By Phil Wahba
October 24, 2017

HBC (hbc) said Tuesday it will sell the flagship Fifth Avenue department store of its Lord & Taylor chain in Manhattan to WeWork for $850 million, in a deal that speaks volumes about the market for retail and office space.

The transaction is part of a deal that will lower HBC’s high debt levels and give the office space startup a new prominent headquarters in the heart of New York’s busiest business district.

WeWork will also lease space in other HBC stores-owned in other cities. HBC, which also owns Canada’s Hudson’s Bay, Saks Fifth Avenue and Germany’s Galeria Kaufhof, said it would lease WeWork space on the upper floors of HBC-owned stores in Toronto, Vancouver and Frankfurt.

It’s an initiative that embodies the pressures on brick-and-mortar retailers to find new ways to generate revenue from struggling stores. In its most recent quarter, HBC said comparable sales at its department stores (excluding Saks but including Lord & Taylor) had fallen.

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It also illustrated the kind of unusual arrangements retailers and mall developers are looking at to extract value from their real estate holdings. HBC has faced pressure from an activist investor for its lackluster financial performance (one bolder suggestion was to turn the Saks Fifth Avenue flagship into a hotel).

After the 2018 holiday season, when the Lord & Taylor building will become WeWork headquarters, the retail space will be down to about 150,000 square feet, a far cry from the 675,000 square feet the Italian Renaissance landmark building once occupied a century ago, when Lord & Taylor was one of the most important retail destinations in New York.

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The move comes amid some turmoil for HBC: last week, it abruptly announced the departure of its CEO, Jerry Storch, just ahead of the holiday season. Its shares have declined sharply in the last year amid fears about its own business, including its debt levels, as well as the pressures buffeting all department stores including the likes of Macy’s.

In addition to the WeWork deal, Rhône Capital, which teamed up with WeWork in a real estate investment fund last year, will make a $500 million equity investment in HBC. All told, HBC’s debt load will fall by C$1.6 billion, or about $1.25 billion.

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And HBC Executive Chairman and acting CEO Richard Baker said on Tuesday the WeWork arrangements could be expanded.

“We have 450 locations around the world and we think there’s an opportunity to go from four to a lot more,” Baker said at WWD’s Apparel and Retail CEO Summit in New York. But he dismissed the idea that the iconic Saks Fifth Avenue store up the street could ever be part of such a deal.

“Certainly not in the Saks flagship. That is one of the most productive buildings in the world.” Baker said, noting the $250 million has pumped into the store’s renovation.

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