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Lord & Taylor Building, Icon of New York Retail, to Become WeWork Headquarters Lord & Taylor Building, Icon of New York Retail, Will Become WeWork Headquarters
(about 9 hours later)
From the moment it opened its doors more than a century ago, the Lord & Taylor building on Fifth Avenue in Manhattan has stood as an icon of old-school retail. From the moment its doors opened more than a century ago, the Lord & Taylor building on Fifth Avenue in Manhattan has stood as a monument to old-school retail.
Its Italian Renaissance design, complete with grand entrance arch and copper cornice, was a 676,000-square-foot temple to commerce — and was named a city landmark a decade ago. Complete with a grand entrance arch and copper cornice, the 676,000-square-foot store is a temple of urban commerce — and was named a New York City landmark a decade ago.
But after Christmas next year, less than a quarter of its space will be home to Lord & Taylor’s flagship store. Instead, the retailer said on Tuesday, the Midtown Manhattan fixture will become the new global headquarters of WeWork, the seven-year-old office space start-up. Lord & Taylor will rent the bottom floors, redesigning them into a smaller version of its department store. But now, the forces buffeting the retail industry are diminishing Lord & Taylor’s presence as a New York institution. The company that owns the department store chain, Hudson’s Bay, said Tuesday that it was selling off the flagship store to WeWork, a seven-year-old start-up whose office-sharing model is helping to reinvent the concept of work space.
In selling its flagship building to a WeWork joint venture for $850 million, Lord & Taylor and its parent, the Hudson’s Bay Company, are bowing to pressures that have increasingly weighed on the retail industry. It is an acknowledgment that even the grand physical shopping spaces of old can now fetch higher values as offices catering to millennial workers. Lord & Taylor will rent out about a quarter of the building, where it will operate a pared-down department store. WeWork will use the rest of the building for its global headquarters and to lease shared office space to its customers. The redesign is expected to come after Christmas of 2018.
Across the United States, retailers are rethinking the uses of their physical spaces, as more shopping moves online and consumers prefer to spend less time in stores. Many struggling malls have converted their stores into rock-climbing gyms, movie theaters and community colleges. Other shopping centers stand mostly empty. In selling its Italian Renaissance-style building to a WeWork joint venture for $850 million, Lord & Taylor and Hudson’s Bay are acknowledging that even the grand physical shopping spaces of old are now worth more as office space catering to millennials.
Over the past year, Macy’s has closed dozens of its department stores, though it has held onto its flagship one on 34th Street in Manhattan. “The department store really is a dinosaur,” said Mark A. Cohen, the director of retail studies at Columbia Business School. “And its demise is ongoing.”
But selling off landmarks also comes with risks. Many old-line retailers have struggled to strike a balance between cashing out their valuable real estate and holding on to historic buildings that have come to define their brands. As Lord & Taylor struggles to find its footing in the e-commerce age, WeWork is capitalizing on the needs of the new economy. The company is offering flexibility and informality to a generation that is increasingly untethered to traditional offices. It allows workers like entrepreneurs or graphic designers to choose the size and style of the space they prefer, and to lease it for as long or short as they want. A motto on its website reads, “Make a life, not just a living.”
It is a difficult task that Lord & Taylor is now undertaking. WeWork has expanded from two locations in New York City when it was founded in 2010 to more than 160 locations in 52 cities this year. It has pushed into increasingly prominent locations for its co-working spaces over the years — but nothing on the order of the Lord & Taylor building.
Founded by the English merchant Samuel Lord in 1826, the department store was once a favored retailer of high society. When its Fifth Avenue flagship opened in February 1914, it drew 75,000 visitors, who were treated to music from a pipe organ on the seventh floor and could choose to dine in one of three restaurants on the top floor. Across the United States, retailers are rethinking the uses of their physical spaces, as more shopping moves online. Many struggling malls have converted their stores into rock-climbing gyms, movie theaters and community colleges to try to attract customers. Other shopping centers stand mostly empty.
But as the company moved into the mass market in subsequent decades, it lost much of its luster. Over the past year, Macy’s has closed dozens of its department stores, though it has held on to its main property on 34th Street in Manhattan. And Hudson’s Bay, whose roots lie in real estate development, is well known for its creative use of financial engineering tied to the property it owns.
It was under Richard Baker, a veteran real estate investor, that Lord & Taylor recovered. Mr. Baker led a 2006 takeover of the department store company, and used that as a springboard for further acquisitions, from the Canadian chain Hudson’s Bay to Saks to the e-commerce outlet Gilt Groupe. He is now chairman and interim chief executive of Hudson’s Bay. Still, selling off landmark properties comes with risks. Many old-line retailers have struggled to strike a balance between cashing out their valuable real estate holdings while retaining the historic buildings that define their brands. Despite the growth of e-commerce, the vast majority of shopping is still done in stores.
But as the retail industry has been battered by the tidal waves of e-commerce, Hudson’s Bay has seen its stock price fall by nearly a third over the past year. Retail sales at Hudson’s Bay were down about 1 percent in the first half of the year. As of Monday’s close, the retailer had a market capitalization of roughly $1.7 billion, or a tenth of WeWork’s private market valuation. “Lord & Taylor has really had a difficult 25 years,” said Peter J. Solomon, a longtime deal maker in the retail industry who founded the namesake investment banking firm. “But good urban retailing is going to be successful. All these young people with money moving into cities are not only using Amazon.”
Hudson’s Bay has faced enormous pressure to sell its trove of real estate holdings — including its crown jewel, the Saks Fifth Avenue flagship store farther up Fifth Avenue. That property was appraised recently at about $3.7 billion. Founded by the English merchant Samuel Lord in 1826, Lord & Taylor’s department store was once a favored retailer of high society. When its Fifth Avenue building opened in February 1914, it drew 75,000 visitors, who were treated to music from a pipe organ on the seventh floor and could choose to dine in one of three restaurants on the top floor.
One of Hudson’s Bay’s shareholders, the real estate investment firm Land and Buildings Investment Management, has pushed for the company to sell the Saks store, suggesting it might be desirable to a hotel developer or as bricks and mortar space for Amazon. The Christmas decorations in its street-level windows have long been a staple of the city’s holiday season, drawing many thousands of tourists and New Yorkers alike.
“The path to maximizing the value of Hudson’s Bay lies in its real estate, not its retail brands,” Jonathan Litt, the founder of Land and Buildings Investment Management, wrote in a letter to the board of Hudson’s Bay in June. But when the company moved into the mass market, it lost much of its luster.
That pressure apparently has had an impact. Last week, the department store operator said that its chief executive, Gerald Storch, had stepped down and that he would be replaced on an interim basis by Mr. Baker. The company began to recover about a decade ago under Richard Baker, a veteran real estate investor. He led a 2006 takeover of the department store company, and used that as a springboard for further acquisitions, from the Canadian chain Hudson’s Bay to Saks and the e-commerce outlet Gilt Groupe. He put all the brands together under the umbrella of the Hudson’s Bay Company.
And Tuesday’s announcement acknowledges Mr. Litt’s criticism to some extent. Beyond the Lord & Taylor building sale, Hudson’s Bay struck agreements to lease some of its other retail space to WeWork, including in Hudson’s Bay stores in Canada. But as the tidal waves of e-commerce batter traditional retailers, Hudson’s Bay has seen its stock price fall by nearly a third over the past year. Retail sales at Hudson’s Bay were down about 1 percent in the first half of the year. As of Tuesday’s close, the company had a market capitalization of roughly $1.7 billion, or a tenth of WeWork’s private market valuation.
WeWork’s partner in its real estate joint venture, Rhône Capital, will also invest $500 million in Hudson’s Bay. (The joint venture, WeWork Property Advisors, will eventually take over some of that holding.) As its financial performance stagnated, Hudson’s Bay faced enormous pressure to sell its trove of real estate holdings — including its crown jewel, the Saks Fifth Avenue flagship store farther up Fifth Avenue. That property was appraised recently at about $3.7 billion.
All told, that will give Hudson’s Bay more than $1 billion in fresh capital to pay down debt and bolster its cash holdings. The $850 million purchase price for the building is about 30 percent higher than an appraisal made in July 2016. One of Hudson’s Bay’s shareholders, the real estate investment firm Land and Buildings Investment Management, has pushed for the company to sell the Saks store, suggesting that it might be desirable to a hotel developer or as a brick-and-mortar space for the online giant Amazon.
“This partnership places H.B.C. at the forefront of dynamic trends reshaping the way current and future generations live, work and shop: the sharing economy and urban and suburban mixed-use real estate planning,” Mr. Baker said in a statement. “The path to maximizing the value of Hudson’s Bay lies in its real estate, not its retail brands,” Jonathan Litt, the founder of Land and Buildings Investment Management, wrote in a letter to the company’s board in June.
For WeWork, the deal is a sign of the fast-growing start-up’s ambitions. That pressure apparently has had an impact. Last week, the department store operator said that its chief executive, Gerald L. Storch, had stepped down and that he would be replaced on an interim basis by Mr. Baker.
Originally created as a provider of shared working spaces, the company has increasingly pitched itself as reinventing how work is done. That vision has drawn backers like SoftBank, the Japanese conglomerate, which invested $4.4 billion in WeWork this year. The roots of Tuesday’s sale announcement lay in talks that Mr. Baker had months ago with Adam Neumann, WeWork’s co-founder and chief executive, well before Land and Buildings made its recommendation.
The Hudson’s Bay deals are meant to give WeWork prime real estate, particularly in Midtown Manhattan, with a way to blend street-level retail space alongside upper-floor real estate more useful for shared office space. “What we figured out is that, for the retail business, we could make our stores more interesting and younger,” Mr. Baker said. Meanwhile, WeWork “was looking for great locations that were convenient and fun.”
“Retail is changing, and the role that real estate has to play in the way that we shop today must change with it,” Adam Neumann, WeWork’s co-founder and chief executive, said in a statement. “The opportunity to develop this partnership with H.B.C. to explore this trend was too good to pass up.” In addition to the building sale, WeWork’s private equity partner in its real estate joint venture, Rhône Capital, will invest $500 million in Hudson’s Bay. That will give the retailer more breathing room to invest in strategies that help it better compete with Amazon and other online retailers.
While WeWork normally leases space in commercial buildings, it set up WeWork Property Advisors to buy some property outright. Among the advantages of such arrangements is that the start-up would be able to enjoy any rise in the value of the real estate where it sets up its co-working spaces.
Whether the move will placate Land and Buildings, which has threatened to try to replace the Hudson’s Bay board in the wake of Mr. Storch’s departure, is unclear.Whether the move will placate Land and Buildings, which has threatened to try to replace the Hudson’s Bay board in the wake of Mr. Storch’s departure, is unclear.
The Hudson’s Bay deals are meant to give WeWork prime real estate, particularly in Midtown Manhattan, with a way to blend street-level retail space with upper-floor real estate more useful for shared office space.
“Retail is changing, and the role that real estate has to play in the way that we shop today must change with it,” Mr. Neumann said in a statement. “The opportunity to develop this partnership with H.B.C. to explore this trend was too good to pass up.”
While WeWork normally leases space in commercial buildings, it set up a division, WeWork Property Advisors, to buy some property outright. Among the advantages of buying property is that the start-up would be able to enjoy any rise in the value of the real estate.
The $850 million purchase price for the Lord & Taylor building is about 30 percent higher than an appraisal made in July 2016. But while Mr. Baker hailed the benefits of the deal, he pledged that he would not do the same thing to the company’s other iconic retail building, 15 blocks north.
“The Saks store is way too productive in the luxury retail business to handle any other uses,” he said.
On Tuesday afternoon, as a light rain fell, a steady flow of shoppers entered and exited under the arch at Lord & Taylor’s Fifth Avenue entranceway. Standing under scaffolding protecting her from the drizzle, Tamara Citroen said the building’s sale was not a surprise. She shops regularly at the flagship store, she said, but acknowledged that it could be a hassle with all the tourists flooding the area.
“I prefer to shop online,” she said.