Converting Retail Into Commercial Space? Consider This.
Macy’s Herald Square is considering adding offices to its store but two Greenspoon Marder real estate attorneys point out some of the challenges the building owner could face.
NEW YORK CITY—With Macy’s world famous Herald Square store in talks to build a 1.2 million-square-foot office tower on top of its iconic 34th Street location, will this start a trend? With brick-and-mortar retail softening, will there be more combinations of retail adding office space?
Partners at the law firm Greenspoon Marder in the real estate practice group, Robert P. Reichman and Jonathan Weiss, have decades of experience in property leasings and dispositions including office buildings and shopping centers. Their work is unrelated to Macy’s but it informs opportunities for other owner developers.
The Macy’s plan could mean a bonus of bringing potential shoppers to the department store anchoring the building. But Reichman says the strategy’s main point is not to increase customers. “As retail slows down, these big retailers are going to look for ways to monetize their locations. One way would be to sell the development rights to their property or to sell their property,” he says.
He adds trends will depend on what’s going on in retail. Greenspoon Marder has worked on deals where underperforming retail assets in central business districts were converted into residential and commercial properties. “Historically, the trend was not for adding commercial to retail but getting rid of the retail entirely,” says Reichman.
There are several challenges that Macy’s or stores in similar situations will want to consider. Weiss says Macy’s plans of building an 800-foot office tower will mean the disruption of a major construction project. This one would be in the already crowded metropolitan area of Midtown Manhattan.
He advises property owners to contemplate whether the offices will be a good fit in the neighborhood. Businesses often prefer to geographically cluster with like businesses. This can mean closer access to clients, competitors and shared third-party vendors. Weiss points to tech companies clustering in Chelsea and around Madison Square Park and to how they’ve been a driving force in Manhattan’s real estate market.
To attract these tech tenants to a Herald Square tower, Weiss asks, “Is that area going to be sexy enough for the types of companies that are looking to expand in Manhattan?”
He poses the following questions: “Is this going to be a location that those types of companies will want to be in? Do they want to be downtown? Do they want to be in newer developments that are already completed, like in Hudson Yards?”
Both lawyers had joined Greenspoon Marder in January 2019 coming as partners from Wilk Auslander, a law firm located in Times Square. Their offices looked down at the building where the New Year’s Eve ball drops. Reichman acknowledges there were always crowds when he was coming into the office and leaving.
“In the heart of the city where you have really congested areas, I think that’s going to be a problem for Macy’s,” he opines.
With conversions, if a retail building is being repurposed as an office building, it will need to accommodate the day-to-day operations. Weiss states this may require a complete retrofitting. For example, utilities and plumbing for visiting shoppers could be overburdened by daily office use.
“If you have a few thousand people coming and going in a shopping retail space, the building is designed very differently than for just say 5,000 people [office workers] using the utilities and plumbing throughout the day,” he says.