The makeover department

Macy’s recently announced $400 million renovation isn’t the only upgrade among the city’s retail stalwarts
By Peter Kiefer | December 01, 2011 06:44PM

Manhattan’s department stores are under siege, as shoppers increasingly choose to go online rather than brave the city crowds. Last year, over $15 billion was spent in online shopping during the holiday shopping season, according to the digital research firm comScore, and that figure is expected to jump by as much as 15 percent in 2011.

In response to that and mega-stores like Uniqlo and Top Shop opening throughout the city, old-school department stores — like Saks, Bloomingdale’s, Macy’s, Barneys and Lord & Taylor — have effectively doubled down, upgrading stores to the tune of a half-billion dollars. Indeed, last month Macy’s announced a planned $400 million renovation to its Herald Square flagship.

Over the past few years, department store sales have fallen nationwide, forcing these stalwarts to fight over a smaller share of the pie. As a result, sources say, when one store upgrades, it often creates a “copycat” effect among others who are fearful of looking dated.

But according to several brokers and appraisers, any value these renovations may add to the property generally doesn’t boost the intrinsic value of the building. That’s because given the age of these spaces, any future sale would likely require a gut renovation and a switch from retail to another use.

As the holiday season moves into full swing, here is a look at recent renovations at five department stores, and what shoppers can expect to see while browsing for gifts.

Barneys (660 Madison Avenue)

alternate textCost of renovation: Not available
Period of renovation: March 2011 to December 2011
Size of store: 275,000 square feet
Scale of renovation: Several floors

Last year was a busy one for the upscale retailer. Indeed, new CEO Mark Lee took the reigns in September 2010. That was after Istithmar, the Dubai government’s investment arm, bought it three years ago for $942 million (including $500 million in debt) at the height of the boom. This year, its 660 Madison Avenue flagship underwent a major face-lift, right on the heels of a refinancing for which Real Capital Analytics valued the building at $800 per square foot. That put the total valuation of the store at around $220 million. That figure, predictably, is well above the $120.4 million that the city’s Department of Finance evaluated Barneys at (The Real Deal applied the same 45 percent markup to the city’s other department store appraisals to determine prices they would fetch, since similar valuations from RCA were not available). The upgrade is Barneys’ first major renovation since it moved to the building, which it owns, in 1993. Lasting much of this year, the renovation focused on the eighth floor, which now has a restaurant called [email protected] — a hat tip to former Barneys CEO Gene Pressman. But perhaps the biggest transformation was the merging of the men’s and women’s Co-ops, the division targeted to younger shoppers. The renovation is still underway on the main floor, so look out for further changes in the coming months as the bandages continue to be pulled off. That’s in addition to the shop windows that Lady Gaga is designing for the holiday season. A Barneys spokesperson declined to comment on the cost of the renovation.

Bloomingdale’s (1000 Third Avenue)

alternate textCost of renovation: Not available
Period of renovation: March 2011 to November 2011
Size of store: 859,000 square feet
Scale of renovation: 132,000 square feet

The 859,000-square-foot Bloomingdale’s flagship on 59th Street is the old dame of New York department stores. This year, the store celebrated its 125th year at that location with a renovation that impacted 132,000 square feet of retail space. Aisles were widened, allowing space for new retailers Bulgari, Damiani, Di Massima, Rachel Zoe and others. The city puts the current market value of the building at $170 million, but the value of the store could be closer to $245 million, given that the city undervalued the Barneys site by roughly 45 percent. Still, one source, a New York City real estate appraiser, speaking on the condition of anonymity, pegged the value closer to $221 million. According to Laura Pomerantz, principal and founding partner of PBS Real Estate, the opening of the Uniqlo on 53rd Street poses a direct challenge to Bloomingdale’s. “There is strong competition from the street retailers, and so they need a new environment to combat those upstarts,” she said. “It is difficult to do that without renovating their store. The old buildings cannot appropriately expand their brands.” Bloomingdale’s representatives declined to comment, and the cost of the renovation was not publicly available.

Macy’s (151 West 34th Street)

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Cost of renovation: $400 million
Period of renovation: Spring 2012 to fall 2015
Size of store: 2.2 million square feet
Scale of renovation: Will add 100,000 square feet of selling space

Last month, Macy’s announced a $400 million face-lift of its Herald Square flagship, the most expensive of the city’s recent department store renovations. And according to Faith Hope Consolo, the chairman of retail leasing, marketing and sales at Prudential Douglas Elliman, the announcement couldn’t come soon enough. “Macy’s was tired, old and just didn’t function,” she said. The renovation is expected to start this spring and last until 2015. It will add about 100,000 square feet of selling space to the store, which opened in 1902. The plan is to convert stock and office space into retail space, the New York Post reported. According to our back-of-the-envelope calculation, the building could be worth $400 million. But the appraiser source said that evaluation was likely too high because of the building’s wear and tear. The source put the value closer to $345 million. A new restaurant on the sixth floor will reportedly have views of the Empire State Building. Macy’s also said that it will be creating the world’s largest shoe department, featuring as many as 300,000 pairs of shoes.

Saks Fifth Avenue (611 Fifth Avenue)

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Cost of renovation: $30 million
Period of renovation: 2006 to 2011
Size of store: 646,000 square feet
Scale of renovation: 97,000 square feet

The 646,000-square-foot Saks Fifth Avenue flagship, at 611 Fifth Avenue, could be worth around $270 million, according to The Real Deal‘s calculation. The appraiser source said, however, that the value could even be significantly higher, closer to $370 million. Saks, which opened the flagship store in 1924, redid its third floor and its beauty departments in 2009, and revamped menswear on the sixth floor as part of a $30 million makeover, according to published reports. And according to a Saks spokesperson, ongoing renovations over the past five years have impacted nearly every floor, including women’s apparel on the second floor. A Cartier shop opened earlier this year, and a number of dedicated shops for individual collections were added.

Lord & Taylor (424 Fifth Avenue)

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Cost of renovation: $20 to $25 million
Period of renovation: 2010
Size of store: 611,000 square feet
Scale of renovation: Multiple floors

As America’s oldest department store, founded in 1826, Lord & Taylor certainly had no intention of being left behind. The retailer spent most of 2010 upgrading the six floors of its Fifth Avenue flagship store to the tune of $25 million, according to published reports. That is no small sum, considering the value of the building is around $71.2 million, according to The Real Deal‘s calculation, which the source said might be slightly high. The store moved to its Fifth Avenue location in 1914 and hasn’t had a major renovation in 30 years. According to PBS Real Estate’s Pomerantz, such significant expenditures make sense given the context of the current environment. “When interest rates are as low as they are, capital expenditures such as these make sense,” she said. “The cost is much lower than in the past.” The renovation created a new home-goods department on the ninth floor, and gave the first-floor beauty department a cleaner look. Representatives from the store did not return calls for comment.