ABC Carpet & Home sells the top floors of its flagship store, signaling that retailers and real estate developers alike will have to get creative to offset retail rent declines.

What happened

  • The deal between Normandy Real Estate Partners and the ABC Carpet & Home flagship building, which will convert the upper part of the building from retail space into office space, is one of a slew of other deals made by retailers that are reducing their footprints and/or redeveloping their spaces.
  • Lord & Taylor’s parent company Hudson’s Bay Co. sold parts of the department store’s flagship Fifth Avenue building to WeWork for its headquarters and other office space.

Why it matters

  • While retail real estate demand is falling, office space demand is rising—in the Flatiron district, where ABC Carpet & Home’s flagship store is located, only 10% of the neighborhood is available to companies seeking office space. Still, office space is significantly less costly; in 2017, Class A and B office space in Flatiron was an average of $71.84 per square foot whereas commercial space was $456 per square foot.  
  • ABC Carpet & Home has long been a pioneer among legacy retailers in adapting to transformations in the industry—it added three restaurants run by a celebrity chef and launched an area called Deepak HomeBase where Deepak Chopra holds events. Though it will keep its own corporate offices and lower-level retail space at its flagship location, the company pragmatically sees its store as an evolving concept. Its restaurants, for example, are furnished with ABC products, making dining at the ABC Building a shoppable, interactive experience. It also closed its Bronx outlet in June 2016, which put more focus on full-price products. Now the question is whether less space means higher sales per square foot for the company, or if the company could mitigate cutting square footage more effectively by shifting more to ecommerce.
  • Given the large discrepancy between retail and office rents, developers need to figure out if they should lease their properties to companies looking for office space, or hold out for flagship retail tenants. Either way, they will be making concessions on the rates they hoped for.