In recent years, Macy's (NYSE:M) has increasingly turned to real estate sales to generate extra cash as its sales and profitability have come under pressure from weak mall traffic and rising competition. It has already captured a lot of the low-hanging fruit there, as evidenced by the fact that Macy's expects a significant drop-off in asset sale gains this year.

That said, Macy's is making slow but steady progress toward cashing in on the immense value of its Herald Square flagship store. Furthermore, one of the department store giant's other long-term projects to capitalize on its real estate value appears to be close to fruition.

A long-percolating partnership

In late 2016, Macy's and Brookfield Asset Management (NYSE:BAM) formed a strategic alliance to investigate ways to maximize the value of the real estate Macy's owns. Macy's gave Brookfield two years to study 50 of its properties and create "pre-development" plans for those sites. In general, the idea was to build additional retail space -- or in some cases, offices, hotels, or apartments -- on excess parking lot land owned by Macy's.

Macy's provided periodic updates on this project during 2017. The biggest highlight was that Brookfield Asset Management saw good potential to proceed with development on roughly two-thirds of the 50 properties it was studying.

The exterior of a Macy's store

Most Macy's stores have more parking than they need today. Image source: Macy's.

In early 2018, Macy's CFO Karen Hoguet stated that the two companies had already agreed to terms on nine properties. For six of those, new retail space would be built on excess parking lot land. The other three projects were to be larger in scale, including the full redevelopment of two standalone furniture galleries and a larger mixed-use development adjacent to one store.

There's been complete silence from Macy's about the Brookfield alliance since then. But the lack of discussion on earnings calls didn't mean the partnership had stalled out.

Check out the latest earnings call transcript for Macy's.

Finally, signs of progress

One sign that the Macy's-Brookfield partnership was alive and well surfaced in February. Local media reported that village leaders in Vernon Hills, Illinois, were asking Macy's and Brookfield to scale back a plan to build four outparcel buildings with 26,000 square feet of retail space on Macy's-owned parking lots at Hawthorn Mall.

Then, in early March, a commercial real estate broker posted outparcel sites for lease at 11 Macy's locations, mainly in the Northeast. (These sites are probably included in the Brookfield partnership, but Macy's didn't respond to a request for comment to confirm.) Each listing includes a site plan calling for between one and five new retail buildings either attached to a Macy's store or adjacent to one.

Here, too, the new buildings would be built on what is currently excess parking lot space. The amount of new retail space being considered for these sites is quite significant, ranging from 52,500 square feet at the low end up to 193,000 square feet at the high end. Across these 11 properties, a total of up to 1.2 million square feet of new space could potentially be added.

Thus, it seems clear that Brookfield Asset Management is moving forward with plans to develop some of Macy's excess land. And the information that has become public recently probably reflects just a sample of the activity under way, with larger-scale projects still earlier in the planning process.

A win-win for Macy's

Developing its excess parking lot land for new retail and mixed-use space will help Macy's in two ways. First, Macy's will get a cash windfall, either from selling the land to the developer up front or from selling its share of a completed development project.

Second, having additional retailers, restaurants, apartments, hotels, and offices adjacent to its stores should boost customer traffic. That will offset the broader trend of falling mall traffic and make it easier for Macy's to grow its sales at those locations.

The bulk of the gains from this real estate initiative are still a year or two away, if not more. But the potential value creation for Macy's over the next several years could be quite substantial.