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Story by The Wall Street Journal

Retailer considers whether to spin off real-estate assets, which include landmark building in New York

Macy’s Inc. is the latest major retailer to consider spinning off its real-estate assets into a separate company, following recent moves by Sears Holdings Corp. and Darden Restaurants Inc.

But first it will have to answer a thorny question: what to do with its prized asset, the landmark building at New York’s Herald Square?

Its decision could point the way for other retailers that own trophy properties, a group that includes Nordstrom Inc. and Neiman Marcus Group Inc. Like Macy’s, their crown jewels are in prime locations in major metropolitan areas, making them more valuable than look-alike properties in malls or smaller cities.

Unloading the Herald Square building could make a lot of money for Macy’s shareholders now, while finding a way to extract some value without ceding control of such a prime location could pay off more in the long run, according to analysts.

Herald Square is especially tricky because there is no consensus on precisely how much the property is worth, with estimates ranging from less than $3 billion to more than $4 billion.

“The hard part is, there’s nothing like Macy’s Herald Square,” said Jim Costello, senior vice president at Real Capital Analytics, a real-estate research firm.

Investors have been pressuring Macy’s and other retailers in recent years to spin off their real-estate assets into separate companies. The aim is to make the most of those assets at a time when commercial real-estate values are soaring and the retailers face long-term challenges from online rivals.

Macy’s earlier this month said real-estate prices have prompted it to study its options. The company owns 556 stores from Puerto Rico to Guam, most of them nondescript. Its flagship store, however, covers almost an entire New York City block, features about 1.1 million square feet of retail space, includes additional space for offices and storage, and serves as the endpoint for Macy’s annual Thanksgiving Day parade.

That distinguishes its portfolio from those of retailers whose strategy revolves around owning and operating stores of a similar size in residential neighborhoods or strip malls around the country.

Some other retailers also have crown jewels. Nordstrom owns its flagship store on Pine Street in Seattle, which has 383,000 square feet of retail space. Tiffany & Co. bought its store on Fifth Avenue in Manhattan in 1999, after it had been sold by the jeweler and leased back in a previous deal. Neiman Marcus, which is planning an initial public offering of its stock, has a portfolio that includes stores in San Francisco, Dallas and Beverly Hills, Calif.

“Often, there’s additional value that can be gained from having those primary locations,” said Adam Silverman, a retail analyst atForrester Research. “The cookie-cutter locations may not drive as much traffic or the right kind of clientele.”

Activist investor Starboard Value LP last month said it had taken a stake in Macy’s, and chief executive Jeff Smith said at the time the building was worth about $4 billion, based on an assessment by real-estate experts.

Analysts at investment bank Cowen & Co., where Mr. Smith once worked, were less bullish, pegging the value at $3.3 billion in a July report. And Robert Von Ancken, chairman of Landauer Valuation & Advisory, a unit of real-estate firm Newmark Grubb Knight Frank, said in an interview he was skeptical the Herald Square building was worth more than $3 billion.

“The real answer is, we don’t know,” said Jim Sluzewski, a Macy’s spokesman. “And that’s why we have teams of people looking at the question.”

The company has hired real-estate firm Green Street Advisors, tax experts at law firm Skadden, Arps, Slate, Meagher & Flom LLP, and bankers including Goldman Sachs Group Inc. and Credit Suisse Group AG, among others, to study its real-estate portfolio.

Investors have bid down Macy’s shares amid questions about its real estate and its financial results. Since hitting a peak for the year on July 16, the day after Starboard Value disclosed its stake, Macy’s shares have dropped 22%, through Monday’s close. At that share price, Macy’s market value is about $19 billion, according to FactSet, less than the $21 billion Starboard believes the company’s real estate alone is worth, and roughly equal to Cowen’s estimate of nearly $19 billion. Cowen concluded that the company’s second most-valuable store, in Chicago, is worth about $1.7 billion.

Creating a new company to own the real estate is one option, but that could saddle Macy’s with rent payments and force it to cede control of the building.

This month, Macy’s announced a different real-estate deal that could be a model. The company said it was selling off part of its store in downtown Brooklyn and a nearby parking garage to developer Tishman Speyer for $170 million in cash and another $100 million over three years. It will compress its existing retail operations at the site into 310,000 square feet on five floors, down from 378,000 square feet on eight floors.

A similar plan could be lucrative in Herald Square, where the upper floors could be converted into condominiums or a hotel, according to analysts.

“There is clearly impressive potential,” said James Sullivan, a senior real-estate analyst at Cowen. “That is the path to the highest value creation for the Herald Square store.”