WeWork venture to Buy Lord & Taylor’s New York Flagship Store for USD 850 Million

Work-space start-up to convert the landmark department store building into its headquarters

The Lord & Taylor Flagshipstore in New York City, USA

Real estate start-up WeWork Cos. has struck a deal to acquire Lord & Taylor’s flagship New York City store for USD 850 million, a move that will convert the landmark building into the start-up’s headquarters next year.

The transaction, part of an effort by Lord & Taylor’s parent Hudson’s Bay Co. to reduce its debt, is the most dramatic sign of how excess retail square footage is giving way to more profitable uses of real estate.

Lord & Taylor has operated its store on Manhattan’s Fifth Avenue since 1914, but the company’s parent has been exploring strategic options for its real-estate assets as fewer shoppers visit department stores. The Fifth Avenue store was appraised at USD 650 million a little more than a year ago. Lord & Taylor will continue to operate a smaller store at the location, but most of the 12-floor building will become WeWork’s headquarters and other office space.

WeWork, which has raised billions in venture capital since it was started in 2010, has become one of the world’s richest start-ups, with a valuation of more than $20 billion. It takes on long-term leases for raw office space and builds out the interior with flexible spaces and modern design that it then subleases for terms as short as a month. The company is buying the New York store through its real estate fund, WeWork Property Advisors.

Department stores have been struggling with falling sales as shoppers buy more online, shift their preferences to smaller specialty stores and spend more on travel and entertainment. Macy’s Inc. and Sears Holdings Corp. have been closing weaker stores and looking to redevelop some locations. Earlier this month, the family that runs Nordstrom Inc. postponed a plan to take the company private until after the holiday season after failing to raise enough financing at reasonable rates.

Earlier this year, Hudson’s Bay explored potential combinations with both Macy’s and Neiman Marcus, people familiar with the matter said, but the discussions didn’t result in deals. And in June, activist investor Land & Buildings Investment Management LLC took a stake in Hudson’s Bay and urged the company to consider strategic alternatives, including redeveloping its vast real estate holdings.

“We pay a lot of attention to not only managing our retail business but to creating value through creative transactions with our real estate,” said Hudson’s Bay’s Chairman and interim CEO Richard Baker, whose company also owns Saks Fifth Avenue.

He added that there is a future for department stores, but they need to make their space more productive. “Department stores aren’t going anywhere,” Baker said. “Stores that are well run will be here for a long time.”

WeWork formed a joint venture with private-equity firm Rhône Group, which is investing USD 500 million in convertible preferred shares in Hudson’s Bay, as part of the investment. WeWork will also take space in the upper floors of three Hudson’s Bay department stores in Canada as well as the Galeria Kaufhof in Frankfurt.

Hudson’s Bay expects the transactions to reduce its debt by 1.6 billion Canadian dollars. It forecast “minimal impact on its earnings from the sale of the Lord & Taylor Fifth Avenue building, which, in comparison is many times less productive than the Saks Fifth Avenue flagship building.”

Lord & Taylor is considered the oldest U.S. department store, dating back nearly 200 years. It was a pioneer in many ways, becoming the first to install an elevator, the first to open a branch location, and the first to hire a woman CEO, Dorothy Shaver, who was instrumental in making it a beacon for American designers in the ‘40s and ‘50s. It was acquired by Canada’s Hudson’s Bay in 2012 and operates around 50 locations.

Baker said he expects the partnership to bring an additional 6000 to 8000 people to the stores per day. The companies expect to offer reciprocal benefits that will give WeWork members access to exclusive sales and allow Hudson’s Bay customers to join WeWorks’ member platform.

Eric Gross, a managing partner at WeWork Property Fund, and M. Steven Langman, a managing director of Rhône Group, will join Hudson’s Bay’s board. Last week, Hudson’s Bay said its CEO, Gerry Storch, was leaving the company on Nov. 1.