Starwood buys condominium interest at Seattle Macy’s

Starwood Capital Group is the latest private equity firm carving up department stores in a push for unusual office space.

The Greenwich, Connecticut-based firm announced last week that it bought the top four floors of the Macy’s department store in downtown Seattle for $65 million through its Starwood Global Opportunity Fund X.

Starwood plans to convert the 300,000 square-foot space, currently used for retail and regional offices, into creative offices. Renovations include a new office lobby, dedicated elevators and a rooftop deck, all to be finished within a year. Macy’s will continue operating in the first four floors of the building.

“Our vision is to make the store easier and quicker to navigate while also attracting new jobs and economic activity to space that has not been fully utilized,” said Terry Lundgren, Macy’s chief executive officer, in a statement.

Starwood is not the first private equity real estate firm to have struck a creative office deal with Macy’s. The Cincinnati-based chain sold the top five floors, air rights and garage of its downtown Brooklyn store to Tishman Speyer for $170 million in the middle of August. The New York-based real estate investment firm will turn the retail space into offices, and convert the parking garage into a mixed-use development. Like the Seattle deal, Macy’s will continue to operate in the building it has occupied since 1865.

As consumers shift to online purchases, Macy’s has been stuck with underperforming stores and a big retail footprint. To cope with the change in buying habits, it has been shedding properties. The department store sold its entire downtown Pittsburgh building to a Philadelphia developer in July and closed the location in September, but these latest deals in Seattle and Brooklyn have allowed the retail giant to continue operating.

Private equity real estate firms are also confronting a shift in the industry. As offices in primary and secondary cities approach record prices, firms are looking outside traditional commercial real estate assets for better returns.

PERE reported on this trend last week. A Deloitte report on commercial real estate noted that more people are using non-traditional offices, such as co-working areas, instead of sitting in corporate cubicles. That has changed how real estate firms approach office space, with some companies shifting to short-term leases with flexible use arrangements.

“The new sharing/collaborative economy creates both opportunities and threats to value creation in the private equity real estate investments, and investors that appropriately adapt to the changing needs of tenants across property types will have the opportunity to earn out-sized returns on their investments,” Bob O’Brien, Deloitte’s head of real estate, told PERE.

The private equity real estate companies involved in the Macy’s deals picked department stores in cities known for tech companies, access to public transportation, young workforces and low vacancy rates, where office rents have skyrocketed and demand has never been higher.