Normandy has plans for a $40 million conversion to redevelop the upper portion of ABC Carpet’s flagship store in New York. Photo: Erin Lefevre for The Wall Street Journal
Normandy Real Estate Partners found what it viewed as the perfect spot for a high-end Manhattan office development: the upper floors of the ABC Carpet & Home building, a retail industry landmark.
Last year, Normandy closed on a $133 million deal for the upper portion of ABC Carpet’s flagship store in the Union Square and Flatiron District neighborhoods, with plans for a $40 million conversion of several floors of retail space into office space.
As online shopping reshapes retailing, it is reordering the real-estate market as well. Selling merchandise on floors above street level once made sense for retailers such as department stores and, in some cases, was preferred over less glamorous office use. Normandy’s project is an example of office space edging into territory that once was retail’s domain.
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“Many larger-format retailers such as department stores and furniture stores are reworking their concepts to maximize their retail footprints,” said Amira Yunis, executive vice president in the retail group at real-estate-services firm CBRE Inc. “Retailers still want to showcase their goods, but, due to the changing retail environment and high occupancy costs, many are finding they no longer need this much space.”
In other parts of the city, retailers with multiple floors have been condensing their store operations. At Macy’s downtown Brooklyn store, developer Tishman Speyer is redeveloping the top four floors of the building, integrating those levels with 10 new office floors it plans to build above a portion of the store. Lord & Taylor plans to reduce its store at its Fifth Avenue flagship, which parent Hudson’s Bay Co. is selling to co-working giant WeWork Cos. WeWork’s headquarters and other office space will occupy most of that building.
Retailers have been under pressure to scale their selling space to the way consumers are shopping today. Some have opted to create separate entities to tap the value of excess retail space and invest those proceeds into the business, said Michael Brown, a partner in the retail practice of global strategy and management consultant A.T. Kearney.
“The trend that has been driving this is private equity and activist investors’ involvement in retailers creating this new practice of monetizing the value of real estate,” Mr. Brown said.
In the case of Normandy’s investment, the shift among retailers to smaller store sizes combined with the growing demand for office space in Midtown South neighborhoods helped shape the decision to convert to office space, said Paul Amrich, a vice chairman at CBRE. He and partner Neil King are leading the team marketing and advising the project.
‘Retail has changed in a dramatic way...It just makes more sense to operate those floors as an office building.’—Neil King
“Retail is decreasing its footprint because of technology, at the same time office occupancy in that area is growing and maturing, and therefore rents are rising,” Mr. Amrich said.
Normandy, which is the lead investor in the project, plans to create top-tier office space on the third to sixth floors of 880-888 Broadway, expecting rents above $100 a square foot, Mr. Amrich said.
ABC has been a pioneer of sorts over the past several years, adapting to shifts in the retail landscape with enhancements to its shopping experience. The retailer added three restaurant concepts on the lower levels in partnership with well-known chef Jean-Georges Vongerichten. The store’s Deepak HomeBase features discussions and events hosted by Deepak Chopra. ABC’s partners and investors sold the upper portion of the building and intend to continue operating the store on the ground floor, lower level, mezzanine and second floor, while the retailer’s corporate offices also will remain in the building.
The property, which consists of two connected buildings, is in the heart of Midtown South, a Manhattan submarket favored by technology, advertising and media tenants, including Google parent Alphabet Inc. and Facebook Inc. More recently, high-end financial firms and technology divisions of financial-services companies have snapped up new or like-new office space in Midtown South. Even as Manhattan office rents have remained relatively flat because of the addition of office space, new or redeveloped offices in Midtown South frequently fetch rents above $100 a square foot, rivaling trophy buildings in the city’s traditional office markets.
The rate of available space in Midtown South is the lowest of Manhattan’s three submarkets, at 10%, according to CBRE.
“When we’re looking at the property from an investment and opportunity perspective, this is a location we think is going to speak to the employee base companies are after,” said Paul Teti, a partner at Normandy.
Located in a historic district, the building has the sort of character technology and companies in the creative sector usually prefer over flat, glass office buildings, Mr. Teti said. Built in the 1880s, the building has high ceilings, large windows and skylights, and large floor sizes of around 35,000 square feet, allowing companies to set up offices on fewer floors, said Neil King, a CBRE executive vice president.
Normandy’s redevelopment plans, which will have to be approved by the city’s Landmarks Preservation Commission, will add new windows, modern mechanical and power systems, a roof terrace and a 4,000-square-foot glass penthouse.
“Retail has changed in a dramatic way,” Mr. King said. “It just makes more sense to operate those floors as an office building.”
Write to Keiko Morris at Keiko.Morris@wsj.com