Macy's rehab can prove a challenge for developer and city

Scrap collectors a few weeks ago stole brass signs off the giant building Macy's abandoned in 2013 in downtown St. Louis. An electrical fire last summer damaged a Macy's store that closed in 2015 in downtown Pittsburgh.

And in the building Macy's vacated in Missoula, Mont., there's a different problem. "It's just sitting there housing pigeons," says Ellen Buchanan, director of the Missoula Redevelopment Agency. "They don't spend a lot of money at the local restaurants."

The departure of a giant department store creates a chance to update and modernize a city center. But it also creates risks, and even danger, as a large empty building goes untended.

Last week's decision by Macy's Inc. to close its downtown store in Minneapolis means the city will be balancing those opportunities and risks for the first time since the 1980s, when a fire in a vacant department store destroyed a city block.

The firm purchasing the Macy's site, a three-building complex known to most Minnesotans as the former flagship Dayton's store, is sending executives to discuss its future with city officials this week. "We want to see a new entity there as quickly as possible," City Council President Barb Johnson said. "But we realize how long it takes to have things happen."

For five decades, American cities have grappled with the closings of big department stores in downtowns, first because of competition from suburban malls and, lately, off-price and internet retailers. Each closing reduces shopping variety, wipes out jobs and reduces the local tax base.

Each also challenges a city's commercial real estate base with a huge parcel that has to be torn down and replaced, or remodeled and put back on the market. The buyer of the Minneapolis property, 601W Cos., a New York real estate developer, will remodel it into a mix of retail and offices, Macy's said in announcing the $40 million transaction.

The conversion won't be easy, said David Frank, the Minneapolis director of economic policy and development. "Some buildings lend themselves well and easily and less expensively to new uses, but department stores aren't one of those," he said.

At its mid-20th century peak, Minneapolis had four, block-long department stores along Nicollet Avenue. Each closing led to redevelopment.

But they did not all go smoothly. On Thanksgiving Day 1982, shortly after Donaldson's department store moved from its six-story building to then-new City Center across the street, arsonists started a fire that spread quickly to the Northwestern National Bank building next door.

The fire was the costliest in the city's history to that point and led to the demolition of the two buildings and construction of what is now Wells Fargo Center and Gaviidae Common, a rebuilding process that took six years.

The Minneapolis Macy's is the largest of the 68 that the Cincinnati-based company has said it will close this year. The company, which has downsized occasionally since becoming the nation's largest department-store operator in 2005, will also vacate downtown stores in Portland, Ore., and Santa Barbara, Calif.

At just over 1 million square feet, the Minneapolis site is comparable in size to the one Macy's closed in St. Louis in 2013 and one in downtown Pittsburgh in 2015 — and twice the size of the one it closed in St. Paul in 2013.

Most of the company's closings in recent years have been in suburban malls. In addition to Missoula, Pittsburgh, St. Louis and St. Paul, Macy's since 2010 closed downtown stores in Boise, Idaho; Honolulu; and Spokane, Wash. Wal-Mart Stores Inc. took over the Honolulu location, and all the others except St. Louis and Missoula are actively being redeveloped.

In St. Paul, the Port Authority purchased the downtown Macy's in 2014 and, last spring, finalized plans with Minneapolis developer Hempel Cos. to remake it into a mixed-use complex anchored by a new practice facility for the Wild.

Department store buildings present unique challenges in redevelopment. While there is some appeal in expansive space, the trade-off is that most of the space isn't close to a window, meaning little natural light.

Many department stores require environmental remediation because they were built when developers used materials, such as asbestos, that have since been deemed unsafe, Frank said.

"It's a significant cost to retrofit it," said Russ Nelson, president of NTH real estate and project management. "Getting tenants who will lease space at rates that make the investment work, I think that's a challenge."

601W may face some challenges filling the office space given the amount of inventory in the market. According to a market report released last week by JLL, a lot of mediocre Class B office space in Minneapolis may languish without significant capital improvements.

And there are other signs that the Minneapolis commercial real estate market, after several years of fast growth and new construction, is plateauing. Two blocks away from the downtown Macy's, a developer last year backed down from replacing the former TCF Bank Building with a 50-story tower, opting for a modest upgrade that's now underway. Meanwhile, at the north end of Nicollet Mall, another developer is scrambling to line up a financing partner for a hoped-for 40-story hotel and residential tower.

The Macy's buildings may have some features that could be preserved. They were deemed eligible for listing on the National Register of Historic Places and may qualify for a local designation, Frank said. That could yield some financial benefits to the developer but would also lead to some restrictions.

The redevelopment of Missoula's old Macy's building, known locally as the Mercantile, was brought to a standstill after preservationists sued the city and a developer that wanted to raze the property for a hotel.

"It's a sore thumb," Buchanan said. "It's just sitting there with a chain-link fence. Macy's leaving has had a significant impact on downtown retail. We are recovering from it, but we are not going to fully recover until that property is occupied again."

In downtown St. Louis, city officials are talking with a potential buyer for the century-old building Macy's last occupied, called the Railway Exchange. The prospect wants to turn its 21 stories into a mix of residences, stores and a hotel.

"It's ideal for a large user, but it has been difficult attracting somebody to be the developer for the entire space," said Otis Williams, director of the St. Louis Development Corp.

In November, thieves stole 10 brass signs off the building that said "Famous-Barr," the name of the regional department store that occupied the site before Macy's. The rest were taken down to prevent further vandalism.

Nicole Norfleet • 612-673-4495

Twitter: @nicolenorfleet