. The US is overstored in general; the number of stores in this country outpaced the demand for them around the year 2000, according to Bloomberg, and yet stores incessantly opened more doors. This, in part with changing shopping behaviors, has created the retail real estate crisis, and Brown says it’s imperative for department stores to start seeing the writing on the wall.

“Department stores don’t need eight floors of real estate anymore,” he says flatly. “A lot of them are getting choked because this is something they won’t admit.”

Lord & Taylor’s WeWork deal wasn’t the first example of this. Last year, Macy's sold its San Francisco men’s store for a reported $275 million, as well as another one of its buildings in downtown Portland for $54 million. This year, it sold a building in Los Angeles’s Westside Pavilion for some $50 million and its Minneapolis flagship store for $59 million, leading financial site Motley Fool to joke that Macy’s seems like a real estate company “masquerading as a retailer.” Sears, too, has been selling off its real estate since 2015. The difference is that the cash from its real estate deals is essentially being used to keep the lights on. Brown says its moves were way too late, and while the money made on its real estate is “buying them extra time just to keep them alive, unless Sears can pull off a miracle, it’s going to run out of real estate to sell.”

Photo: Bryan Bedder/Getty Images

To avoid a Sears-like near-death situation, Brown believes time is of the essence, and not just because it seems like Amazon is launching a new project every other day. Tech companies like WeWork are on the prowl for space, as are hotels and restaurants. Renting to start-ups, Brown adds, is a savvy strategy; sharing a building with a company like WeWork automatically brings in foot traffic that could translate to sales.

Brown says he wouldn’t be surprised if Macy’s soon turns its attention to spaces like Herald Square, an iconic location that’s also a 2.2-million-square-foot “disaster.” “Most people associate Herald Square with the Macy’s flagship, so I could see hesitation over a PR message by selling it, but I wouldn’t be surprised,” says Brown. “If that Lord & Taylor building brought in nearly $1 billion, I could see the Herald Square flagship bringing the same, if not more, and hotels and high-end apartments would be perfect for the location. It’s just too much money on the table for retailers not to look at.”

Other real estate gems include Bloomingdale’s massive Upper East Side location, the Saks Fifth Avenue location that literally generated the company’s name, and the Central Park-adjacent Bergdorf Goodman mansion. It might be sad to imagine a future in which department stores have shrunk down to tiny boutiques while historical buildings are handed over to sprawling tech companies, but it’s the inevitable future.