Tech

Sarah Halzack is a Bloomberg Gadfly columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

It's hard to ignore the symbolism of a recent $850 million real-estate deal: Lord & Taylor, a storied but struggling department store, is selling its Manhattan flagship to high-flying startup WeWork Cos., which will turn it into a headquarters.

On its face, it seems like a classic tale of "out with the old, in with the new." But a better way of looking at this deal is that it exposes a key contrast crystallizing in two major industries: Retail is being forced to get realistic about threats to its business model, while technology startups -- or those that can pass for one -- are still dwelling in a fantasy land.

Lord & Taylor is part of the troubled Hudson's Bay Co., a Canadian department-store empire that includes Saks Fifth Avenue and an eponymously named chain, among other brands. The company is in a tough spot: It has a large debt load, and it also badly needs to spend money to improve its e-commerce capabilities. And it's simply not in a great position to do that:

Cash Crunch
Hudson's Bay Co. had negative free cash flow for the past two fiscal years and is expected to see more of the same for the next two
Source: Bloomberg

The real-estate deal is a humble acknowledgment that there can be no sacred cows in the company's fight for survival. Macy's Inc. long ago came to a similar decision, freeing up cash with moves such as selling its downtown Minneapolis store for $59 million. It wants to sell several floors of its State Street location in Chicago, and it's evaluating options for its golden goose -- the Herald Square store in New York.

The Lord & Taylor deal doesn't mean the department store will disappear from the Manhattan location. It will lease back some of the building and keep a smaller store. Hudson's Bay is making the right call here: Lord & Taylor doesn't need a showpiece or a monument to its mid-20th century glory days; it just needs productive selling space.

For WeWork, the richly valued young company that leases office space, it's hard not to see its real-estate splurge as evidence we have hit peak silly times for startups. There's an axiom in business that when a company buys the rights to put its name on a major professional sports stadium, that is a sign of excess froth and hubris for that company. WeWork is taking the froth to the next level.

WeWork is among the most head-scratching of the current generation of richly valued not-quite-technology startups. The company squirms at being described as a real-estate company, but it is a real-estate company valued like a technology company at about $20 billion, or roughly 20 times its projected annualized revenue. WeWork's CEO recently said the company's valuation is "much more based on our energy and spirituality than it is on a multiple of revenue." Okay.

WeWork is presumably burning cash, as all modern tech startups seem to believe they are legally required to do, yet it chooses to use its investors' money to buy expensive real estate, while acquiring a software coding school, branching into fitness classes for tenants and (no joke) writing checks to other startups. WeWork plans to rent out part of its new headquarters, and it will also lease space within other Hudson's Bay department stores. 

Startup Versus Stodgy
WeWork is growing more quickly than its established publicly traded peers, and its valuation is significantly higher
Sources: Bloomberg and CB Insights (for WeWork)
Note: WeWork's revenue multiple is calculated from news reports about its annualized pace of revenue based on the company's projections.

WeWork and its private-equity partner agreed to pay about 30 percent more than the appraised value of the Lord & Taylor building a little more than a year ago. It may be that the value of the building has appreciated significantly, or that WeWork can squeeze more value from the real estate than Hudson's Bay ever could. After all, the New York landmark could become a cool place for WeWork's cubicle-jockey tenants to crunch spreadsheets and hang out at WeWork tequila tastings

But it's also hard not to wonder if the easy access to investor cash for many young, technology(-ish) companies is now distorting the value of assets in the physical world. In other words, frothy valuations may not necessarily stay contained in the magical forest of startup unicorns.

The Lord & Taylor deal is a symbolic passing of the torch. Retail companies, which invented expensive stunts like the Macy's Thanksgiving Day parade and relished their trophy stores, have been battered to the point where their vanity is disappearing. The hubris belongs to the technology companies now. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. It's not clear what share of the $850 million is coming from WeWork, which struck the transaction from its new property investment fund. The company also has a private equity partner in the real estate deal. 

To contact the authors of this story:
Sarah Halzack in Washington at shalzack@bloomberg.net
Shira Ovide in New York at sovide@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net