HBC paring back its retail space
Selling stores, converting space into offices part of series of deals
“To the extent that we can better use top floor or upper floor levels, we’ll do that.” IAN PUTNAM CHIEF CORPORATE DEVELOPMENT OFFICER, HUDSON’S BAY COMPANY
Retail space in select Hudson’s Bay stores in Canada will be converted into office space as part of a series of deals that includes the sale of its Lord & Taylor flagship in Manhattan for more than $1 billion, it was announced Tuesday.
The Fifth Ave. store was purchased by WeWork Property Advisors, a joint venture between WeWork and Rhone Capital, a private equity firm, which also agreed to make a $500-million (U.S.) convertible shares equity investment in HBC.
WeWork Cos. is a New York-based startup offering office space and services, with 170 physical locations in 56 cities and 18 countries.
As part of the deal, the sixth and seventh floors of the Hudson’s Bay store on Queen St. — where lingerie, kidswear and home items are currently sold — will be converted into office space for WeWork Cos., as will the upper floors of the Hudson’s Bay on Granville St. in Vancouver and a Galeria Kaufhof in Frankfurt.
“The department store is not going away — that is critical, but to the extent that we can better use top floor or upper floor levels, we’ll do that,” said Ian Putnam, chief corporate development officer at Hudson’s Bay Company.
“In retail, obviously, the main floor is very valuable and as you go up in the building, the productivity of those floors decreases, so in our minds, we’re converting relatively less productive space from a retail perspective into office for WeWorks,” Putnam said.
Putnam said the move will bring millennial officeworkers into department stores.
“We think that the interaction between the WeWork office and the retail space, and the food and beverage offering in the stores, will be exciting and dynamic,” he said.
He called WeWorks voracious consumers of real estate, and while there is no commitment as to the number of stores that will be included in the program, there is opportunity for growth.
“They’re very keen on our 61 million square feet of real estate around the world,” Putnam said.
Adam Neumann, chief executive officer and co-founder of WeWork, said retail is changing and the role that real estate has to play in the way people shop has to change with it.
“The opportunity to develop this partnership with HBC to explore this trend was too good to pass up,” he said in a statement.
The Lord & Taylor building in New York that is part of the deal is approximately 670,000 square feet and the purchase price includes air rights, which are buildable, according to Putnam.
It will operate as is through the end of the 2018 holiday season, after which the store will be relaunched in a 150,000 square-foot space with the rest of building to be occupied by WeWork’s New York headquarters and WeWork office space.
The sale is in line with recent actions taken by other department stores to reduce or reorient square footage, said Fitch Ratings associate director JJ Boparai.
“Many department stores are selling square footage to add experiential components to the stores or allocating some of the existing square footage to growth concepts. We expect department stores will continue to reevaluate their physical footprints in the near-term,” she said.
Boparai said that while Hudson’s Bay’s announcement that it will be able to pay down debt and increase liquidity with the proceeds of the deal is a positive, concerns remain around the company’s ability to manage expenses and successfully navigate the challenging department store sector.
HBC has been under pressure to monetize the value of its real estate. On Monday, activist investor Land & Buildings threatened to call a shareholder’s meeting to possibly remove directors if the company didn’t take action soon.
“The activist is just suggesting to us that we do what we’ve always done,” Hudson’s Bay executive chairperson Richard Baker told Bloomberg on Tuesday, adding that the transaction started before Land & Buildings bought a stake.
A spokesperson for Land & Buildings declined to comment Tuesday on the HBC deal.
According to a release from HBC, the transaction is expected to result in debt reduction of $1.6 billion (Canadian) or cash on the balance sheet and an increase in total liquidity of $1.1 billion.