WeWork is making what is believed to be the first major public deployment out of its real estate vehicle.
The New York-based co-working startup is purchasing retailer Lord & Taylor’s flagship Fifth Avenue store in Manhattan for $850 million through a joint venture, according to a Tuesday announcement. WeWork is partnering with private equity firm Rhône Capital, which co-manages WeWork’s real estate fund, to buy the 12-story building and convert it into WeWork’s corporate headquarters and office space after the 2018 holiday season. After the renovations, Lord & Taylor will reoccupy part of the building, operating a smaller, 150,000 square foot store in the space.
“Everyone is searching for the next chapter in the retail narrative. If there’s ever an example of how that might work, I’d say this is it”
PERE understands the building was appraised at $633 million last year, with one executive saying the premium paid by WeWork was owed to the building’s prime location and the opportunity to buy so much space from a single seller.
In October 2016, WeWork’s vice chairman Michael Gross said at a New York conference that the firm was setting up a fund to acquire assets for WeWork, its co-working platform, and WeLive, its residential offshoot, PERE previously reported. Since its 2010 founding, the firm has worked with traditional office landlords to lease floors or buildings, which it then remodels into working spaces with amenities including conference rooms, beer on tap and social programming.
The fund, WeWork Property Investors, officially launched in March, according to a filing with the Securities and Exchange Commission. A WeWork spokesman declined to comment on the vehicle and on the Lord & Taylor deal.
Now, WeWork Property Advisors, WeWork’s joint venture with Rhône, is purchasing the building as part of a larger partnership with retailer Hudson’s Bay, which bought Lord & Taylor in 2012. Through the partnership, WeWork will lease other spaces in the retailer’s 61 million square foot portfolio, starting with locations in Toronto, Vancouver and Frankfurt, according to Tuesday’s statement.
Ronald Dickerman, chief executive of private equity real estate firm Madison International Realty, told PERE that the WeWork deal is a win-win for both the co-working space and the retailer. Madison bought 1.3 percent of Hudson’s Bay stock in September 2016, adding to a previous $200 million investment in the company.
“Everyone is searching for the next chapter in the retail narrative. If there’s ever an example of how that might work, I’d say this is it,” Dickerman said. “People are complaining, ‘How do you get millennials into the department stores if they’re buying on Amazon?’ This is a way to do that.”
WeWork was valued at $20 billion over the summer, according to data firm CB Insights. The company has 237 offices in 56 cities, per its website.
Despite its high valuation, not everyone in the real estate world has been positive about WeWork’s outlook as a real estate investor. Last October, Bill Tresham, the president of Ivanhoé Cambridge, praised WeWork as a tenant but was wary of its real estate ambitions.
“Better off that you go into these larger places where you have landlords with lots of capital,” Tresham said after Gross talked about the fund at the New York conference. “I’d say, ‘Don’t waste your money on real estate,’ because there are lots of people with real estate capital.”