Lord & Taylor Building, Icon of New York Retail, to Become WeWork Headquarters

Michael J. de la Merced and Michael Corkery
Lord & Taylor in New York.
Richard Levine | Corbis | Getty Images

From the moment it opened its doors more than a century ago, the Lord & Taylor building on Fifth Avenue in Manhattan has stood as an icon of old-school retail.

Its Italian Renaissance design, complete with grand entrance arch and copper cornice, was a 676,000-square-foot temple to commerce — and was named a city landmark a decade ago.

But after Christmas next year, less than a quarter of its space will be home to Lord & Taylor's flagship store. Instead, the retailer said on Tuesday, the Midtown Manhattan fixture will become the new global headquarters of WeWork, the seven-year-old office space start-up. Lord & Taylor will rent the bottom floors, redesigning them into a smaller version of its department store.

More from The New York Times:
The Dow Jones Without G.E.? It's Possible
Competition, and Debt, Could Spell Trouble for Verizon
Lyft Is Said to Explore I.P.O. as It Raises $1 Billion Led by Alphabet

In selling its flagship building to a WeWork joint venture for $850 million, Lord & Taylor and its parent, the Hudson's Bay Company, are bowing to pressures that have increasingly weighed on the retail industry. It is an acknowledgment that even the grand physical shopping spaces of old can now fetch higher values as offices catering to millennial workers.

Across the United States, retailers are rethinking the uses of their physical spaces, as more shopping moves online and consumers prefer to spend less time in stores. Many struggling malls have converted their stores into rock-climbing gyms, movie theaters and community colleges. Other shopping centers stand mostly empty.

Over the past year, Macy's has closed dozens of its department stores, though it has held onto its flagship one on 34th Street in Manhattan.

But selling off landmarks also comes with risks. Many old-line retailers have struggled to strike a balance between cashing out their valuable real estate and holding on to historic buildings that have come to define their brands.

It is a difficult task that Lord & Taylor is now undertaking.

Founded by the English merchant Samuel Lord in 1826, the department store was once a favored retailer of high society. When its Fifth Avenue flagship opened in February 1914, it drew 75,000 visitors, who were treated to music from a pipe organ on the seventh floor and could chose to dine in one of three restaurants on the top floor.

But as the company moved into the mass market in subsequent decades, it lost much of its luster.

It was under Richard Baker, a veteran real estate investor, that Lord & Taylor recovered. Mr. Baker led a 2006 takeover of the department store company, and used that as a springboard for further acquisitions, from the Canadian chain Hudson's Bay to Saks to the e-commerce outlet Gilt Groupe. He is now chairman and interim chief executive of Hudson's Bay.

But as the retail industry has been battered by the tidal waves of e-commerce, Hudson's Bay has seen its stock price fall by nearly a third over the past year. Retail sales at Hudson's Bay were down about 1 percent in the first half of the year. As of Monday's close, the retailer had a market capitalization of roughly $1.7 billion, or a tenth of WeWork's private market valuation.

Hudson's Bay has faced enormous pressure to sell its trove of real estate holdings — including its crown jewel, the Saks Fifth Avenue flagship store farther up Fifth Avenue. That property was appraised recently at about $3.7 billion.

One of Hudson's Bay's shareholders, the real estate investment firm Land and Buildings Investment Management, has pushed for the company to sell the Saks store, suggesting it might be desirable to a hotel developer or as bricks and mortar space for Amazon.

"The path to maximizing the value of Hudson's Bay lies in its real estate, not its retail brands," Jonathan Litt, the founder of Land and Buildings Investment Management, wrote in a letter to the board of Hudson's Bay in June.

That pressure apparently has had an impact. Last week, the department store operator said that its chief executive, Gerald Storch, had stepped down and that he would be replaced on an interim basis by Mr. Baker.

And Tuesday's announcement acknowledges Mr. Litt's criticism to some extent. Beyond the Lord & Taylor building sale, Hudson's Bay struck agreements to lease some of its other retail space to WeWork, including in Hudson's Bay stores in Canada.

WeWork's partner in its real estate joint venture, Rhône Capital, will also invest $500 million in Hudson's Bay. (The joint venture, WeWork Property Advisors, will eventually take over some of that holding.)

All told, that will give Hudson's Bay more than $1 billion in fresh capital to pay down debt and bolster its cash holdings. The $850 million purchase price for the building is about 30 percent higher than an appraisal made in July 2016.

"This partnership places H.B.C. at the forefront of dynamic trends reshaping the way current and future generations live, work and shop: the sharing economy and urban and suburban mixed-use real estate planning," Mr. Baker said in a statement.

For WeWork, the deal is a sign of the fast-growing start-up's ambitions.

Originally created as a provider of shared working spaces, the company has increasingly pitched itself as reinventing how work is done. That vision has drawn backers like SoftBank, the Japanese conglomerate, which invested $4.4 billion in WeWork this year.

The Hudson's Bay deals are meant to give WeWork prime real estate, particularly in Midtown Manhattan, with a way to blend street-level retail space alongside upper-floor real estate more useful for shared office space.

"Retail is changing, and the role that real estate has to play in the way that we shop today must change with it," Adam Neumann, WeWork's co-founder and chief executive, said in a statement. "The opportunity to develop this partnership with H.B.C. to explore this trend was too good to pass up."

While WeWork normally leases space in commercial buildings, it set up WeWork Property Advisors to buy some property outright. Among the advantages of such arrangements is that the start-up would be able to enjoy any rise in the value of the real estate where it sets up its co-working spaces.

Whether the move will placate Land and Buildings, which has threatened to try to replace the Hudson's Bay board in the wake of Mr. Storch's departure, is unclear.