The value of Macy's (M 3.27%) real estate may be worth more than the company itself, as an analyst recently calculated, but is it really worth $16 billion as investment management firm Cowen says?

With activist hedge fund investor Starboard Value putting a price tag of $21 billion on the property last year, it could be that Cowen was undervaluing the properties. But with the retail industry still needing to rationalize thousands of stores and hundreds of millions of square feet of space, the mid-teen figure still seems high.

Macy's Herald Square store

Image source: Macy's.

Locked away for good

Sears Holdings (SHLDQ) was for a long time held out as an undervalued investment because its vast real estate portfolio wasn't being taken into account. The "storehouse of value" its properties supposedly represented either justified the $150-per-share price its stock traded for at the time or meant the market was undervaluing the company as the price began to fall.

Certainly, there remains value today in the thousands of stores Sears owns, particularly as it was able to raise $2.7 billion last year by selling 235 stores to real estate investment trust Seritage Growth Properties (SRG 0.85%), which was created for the express purpose of buying them. But those were probably the cream of Sears' portfolio and the carrying value of its real estate today is listed at less than $1.9 billion, net of almost $2.5 billion in accumulated depreciation and amortization. Chairman and CEO Eddie Lampert, though, has been extending billions of dollars in credit to the retailer and using the property as collateral.

Still, even though Macy's stores are probably of better quality than those that remain at Sears, with many of its stores located in Class A malls (higher-end malls that attract quality and upscale tenants like Apple), it's still hard to see how they can be worth so much.

Portfolio on parade

On the one hand, Macy's flagship stores, such as those located at Herald Square in New York, Union Square in San Francisco, and the State Street store in Chicago are likely worth billions themselves. Cowen pegged the Manhattan store at $3.3 billion all by itself.

But even after announcing the closure of hundreds of stores, Macy's still has too many. A report last year by real estate research firm Green Street Advisors said the retailer needed to close that many stores just to bring the chain's productivity levels back to where they were in 2006.

It's not just Macy's that needs to reduce its footprint, either. Green Street said as many as 800 anchor stores in malls need to be closed, or one-fifth of the total, and that's with the announcements at the time by J.C. Penney, Nordstrom, and Sears that they'd be closing hundreds of stores, too.

What it means is that there could be an excess of real space hitting the market that will drive prices lower, leaving Macy's unable to realize the premium prices they could otherwise have received.

Bloomgindales Soho New York store

Image source: Macy's.

Still a sprawling empire

Macy's owns or operates over 800 stores that operate under various banners, including Macy's, Bloomingdale's, Macy's Backstage, and Bluemercury. Starboard Value had said Macy's real estate was the most valuable portfolio in the real estate space, which is why it wanted to split the retailer's properties into two joint ventures, one for its top-rated locations and another for its lesser-valued spot. Green Street said 80% of Macy's stores were located in top-rated Class A malls, like those run by Simon Property Group (SPG 1.55%) and General Growth Properties (GGP). The Macy's brand alone anchored nearly 90 malls each for both operators.

Yet Macy's isn't just closing its lower-rated stores. Commercial real estate research firm CoStar found earlier this year that two-thirds of the Macy's stores set to close were in quality "A" or "B" malls (midtier malls that are not high-end, but are also not struggling or at risk of closure).

While that gives them higher returns on their property, it also reduces the overall value of the remaining portfolio, even as the department store space has little chance of improving. Between 1999 and 2016, department store retail sales shrank 32% to $155.5 billion, and with more space opening up as chains reduce their footprint, Macy's won't continue to get top dollar, if it even is now. It might be hard for Macy's to hit that $16 billion figure, let alone the $21 billion Starboard Value assigned it.

Despite all this interest in Macy's real estate, whether from activist investors or analysts trying to see just how much of a storehouse of value it possesses, Macy's has other ideas on how to monetize it. It's an exercise that has some worth, so long as you don't assign too much value to what a particular piece of property might be worth.