Deal turns part of HBC stores into workspace

A day after an activist investor lodged his latest grievance against veteran retailer Hudson’s Bay Co., the retail company countered Tuesday with a blockbuster real estate deal that will cut debt and increase cash by $1.6 billion through a joint venture deal and the sale of its Lord & Taylor flagship in New York.

The deal with Rhone Capital LLC and New York-based WeWork Cos. will see floors of HBC’s key department stores in New York, Toronto, Vancouver and Germany converted into WeWork’s shared office workspaces for entrepreneurs, freelancers and small businesses.

The iconic Lord & Taylor building on Fifth Avenue in Manhattan will serve as global headquarters for the office space startup, and the existing Lord & Taylor will shrink to about a quarter of its size within the 660,000-square-foot building, leasing back 150,000 square feet on its lower floors.

“Retail space is very valuable on the ground floor, one floor down and one floor up — and it becomes less valuable as you head up from there,” said Ian Putnam, chief corporate development officer at HBC.

The deal, coming at a time of profound struggle for traditional department stores, will see Rhone Capital LLC buy $632 million worth of convertible shares in HBC, the owner of Saks, Gilt.com and Hudson’s Bay department stores. Rhone and WeWork have also teamed up to buy the Lord & Taylor building on Fifth Avenue for $1.08 billion.

“With this transaction we are shrinking the square footage and making the upper floors much more productive,” Putnam said. “And from our perspective, the interaction between the WeWork space, the store and the food and beverage offering will be very exciting and attract a new, younger millennial customer into the department store.”

While Putnam did not elaborate on the current productivity of those sales floors, he said HBC believes any sales impact will be offset by increased traffic.

“If you go to a WeWork it really is a way to shop and live and work in one environment. There are a lot of young, talented people who are interacting — it’s very communal.”

HBC has been proactive in recent years about converting dead square footage into crowd-drawing space, through opening trendy restaurants and boutiques such as Topshop and Kleinfeld Bridal.

In addition to the New York store, the transformation will affect two floors in each of HBC’s Galeria Kaufhof department store in Frankfurt, Toronto’s Hudson’s Bay flagship on Queen Street and HBC’s Vancouver store, realigning an assortment of categories such as home goods and lingerie.

“It’s brilliant,” said Jim Danahy, CEO of Toronto-based retail advisory firm Customer Lab. “(HBC executive chairman) Richard Baker sees the value of retail space as a creative leveraging tool, but he hasn’t walked away from the sense of community and purpose that retail serves. Think about having people who live and work and shop all in the same place.”

Many old-school real estate developers too frequently think of only single-use land planning, Danahy said, but the future points to “adaptive mixed reuse” of commercial retail spaces.