NEW YORK (Reuters) - The sale of Lord & Taylor’s flagship Fifth Avenue store in Manhattan is not surprising considering the plight of retailers, but demand for iconic buildings in major cities for conversion into co-working sites is relatively novel and growing.
An affiliate of WeWork Cos agreed on Tuesday to pay Canadian department store operator Hudson’s Bay Co (HBC.TO) $850 million to make most of the landmark 1914 building that fronts an entire block between 38th and 39th streets its headquarters.
Turning a structure built for one business into another use, otherwise known as repositioning, is not new. But the advent of co-working and other forms of flexible workspace is a global phenomenon whose rapid rise has filled the needs of both start-ups and an increasingly mobile workforce of large corporations.
A global desire to work and live in highly urbanized areas has put a premium on office space in central business districts. HBC Executive Chairman Richard Baker said WeWork is paying a 30 percent premium to the building’s last appraised value.
“This is a reminder that space, particularly in dense, expensive cities, tends to find its highest and best use,” said Jamie Hodari, co-founder and chief executive of Industrious, a leading U.S. co-working company.
“The warehouses of yesterday are the apartments of today, and it seems just as reasonable to assume the department stores of today might be the shared workplaces of tomorrow,” he said.
The value of central business district office space continues to climb with most major U.S. markets reporting tightening vacancy levels and increasing rents.
The Lord & Taylor property was valued at $665 million last year, according to Hudson’s Bay annual report. The space occupied by Lord & Taylor will shrink to 150,000 square feet (13,935 square meters), a quarter of its current size, after the 2018 holiday season, HBC said.
The ascendancy of co-working users like WeWork is one of the trends driving office space demand, said Garrick Brown, national retail research director at brokerage Cushman & Wakefield.
Many retailers are aware their urban real estate holdings they own may be worth more than their businesses, he said.
Macy’s has effectively used the sale of property to raise capital, while the deal with WeWork gives Hudson’s Bay the means to weather the challenges facing department stores, he said.
The strategy works well for those who want to close stores, shrink them or simply lease them back from the new owners.
“Expect more of these types of deals in the future with many of these assets repositioned with a smaller retail footprint, or even no retail footprint, with new office, hotel or even high-end residential taking the place of retail,” Brown said.
WeWork, which gained the backing of Japan’s SoftBank Group Corp (9984.T) with $4.4 billion in investment earlier this year, has grown to more than 150,000 members in 172 locales worldwide in seven years.
The firm has 44 offices in New York City and after the Lord & Taylor acquisition it will occupy more than 4 million square feet, or double the office space in Manhattan used by financial giant Goldman Sachs, according to Colliers International.
Reporting by Herbert Lash; Editing by Marguerita Choy