What WeWork’s Jump Into Retail Means for REITs

The hefty price WeWork paid for the Lord & Taylor building in Manhattan suggests that REITs with easily convertible buildings in desirable locations could see a bump in valuation. BDO USA Partner Stuart Eisenberg explains why.

stuart-eisenberg_1_800x600While lots of eyes and attention remain fixed on 2017’s string of retail bankruptcies and the growth of “clicks-to-bricks” retailers, WeWork may be quietly laying the foundation for a broader move into retail real estate. There certainly appears to be no shortage of funding momentum for the $26 billion startup, following a $4.4 billion commitment from the SoftBank Vision Fund in August that is expected to fuel global expansion.

And REITs should be watching—WeWork’s model for expansion could disrupt not only office REITs, but REITs across some unexpected sectors.

Underscoring the company’s interest in potentially extending its business model into the retail space, the Wall Street Journal reported that WeWork Property Advisors would get a seat on the Hudson’s Bay Co.’s (HBC) board after WeWork and its private equity partner Rhone Group acquired the Lord & Taylor building in Midtown Manhattan from HBC in October. It has also been reported that WeWork principals have invested in a retail technology start-up and that several of the real estate company’s recent hires hail from an online electronics retailer.

Behind the Lord & Taylor Buy

One factor that makes the Lord & Taylor deal notable is the $850 million price tag. The property sold for 30 percent more than its appraised value last year. While the property’s location likely partially contributed to the deal value, it’s no secret that there’s a greater demand for spaces that can be converted to alternative uses, and the building’s flexibility might have also driven up the price. This suggests REITs that own buildings that can be readily converted to alternative use could see a bump in valuation based on an assumption that the highest and best use value exceeds the value based on the existing use. Retailers with flexible space in prime markets, where demand remains high, are likely to see the greatest benefit.

This trend isn’t limited to retail, though. On the hospitality front, WeWork has experimented with nightly rentals in its co-living space in lower Manhattan. During a recent panel at the Urban Land Institute Fall Meeting moderated by WeWork’s Liz Burow, several industry leaders pointed to the growing emphasis on short-term lease arrangements across industries. Panelists noted that space flexibility is now playing a key role in growth trajectory for many types of companies, with flexible lease terms allowing for the development of new groups within a company and greater experimentation with short-term projects.

Adaptability is the name of the game for a huge variety of tenants—think retailers, food pop-ups and boutique hotels, but also health care providers, as the care continuum expands far outside the walls of traditional hospitals. For REITs, this means potentially baking in greater flexibility to lease-term length in sectors beyond offices, and further blurring the lines in large mixed-use spaces. These changes could have significant implications for REITs’ maintenance and property management needs, as well.

When it comes to the co-everything movement, We(will be)Watching.