BOSTON — This college town is a textbook case of the major, and sometimes paradoxical, themes roiling U.S. retailing.
There is a legendary regional department store in its dying throes — big-box discounters circling, corporate consolidation and a thriving luxury scene tied to a sizzling, if somewhat precarious, housing market.
Federated Department Stores’ $17 billion acquisition of May Department Stores Co., which operated Filene’s and Lord & Taylor, is a catalyst. Federated’s announcement that it will close eight Filene’s stores in Massachusetts and sell off the downtown flagship has led to speculation and concern over what might occupy a landmark as familiar to Bostonians as Fenway Park. The nine-story Beaux Arts structure anchors Downtown Crossing, a conduit for more than 100,000 people daily and the city’s busiest intersection.
Federated executives also are debating the future of L&T, operator of a New England flagship on Boylston Street downtown and four stores in area malls. Given Federated’s preference for streamlining, the Boston L&T might be sold or converted to a Bloomingdale’s, which, like Macy’s, is owned by Federated. The Bloomingdale’s in Chestnut Hill, Mass., about a 20 minute drive from downtown, is to expand.
The Cincinnati-based conglomerate is eliminating regional brands to make Macy’s a national nameplate. Boston will lose at least 1,100 jobs at Filene’s headquarters, from which May Co.’s Kaufmann’s chain also was run. The closings will affect an estimated 1,600 more jobs at the eight metro-area Filene’s slated to shut.
The Federated consolidation is one more ding to a dented regional economy. Several of the area’s biggest employers, including FleetBoston Financial and Gillette Co., have been swallowed in mergers in the last two years. Proctor & Gamble Co., which bought Gillette, plans to cut 6,000 jobs. Adidas Salomon AG’s $3.5 billion purchase of Canton, Mass.-based Reebok International in August might also result in job losses.
“The whole center of gravity could shift because of Federated’s purchase of May, and until those dynamics are set, the jury is out,” said Ross B. Glickman, chairman and chief executive officer of Chicago-based Urban Retail Properties Co., which is building Waterside Place, a mixed-use development on the South Boston waterfront.
Boston, which has seen dramatic run-ups in real estate values, is also the U.S. metro area at greatest risk for housing price declines, based on home sale prices relative to employment and income levels, according to PMI Group, a Walnut Creek, Calif.-based mortgage insurance company.
Still, luxury retailers, betting on an affluent population and strong base of universities, hospitals and biotech labs, are undeterred. Barneys New York, Neiman Marcus and Nordstrom are opening units in Boston or environs and Saks Fifth Avenue has just begun a $25 million overhaul of its Copley Place store.
“Boston is a great university city and we have a terrific business there,” Saks president and chief operating officer Andrew Jennings said.
Developers also are seizing wedges of the South Boston waterfront, considered one of the city’s last major frontiers.
Urban Properties has talked with executives from Nordstrom and Target about coanchoring Waterside Place, Glickman said. The $300 million project aims to transform acres of parking lots in South Boston into an urban village of retail, restaurants, theaters, luxury residences and a hotel to open in late 2008 or early 2009.
Still, most attention is focused on Downtown Crossing, which has been defined and anchored for the last century by traditional department stores.
Wal-Mart, Target, Kohl’s, The Home Depot and Jordan’s Furniture, a regional operator owned by Berkshire Hathaway, are among eight companies that have expressed interest in the Filene’s site, said real estate sources, who asked not to be identified.
The Filene’s name will live on at Downtown Crossing as Filene’s Basement, originally used to clear bargain merchandise. The Basement chain now operates as a division of Columbus, Ohio-based Retail Ventures, and has a long-term lease of the building’s windowless, lower floors. It is one of the city’s major tourist attractions, drawing 15,000 to 20,000 visitors daily.
Whatever occupies the building’s upper stories, one sentiment has emerged: Target would likely get a red-carpet welcome from the city. Wal-Mart would not.
Wal-Mart executives scouted Downtown Crossing in July when it became clear Federated would shed either the Filene’s building or its downtown Macy’s lease, according to a Boston Globe report. Filene’s faces a 400,000-square-foot Macy’s across Washington Street.
Philip Serghini, Wal-Mart’s Northeast community affairs manager, said the Bentonville, Ark.-based retailer is not interested in Downtown Crossing, nor is it pursuing any other Boston site.
Mayor Thomas M. Menino, a Democrat who described himself as “a fan” of Target, criticized Wal-Mart this month for not being “fair to labor” at a union-sponsored breakfast, people who attended said.
Menino’s press secretary, Seth Gitell, said that the mayor had met with Target executives about the Downtown Crossing site, and that Menino would welcome more Target stores.
“I think people have their fingers crossed that Target can pull off a deal,” said Suzanne Mulvee, real estate economist with Boston-based Property & Portfolio Management Inc. ” People talk about it as a great choice for the area. Politically, it would be much more difficult to bring in Wal-Mart.”
Much of the response appears to derive from the images of Wal-Mart and Target, rather than from knowledge of substantial operating differences. Wal-Mart is perceived by some as antiunion, and an irresponsible employer, criticism the $285 billion company is trying to rebut. Target is seen as stylish, and a good neighbor through its support of the arts and education.
However, both retailers would create several hundred entry-level (nonunion) jobs in Boston, paying $8 to $11 an hour. Either store would stock hundreds of identical basic household items.
Asked whether Federated would sell to either discounter (and put a competitor across from its Macy’s New England flagship), spokesman Jim Sluzewski said he would “not rule anything in or out.”
West of Downtown Crossing is the epicenter of luxury retail expansion in the densely built blocks around Copley Place and the Prudential Center. The two adjoining malls housed Christian Dior, Louis Vuitton, Neiman Marcus and others.
Barney’s New York is opening in Copley Place in the spring. Saks Fifth Avenue, also part of the complex, is overhauling its entire store for an August relaunch. The renovation will add 10,000 square feet of selling space, boost amenities and improve traffic flow, Jennings said.
L&T, which abuts the Prudential Center, announced in the spring that it would get a facelift. That’s now on hold, Sluzewski said.
Around the corner from Saks, construction is under way on the $240 million Mandarin Oriental hotel, a property aiming for five-star status with 24-hour concierge service and luxury retail on its ground floor. The hotel includes 50 residences, which have sold from $2 million for a one bedroom to $13 million for a penthouse. The Mandarin follows expansion of The Colonnade, a luxury hotel on Copley’s west side, which added 99 luxury apartments in 2003.
“Baby Boomers are cashing out of their big suburban homes and moving into the downtown,” said Karl Case, professor of economics at Wellesley College in suburban Wellesley, Mass. “They’re loaded and they want services. This means a major concentration of buying power downtown and away from the malls.”
Case said the trend has longevity, given the Baby Boomer generation includes people as young as 41.
But other local economists question whether this level of luxury development is justified given an ebbing population, a potentially overheated housing market and a loss of corporate jobs.
“I am very worried,” said Paul Briggs, senior real estate economist with Property & Portfolio Management, a Boston real estate research firm. “It’s difficult to see where the demand drivers are going to come from. In our last down cycle [in 1990], we rebounded because Fidelity [Investments] added jobs like crazy. Now I think Fidelity and State Street [Bank] are good candidates for [a] takeover by a Wall Street firm.”
Debi Greenberg, owner of Louis Boston, a linchpin of the luxury retail scene in the swanky Back Bay area, questioned whether the neighborhood can support four high-end department stores, which would be the case if Bloomingdale’s takes over the L&T spot.
“How many department store anchors do you need?” she said.
Meg Mainzer-Cohen, president of the Bay Back Association said some of the city’s social clubs are struggling to maintain membership.
Yet more investors seem to be betting on Boston rather than against it.
Case said the state’s two largest sectors — health care and education — are growing and secure. And development has been reenergized.
The 1.7 million-square-foot Waterside Place is to have a 20-story hotel, a 21-story residential high rise, 500,000 square feet of retail and a 16-screen cinema. It will abut the convention center, which opened in 2004.
In August, the billionaire Pritzer family, owners of the Hyatt Hotel chain, sold Fan Pier in South Boston to local developer Joseph Fallon. The sale clears the way for a 3 million-square-foot, mixed-use development. If completed, it will be the biggest waterfront project in city history.
The Fenway neighborhood, west of the Back Bay, also is getting a boost from Red Sox ownership’s decision to renovate Fenway Park. The Trilogy Project high rise will add 50,000 square feet of retail, with residences above catering to the Longwood Medical Center and Harvard Medical School. Fenway is mostly apartments, bars, restaurants and medical facilities and has not had a major new retail development in years.
Then there is the completion (barring a few tunnel leaks) of the Big Dig, the long-delayed $15 billion engineering project that buried much of the old elevated I-93 highway into a system of tunnels. Land where peeling, green-painted overpasses once bisected the city — separating Boston Harbor from downtown — will be reclaimed as the Rose Kennedy Greenway, a 27-acre park rimmed with new housing.
“We will become the neighborhood shopping area for all those people who move to the Greenway,” predicted Anne Meyers, president of the Downtown Crossing Association.
About 1,000 housing units are being added to Downtown Crossing, bringing the total to 3,000 residences. Mayor Menino has chipped in $1 million for flowers and other amenities as part of the Downtown Crossing Economic Improvement Initiative.
Meyers said the loss of Filene’s is “a blow,” but residences have her encouraged about the district’s long-term health. The 656,000-square-foot Filene’s building ultimately will be subdivided and occupied by a range of tenants, she predicted.
Although Meyers is not keen on the prospect of Wal-Mart downtown, a large general merchandise outfit could be useful. “There are a lot of people moving downtown,” she said.