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Macy’s Inc. offered new details about plans to build an office tower atop its flagship Manhattan store, which will likely include public improvements to the Herald Square neighborhood and more office space than previously reported.
Chief Executive Jeff Gennette said in an interview that the retailer aims to build 1.5 million square feet in office space above the block-long building that houses one of the largest department stores in the world. Previous press reports said that Macy’s was pursuing a tower with 1.2 million square feet of space.
The tower would include a sky lobby, with sweeping views of the city. Macy’s has also indicated it would help with upgrades to the surrounding area, such as improving nearby subway stations.
Macy’s has been in discussions with city and state officials to get clearance for the project since at least last year, according to the company’s public filings. Mr. Gennette said that details are still being worked out and that he planned to discuss them on Wednesday at an event with analysts and investors mapping out the next leg of Macy’s strategy, which includes shuttering 125 department stores over the next three years.
The company’s development plans reflect both how big-box retailers and department stores are eager to find new revenue streams and how the Manhattan office market is heating up.
While the rise of e-commerce has hurt retail rents, growing demand from tech and other creative industries for New York City office space has helped power that market. In 2019, office Manhattan leasing rose almost 16% from the previous year to 48.9 million square feet, according to Newmark Group Inc.
“The highest and best use in the current market is often tech office,” said Alexander Goldfarb, senior REIT analyst for Sandler O’Neill + Partners LP. “Before it was street retail, and before that it was condos.”
Macy’s, like other large, older retailers, has had to trim its number of physical stores and consider ways to tap the value of its properties across the country. These companies have been under pressure from shareholders to cash in on their real estate, especially those in major urban areas where property has become quite valuable.
The Herald Square location sits near Penn Station in a neighborhood where firms from the tech, advertising, media and design sectors have been expanding into buildings once dominated by apparel production. New mixed-use developments in the Hudson Yards district rising next door to Herald Square have attracted an array of major firms including social media giant Facebook Inc. and money manager BlackRock Inc., raising the potential for office demand spilling over into neighboring areas.
Manhattan’s average asking rent average rose to $78.78 a square foot in the fourth quarter of last year, up 3.8% from the prior year, according to real-estate services firm Colliers International.In 2019, the average weighted starting rent in tech office leases was $90.41 a square foot, a price that was 14.8% above the 2019 average for all industries and driven by tech firms taking newly constructed office space.
Macy’s isn’t alone in taking advantage of its real estate. Mall companies across the country have turned department stores into restaurant wings, apartments and hotels, Mr. Goldfarb said.
Macy’s already has used the model of selling developers air rights and floors above its retail operations to build commercial space.
In 2016, Macy’s sold the remaining upper floors of its downtown Brooklyn store and air rights for the site and a nearby parking garage to real-estate company Tishman Speyer for $270 million. New for-profit school Whittle School & Studios will make the 10 floors above the Macy’s store its home.