By  on April 13, 2007

NEW YORK — Myron E. Ullman 3rd could be taking J.C. Penney Co.'s battle with Federated Department Stores right to Macy's home turf, the 34th Street corridor.

In a move that would reshape New York retailing, sources said Penney's is close to a deal for major space in the Manhattan Mall — one block from Macy's lucrative Herald Square flagship, which is said to generate about $650 million to $675 million in annual volume. Penney's, which has stores in every New York borough except Manhattan, has been trying to find a location in the city for some time. The company is in growth mode, opening about 50 stores a year.

A Penney's spokesman declined comment Thursday, and sources stressed a deal could still fall apart.

Manhattan Mall, a 1 million-square-foot, mixed-use building located on Sixth Avenue between 32nd and 33rd Streets, has 164,000 square feet of retail space on four levels. About 812,000 square feet of office space is occupied mainly by Bank of America and Interpublic Group. Vornado Realty Trust bought Manhattan Mall from Argent for $689 million in November.

While the mall is populated largely by moderate retailers and has a somewhat difficult floor plan and garish decor, the stores are highly productive. With about 60 retailers, the mall does about $900 to $1,000 in sales per square foot, Mark Teitelbaum, chief operating officer of Argent Ventures, said in November. The mall's rents average over $150 a square foot.

Its sales per square foot make the mall more productive than some of the top centers in the U.S. Taubman Centers Inc.'s portfolio of malls registers the highest sales per square foot in the industry, averaging $508 in 2005, although that figure includes department store anchors, which generate lower sales and bring down the average. One of the most successful centers, the Forum Shops at Caesars Palace in Las Vegas, generates sales of $1,400 per square foot.

It could not be learned what space Penney's would occupy in the Manhattan Mall. There are no large vacancies, but real estate sources said most tenants have relocation clauses in their leases, which means they could be forced to move. Steve & Barry's is the largest tenant, with 27,000 square feet. There is about 10,000 square feet of space available on the second level and possibly 3,500 square feet on the main floor, a source with knowledge of the mall said.Another possible scenario would be to put Penney's on the lower level where the food court is located and where Children's Place occupies 6,500 square feet.

The two-level Express unit at the mall is one of the best performing in the chain. Other retailers include Aéropostale, Jimmy'Z, Victoria's Secret and Body Shop. Vornado already owns the Hotel Pennsylvania on Seventh Avenue and a series of smaller buildings on 34th Street between Seventh and Eighth Avenues. Real estate sources speculated Vornado could expand Manhattan Mall, which is adjacent to the hotel. Vornado has already said that it intends to tear down the hotel and build an office tower with a trading floor.

Penney's, which is based in Plano, Tex., has had flirtations with Manhattan. The company in March 2006 opened a pop-up store at 1 Times Square that showcased the retailer's technology. Shoppers were able to purchase — but not take home — the complete merchandise offering at 22 Internet kiosks in the 15,000-square-foot space.

A year ago, Penney's was said to be looking for about 30,000 square feet of retail space in Manhattan, targeting the 34th Street corridor. It's no wonder Penney's wants to locate a store in the area: The Gap on the southeast corner of Sixth Avenue and 34th Street is the top-performing unit in the chain, logging about $60 million in annual sales. Other nearby stores include Victoria's Secret and H&M.

According to the 34th Street Partnership, a coalition of property owners and city officials working to revitalize the area, 100 million people pass through the four corners of 34th Street and Broadway annually. One million public transit users a day walk through the district.

Recognizing the huge potential in the area, rents recently have been climbing in the corridor to between $500 and $600 a square foot. Recent arrivals include Billabong and Bebe.

But it hasn't been easy for mass merchants and department stores to locate in Manhattan. Wal-Mart, Target and Nordstrom have been eyeing locations here for years. Kmart has two stores in Manhattan and Home Depot opened a downsized store on the lower level of the new Bloomberg tower. Bloomingdale's opened a scaled-down version of its 59th Street flagship in SoHo.Penney's has been on a tear of innovation over the last 18 months, and Ullman has stated that he sees immense opportunity to capture market share from Federated as it digests the former May Co. stores and transforms Macy's into a nationwide nameplate. Penney's is spending $1 billion a year to improve its stores.

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