In Midtown Manhattan, the sale of an iconic New York City building might perfectly illustrate the new business landscape -- and a shift in the way we meet, work and shop.

On Tuesday, Lord & Taylor confirmed that it was selling its flagship department store at Fifth Avenue and 38th Street for $850 million. The grand store was once the symbol of Manhattan elegance, even appearing in Theodore Dreiser's novel Sister Carrie. The acquirer? WeWork, the fast-growing coworking startup, which will move its global headquarters into the 12-story building (Lord & Taylor will still run a much smaller store at the location.)  

The move reflects the heightened pressure that traditional retailers face as billions of dollars worth of shopping moves online. In the past year, Macy's has closed dozens of department stores, and malls across the country have converted once-hallowed halls into gyms, movie theaters and community colleges. More recently, the Nordstrom family suspended plans to take the retail chain private for 2018, after failing to raise sufficient funds to do so this fall.

At the same time, startups that are changing customer behavior--encouraging them to order items such as glasses or razor packs online, say, or to set up shop in a buzzing shared office space, rather than a corporate atmosphere--are seeing big paydays. Just last year, the Los Angeles startup Dollar Shave Club sold to consumer products giant Unilever for as much as $1 billion, a move that reflected the value of e-commerce. Weeks later, Jet.com sold to Walmart for $3 billion. Meanwhile, startups such as Warby Parker are expanding at a rapid clip even as competitors close shop; the eyewear retailer opened several brick-and-mortar shops in 2017 alone, with more planned for 2018. 

A powerful new image 

WeWork, which along with other offices will use most of the 12 floors in the Lord & Taylor building, is benefiting from millennial work trends. Since mid-2014, shared office companies in the U.S. have leased more than 3.7 million square feet, bringing the total size of the industry to more than 27 million square feet-- or about 0.7 percent of the U.S. office market, according to real estate firm JLL. It's estimated that there will be more than 26,000 global co-working spaces by 2020, up from just 11,000 last year, according to the research firm Small Business Labs. With the Lord & Taylor space, in particular, WeWork will benefit from a more recognizable presence in a commercial district.  

"Retail is changing, and the role that real estate has to play in the way that we shop today must change with it," said WeWork co-founder and CEO Adam Neumann in a statement. 

Neumann and his co-founder, Miguel McKelvey, launched WeWork in 2010 with the aim of reinventing the nature of work. The company generally leases space in commercial buildings, rather than owning them outright, which it then revamps and subleases as shared office space to clients including freelancers and startups. In the past seven years, WeWork has ballooned to more than 80,000 members across more than 100 locations worldwide. It was most recently valued at $21 billion in July, making it the fifth highest-valued startup in the world.

Analysts anticipate that more fast-growing startups will become the purchasers of former retail spaces--especially in major cities, where businesses are looking for coders. "Startups want to attract talent, which tends to be in dense urban areas," says Sucharita Mulpuru, a veteran e-commerce analyst with research firm Forrester. "The good thing about [department stores] is that once you gut the interiors, they're just shells, and you can do whatever you want with them." She points to retail spaces that have been converted into call centers and consignment stores--as well as trampoline parks, charter schools and even churches.

In the meantime, Lord & Taylor's parent company Hudson's Bay Co. has been in dire need of a cash infusion. The company has seen its stock price fall by nearly a third over the past year, as shareholders have pressed the board of directors to also sell the iconic Saks Fifth Avenue location to a hotel developer--or even to Amazon, as it continues to build out its grocery service through the recent acquisition of Whole Foods. "The path to maximizing the value of Hudson's Bay lies in its real estate, not its retail brands," said Jonathan Litt, founder of the H.B.C. shareholder Lands & Buildings Investment Management, in a forcefully worded letter to the board last June. The company anticipates that the WeWork deal should help it to pay down more than $1 billion in debt. 

It remains to be seen whether the WeWork sale can keep the business afloat. But if the boards of traditional retailers continue to heed shareholder advice, it's a safe bet that you'll see more retail spaces being auctioned off in the coming months--and maybe to some entrepreneurial names you recognize. (Here's looking at you, Jeff Bezos.) 

Published on: Oct 24, 2017