Macy’s is advancing plans to monetize and downsize its three flagships in San Francisco, Chicago and Manhattan and has its eye on changing many of its other 730 locations.
It’s about capitalizing on excess or underproductive square footage through selling, leasing or redeveloping space, all to provide greater value to shareholders and increase sales productivity.
Progress on Macy’s evolving real estate strategy was cited by Karen Hoguet, Macy’s Inc.’s chief financial officer, at Tuesday’s Morgan Stanley Global Consumer and Retail Conference. She provided commentary on Macy’s men’s store on Union Square in San Francisco which has been sold, still operates but will be consolidated into the women’s flagship on Union Square; the Chicago flagship on State Street, Macy’s most architecturally impressive site, where an announcement on how Macy’s will monetize upper floors will be made “before too long,” and on the Herald Square flagship, considered the world’s largest store with more than 2 million square feet (gross), where the retailer is devising a plan for major alterations.
“Herald Square is the hard one,” said Hoguet. “It is extraordinarily productive even up to the ninth floor. There’s lots of offices and it’s in a complicated city in which to make change. Given the value that we all know to be inherent there, whatever that is, we’re taking a lot of time and using a lot of outside help to make sure we come up with the plan that will create the most value.”
At the Chicago flagship, “We’ve been working on trying to monetize the upper floors. We don’t have anything to announce now, but hope to before too long. The idea there is to shrink the store’s site somewhat, much like what we did in downtown Seattle.…We think the smaller footprint with a neighbor above with a lot of people will make a much better store.”
On Union Square in San Francisco, “We sold the men’s box. We’re still operating it until we’re ready to integrate it,” into the main box. “That will happen shortly. And we will integrate men’s back into women’s. You would always like to have a store completely together.…The hope is we will be able to reintegrate men’s into the main box and bring energy to the whole store. We will lose sales, but hopefully not as much as you might think and the productivity will go up, which will make it more profitable.
“The Union Square facing property is extremely valuable. We’re actually going to build space for specialty stores at the front of our store,” to capture value. “We’ll still have frontage — right on the square — but not as much as we do today. Again, we think it will bring new energy and vibrancy to the store.”
Macy’s intensified examination of its real estate stems from pressures to increase its profitability and raise shareholder value, and from other retailers such as Hudson’s Bay Co. and Sears Holdings which seem to be pacing the industry in monetizing real estate aggressively over longer periods.
Last month, Hudson’s Bay said it was selling its Lord & Taylor flagship on Fifth Avenue for $850 million to WeWork Cos. The 650,000-square-foot flagship will be downsized after the 2018 holiday season to 150,000 square feet and most of the site will serve as the New York headquarters for WeWork. Among its deals of the past few years, HBC has partnered with Simon Property Group Inc. in the HBS Global Properties Joint Venture, which owns properties in the U.S. and Germany. HBC contributed 42 owned or ground-leased properties, including the Saks Fifth Avenue Beverly Hills flagship and the Lord & Taylor stores in Westchester and Manhasset, N.Y.
In Canada, HBC contributed 10 owned or ground-leased properties in partnership with RioCan Real Estate Investment Trust called the RioCan-HBC Joint Venture and earlier, HBC sold its Zeller’s chain in Canada to Target Corp. for the mass retailer’s ill-fated Canadian expansion, did a sale-leaseback on its Hudson’s Bay’s Queen Street flagship in Toronto and sold the ground portion of the 640,000-square-foot Saks Fifth Avenue flagship in Manhattan.
Macy’s this year sold and closed its downtown Minneapolis flagship, and well before that transaction, sold the top four floors of the Macy’s in downtown Seattle, among other real estate transactions. The $26 billion Macy’s owns just over 400 of its 730 department stores. In the past two years, some industry experts have valued Macy’s property portfolio at over $20 billion.
With its year-old partnership with Brookfield Asset Management, Macy’s has determined that about two-thirds of the 50 properties being examined will in one way or another get redeveloped. “These are all locations where we want to operate the store,” Hoguet said, but with property that could be redeveloped, be it part of the store, a parking field, or possibly a freestanding furniture store that could be converted into something else, while furniture gets integrated into the main store.
“The idea here is to take advantage of opportunities that we have with real estate that’s valuable and frankly just isn’t being used today. There are a lot of interesting ideas,” Hoguet said. She sees benefits being twofold, from monetizations and by creating “vibrant shopping environments.”
Among the possibilities, is converting parcels into a mixed-use building with residential, retail and office space or converting property into rings of restaurants.
Of the 50 locations Brookfield is scrutinizing, “Some have little opportunity, some are bigger opportunities,” Hoguet said. “Almost all of them are in malls that are not owned by a major developer because we thought it would be easier to execute a transaction where there wasn’t another major developer involved.”
Such conversions, said Hoguet, “take a long time to make happen. What we’ve learned is the more research you do up-front, the more value you will get in the back end.”
Brookfield Property Partners has offered $14.8 billion to buy out the 66 percent of mall operator GGP Inc. that it does not already own. Asked how such consolidations could impact Macy’s, Hoguet replied, “We have good partnerships with the developers. We’ve worked really hard over the last two years to even make them better. Hopefully, if any of these changes should happen, that would not impact us.”
Macy’s stores are also being altered with the rollout of Backstage off-price areas. Though there are seven freestanding Backstage stores, “The right place for (Backstage) to be is within our stores because that increases the productivity of our stores (and) brings new customers to the store,” Hoguet said.
“Frankly, it’s the only off-price concept in the mall. So it’s actually proving to be quite additive to what we’re offering in these stores. We currently have 45 opened within our stores and expect to expand that pretty aggressively in 2018 and continue from there. How many will there ultimately be? I don’t know yet. But we do feel really good about it.”
The rollout is “not a huge amount of capital per store. But if we want to roll it out aggressively, it’s obviously a lot in total, but not per store. It’s all funded within our capital budget. I don’t expect an enormous increase in our budget as a result of Backstage.”