Saks Fifth Avenue: the most expensive shop in the world?

Many financiers have tried to make money from retailers through the ground beneath their stores. But few have pulled off the strategy as well as Richard Baker, the chief executive of the Hudson’s Bay, which owns Saks, Lord & Taylor and the Bay in Canada.

Yesterday, he announced that Hudson’s Bay had taken out a loan against the Saks Fifth Avenue flagship that values the department store - one of New York’s temples of luxury retailing - at nearly $4 billion (€3.2bn), making it one of the most valuable retail properties in the country.

“What this announcement says is that the value of prime Manhattan real estate has gone through the roof everywhere,” Baker said in a telephone interview. The appraisal of the Saks flagship - valuing the store at $3.7 billion - far exceeds the $2.9 billion that Hudson’s Bay paid for all of Saks last year.

Baker said that as his company weighed bidding for the retailer, he and his team thought that the market was not properly valuing the land beneath the Fifth Avenue store.

“Needless to say, we were not surprised,” Baker said. Baker’s deal highlights the soaring valuations of the Manhattan property market since the recession, with New York becoming a haven for global real estate investors, billionaires, tourists and shoppers, as well as young people and the tech industry.

Their desire for a piece of New York is the jet fuel for ever-higher price tags on things like housing, hotels, office towers and storefronts. Some analysts suggest the party may be ending, with real estate prices in New York sailing beyond the peak of the debt-fueled boom in 2007 and profit margins shrinking. At least some private equity firms are cashing in.

Last week, the Blackstone Group announced it was selling its 42-story office tower at 1095 Avenue of the Americas, opposite Bryant Park, for $2.25 billion to Ivanhoe Cambridge, the property arm of a Canadian pension fund.

Nevertheless, construction cranes continue to swing across the entire New York skyline, as developers are building at least seven towers with ultraluxury apartments along 57th Street, south of Central Park, that are selling to Latin American tycoons, Russian metal barons, Arab royalty and Asian billionaires. “New York is on fire, and luxury is coming on strong,” said Robert K. Futterman, founder of RKF & Associates, a retail broker. “You’re seeing job growth, a strong economy, residential, commercial and hotel development.”

A bright spot has been luxury retailing, which is enjoying a resurgence in New York decades after stores like Bonwit Teller, Gimbels and Abraham & Straus collapsed. Neiman Marcus, which already owns the ultrahigh-end Bergdorf Goodman, recently signed up as the anchor for a 1-million-square-foot mall at Hudson Yards, a $15 billion city-within-a-city complex over the rail yards on Manhattan’s west side.

Separately, Nordstrom is now negotiating to open a store downtown in an office building that is being converted into high-end apartments, two years after announcing that it would open the city’s first new department store in recent memory. Naturally, that location is at the base of one of the superhigh towers planned for billionaires, on West 57th Street. And Macy’s is in the middle of a $400 million face-lift for its flagship in Herald Square as it tries to move its brand upscale.

Saks itself is expected to be one of the featured tenants at Brookfield Place, the downtown complex formerly known as the World Financial Center, as it builds additional locations throughout Manhattan. The influx of tourists, foreign investment and well-heeled residents has pushed prices at the top end of the retail market in New York to new heights, 20 per cent higher per square foot today than they were at the height of the last real estate boom, according to Real Capital Analytics.

“Retail will flourish,” Futterman said. “There’s a convergence of luxury in the residential sector with luxury in the retail sector.” Yet, it is unlikely that any of these new stores will have the cachet, or the value, of Saks’ blocklong flagship. The $1.25 billion mortgage that Hudson’s Bay has taken out values the store at approximately $3.7 billion, or about $5,700 a square foot. (By comparison, Hudson’s Bay carried a market value of about $3.3 billion before Monday’s announcement.)

The mortgage on the Saks property is just the latest in a series of deals that Baker has employed to become one of the area’s newer retail magnates. Within eight years, he has assembled a department store operator that now owns two of New York’s most recognizable names in shopping, as well as the Bay, whose roots run back to the fur trade in the 1600s.

Other financiers have tried to make a go of the retail business, with decidedly more mixed results. The hedge fund magnate Edward S. Lampert orchestrated the merger of Sears and Kmart in the hope of creating a department store powerhouse. But that goal seems ever more remote, as the enlarged Sears has endured a steady stream of losses and forced Lampert to resort to a number of sophisticated financial maneuvers simply to raise cash.

Although Baker has grown up around retailing - a native of Greenwich, Connecticut, he is the scion of a wealthy shopping mall development family - his first major move came in 2006 when he bought Lord & Taylor, then just one of several ailing franchises that Federated Department Stores was willing to part with. Next came Hudson’s Bay, which Baker and his partners acquired between 2007 and 2008 for about $1.4 billion. (In late 2012, he combined the two into a new company, Hudson’s Bay, and took them public.)

In both cases, Baker’s investment firm, NRDC Equity Partners, relied heavily on borrowed money. Of the $1.2 billion that it paid for Lord & Taylor, only $25 million came in the form of equity, with the remainder made up of debt financing, secured by the department store estate. That way of unlocking of the value of a retailer’s real estate is a tactic used successfully before. Steven Roth created Vornado Realty Trust by buying the faltering Two Guys discount chain, closing it and turning the stores into a real estate development opportunity. Years later, he repeated the feat with the Alexander’s department store chain.

But Baker unabashedly embraces it as a normal part of his business. With the new mortgage, he will pay down some of Hudson’s Bay’s more expensive debt and give it a huge infusion of new cash. Shares in Hudson’s Bay leapt 8 percent Monday, to 21.82 Canadian dollars a share, or $19.32.

The Saks mortgage may not be the last of Baker’s deal-making. In a call with analysts yesterday, he hinted that his team might yet sell the Fifth Avenue store into a real estate investment trust, generating even more cash. And Hudson’s Bay has yet more real estate to play with. Before Monday, analysts on average estimated the value of the company’s real estate holdings at about $7 billion. “Remember, this is only one property,” Baker said.Th

The New York Times