The best deal at Macy's (M) this year may be the stores themselves.

Shares of Macy's surged over 19% on Monday, after the 165-year-old retail giant received a $5.8 billion buyout offer from real estate investor Arkhouse Management and asset manager Brigade Capital Management, a source familiar with the matter told Yahoo Finance late Sunday.

What's the intent behind the offer? While the iconic company has been struggling to keep up with sales, its robust real estate portfolio is likely the target — yet getting full value for it won’t be easy.

Estimates for Macy's real estate portfolio vary. Evercore ISI pegs it at $5 billion to $7 billion, with its flagship New York City Herald Square location at $900 million to $1.5 billion. TD Cowen puts the portfolio at $7.5 billion to $11.6 billion, while JP Morgan values it at $8.5 billion — with Herald Square worth at least $3 billion, according to a note to clients with research led by Matthew Boss.

"The cake is the real estate," Neil Saunders, GlobalData’s managing director of retail, told Yahoo Finance over the phone. "That's the core of this deal."

Macy’s actual retail business is likely only the “icing on the cake,” per Saunders. That Macy’s makes a profit — unlike most other big box retailers — makes the deal “more palatable” for real estate investors, Jonathan Miller, CEO of Miller Samuel Inc., told Yahoo Finance over the phone.

But the varying portfolio numbers and the fact that the bid is lower than Macy’s asset values speak to the difficulty facing retail real estate. There isn’t a dearth of buyers waiting to snap up big box space; instead, these million-plus-square-foot buildings need to be converted to other use, in an environment where rezoning is onerous, interest rates are high, and office space is no longer in demand.

"Unlocking real estate value may or may not be realistic depending on time horizon, usage and restrictions, developer appetite, and how this may intersect with Macy's as a retailer," TD Cowen analyst Oliver Chen wrote in a note to clients.

Evercore ISI’s Michael Binetti pointed out in a client note that in 2015, an activist investor valued Macy’s real estate at $21 billion, including $3.3 billion for seven downtown properties. Subsequently, Macy’s sold four of those properties (San Francisco, Minneapolis, Pittsburgh, and half of the Chicago store) for a combined $351 million.

Department stores' values are historically overestimated, per Binetti. The Herald Square location could take $200-$500 per square foot to reconfigure to make it useful, further reducing the value available to Macy’s, Binetti added.

While these factors likely suppress the maximum figure for a Macy's bid, the retailer's prime locations are a point in its favor. Residential conversions, particularly at a time of housing shortage, could unlock upside potential, said Miller.

"They must have some idea about the challenges and the time frame, and that's factored into the price they're willing to pay,” Miller said of the bidders.

Conversions are expensive and won’t happen overnight. Miller estimates the process to be three to five years, though the timeline dovetails with other economic trends as financing costs drop and the economy strengthens in the future.

And this could be just the beginning of a battle for the department store, making room for more to join in the buyout.

"They've come in with a premium that's not exceptionally high and I would not be surprised if the bid goes up before it's over," Richard Kestenbaum, Triangle Capital LLC co-founder and partner, told Yahoo Finance Live. "I'd expect another financial bidder, if there is going to be another bidder."

This offer comes as Macy's beat modest estimates in its latest quarterly earnings results, but its stock, before Monday's surge, was down 45% compared to five years ago.

Another beginning of the end for big box stores

It's no secret that department stores have felt the brunt of consumers changing the way they shop.

JCPenney, Lord & Taylor, Stage Stores, Bon-Ton, Belk, and Sears have closed roughly 1,500 department store locations since 2018, per JP Morgan.

While Macy's should be picking up customers from their demise, it has lost “90 [basis points] of market share in the US Softlines Retail Industry vs 2019,” according to Evercore ISI.

The continuing growth of e-commerce, a more cautious consumer, expansion of discount retailers like TJ Maxx, and brands’ preferences to operate their own stores have only worsened the trend line for Macy’s.

"Even in an environment where [other big box retailers] are failing, Macy's isn't really making up a lot of ground," Saunders said, pointing out that some of its premium lines like Michael Kors and Coach often sell out of its own shop on the same mile as Macy’s.

JPMorgan sees Macy's valuation as lower than the buyout offer, with a December 2024 price target of $19, based on 3.5x its 2025 EBITDA.

TD Cowen breaks down the current offer to “1x EV/Sales for Bluemercury, 0.25x for Bloomingdales, and nothing for Macy's, assuming a $7.5 billion real estate valuation,” effectively erasing the value for the main business.

Consumers don’t want to "shop where their parents shopped," said Kestenbaum. Shoppers today want a connection to the brands they wear, and care about elements like environmental sustainability and fair labor practices.

But communicating brand value is difficult for big box stores that are meant to be a mishmash of all brands. “The decline in department stores fits into what consumers want now,” Kestenbaum added.

While the future of Macy’s is up in the air, one thing is almost for certain: It won’t look like it does now.

"Being private could allow for more freedom, faster change, and disassembly of Macy's as we know it today — and a new owner would need to balance short and long-term goals and objectives which could involve Macy's coming back to the public markets in a different form," TD Cowen said in its note.

Luxury chain Bloomingdales and cosmetics store Bluemercury have fared better financially than Macy’s. Though they’re too small to save the parent company, they could be sold off individually.

Investors could get a "reasonable premium" for Bluemercury, Saunders said. Meanwhile, Bloomingdale's could merge with other upmarket retailers like Saks Fifth Avenue and Neiman Marcus.

Or Macy’s could end up a shell of its former self, as investors divest of its real estate and any other profitable assets a la Sears, University of Michigan professor Erik Gordon told Yahoo Finance over email.

"The track record of real estate players and fund managers who take over retailers is bleak ... Buying Macy’s for its real estate might work slightly better than Eddie Lampert’s real estate play at Sears. That one ended in bankruptcy."

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Brooke DiPalma is a senior reporter for Yahoo Finance. Follow her on Twitter at @BrookeDiPalma or email her at [email protected].

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