Dive Brief:

• Macy's is working with "city, government and community leaders" in New York for plans "to build a commercial office tower while continuing to operate this iconic store as our national flagship," a Macy's spokesperson told Retail Dive in an email.

• The proposal for the department store's Herald Square flagship, which was first reported by Bloomberg but has few details, is "the best way to unlock the store's underlying real estate value and promote economic activity in the area," the spokesperson said. "But we're still early in this process and there are a number of hurdles we need to cross before we can share more concrete details."

• Similar plans were first floated in 2016, according to a New York Post article from that time. The Palladian facaded building has been on the site since 1902 and, thanks to several additions over decades, now spans almost the entire block, which boundaries Broadway, Seventh Avenue and 34th and 35th streets. 

Dive Insight:

Macy's boasts a formidable real estate portfolio that has garnered it some nice proceeds as it has trimmed its over-stored portfolio in recent years. The department store has shuttered some 100 stores nationwide since 2016.

"Macy's, like Sears and to a lesser extent JC Penney, is really two separate companies today — a largely obsolete retailer and an enormously valuable real estate company," Nick Egelanian, president of retail development consultants Siteworks, told Retail Dive in an email. "Sears funded decades of operating losses by selling its most valuable real estate (actual real estate and long term leasehold rights) and eventually figured out how to directly monetize parts of its remaining 'fleet' by creating [real estate investment trust] Seritage. Macy's is in a similar position. While it still operates profitable stores on the coasts, much of the rest of its fleet is simply not viable for retail any longer."

There was never a chance that the company would unload its iconic flagship, Macy's said. "Herald Square is a highly productive and profitable store and is important to our brand, to our customers and to the neighborhood," according to the spokesperson's statement. And Macy's real estate assets, including its flagship, are different than Sears', according to Egelanian.

"I don't know the office market at Herald Square per se, but I am quite confident that over the long term, densifying its holdings at Heralds Square is a very sound real estate strategy that will make sense for Macy's investors and shareholders," he said.

The building is too large for retail in the age of e-commerce and in a city that just unveiled a massive new retail development in Hudson Yards. Among the many questions surrounding these early plans is whether an office or mixed-use addition could attract tenants, according to Mark Cohen, director of retail studies at Columbia University's Graduate School of Business.

"There's no question that Macy's Herald Square store is way overspaced and that some amount of that excess space carries value that could be liberated via some form of sale and redevelopment," he told Retail Dive in an email. "But I can't imagine a commercial tenant or residential developer paying any kind of premium to occupy space in what is a cluttered and crowded location in place of far more attractive alternatives such as Hudson Yards."

Whatever plan Macy's ultimately does unveil promises to be controversial, according to architect Bruce Kopytek, who writes about department store history, including their often iconic buildings, and has worked on various retail store additions and renovations. He noted that similar plans to build an office tower atop Grand Central Station were quashed by historic preservation activists led by Jackie Kennedy Onassis, in a 1978 Supreme Court decision that also helped establish the New York City landmarks law that Macy's executives are no doubt coming up against today, he said. And the project is likely to be highly disruptive to the surrounding area as well as to the building itself.

"That Macy's store is really a beautiful building, and it's one more affront on history," he said in an interview. "You can't just build on top of that building. You need four-foot holes to the foundation, which in New York goes down to bedrock. The ensemble of buildings there​ has its own scale. Putting a new modernist tower on top of it is a little bit of an affront to my senses, and I think it would be to a lot of people."