Ever since the old Gimbel's store on Herald Square was gutted and turned into a vertical mall in 1989, the property has struggled as a retail venue. Now, Vornado Realty Trust, is taking over the 1-million-square-foot building in a $689 million deal and has announced plans to renovate once more — this time producing a mixed-use project.

In all, Vornado is making a big bet on the Herald Square area as Manhattan Mall gives it another piece in a swath of properties it controls along Manhattan's 33rd Street corridor from Ninth Avenue to Sixth Avenue. Moreover, Vornado, along with Related Companies, is handling the 2-million-square-foot development of the nearby Moynihan Train Station just two blocks away from the mall. Overall, Vornado will now own 9 million square feet of space in midtown Manhattan, most of that clustered around Penn Plaza.

Manhattan Mall, in fact, sits directly adjacent to Vornado's Hotel Pennsylvania. Combined, the two buildings now give Vornado control of an entire city block stretching from 32nd to 33rd Streets and Sixth and Seventh Avenues. As part of the deal, Vornado also secures 250,000 square feet of air rights above the mall. The company is also likely to use the air rights to add apartments or a hotel to the property, according to Robert K. Futterman, CEO of Robert K. Futterman & Associates, whose firm served as the leasing agent for the Mall from 2002 to 2004. In all, it gives Vornado a similar opportunity to when it bought another old department store site, Alexander's, on 59th and Lexington in 1995. The site became the $630 million, 56-story, 700,000-square-foot Bloomberg Tower.

Vornado is buying the 13-level property from Argent Ventures and German fund hausInvest Global, which have controlled the Mall since 1998. During that time, they have scaled back the mall, converting unrentable retail space into offices. Just 164,000 square feet of the property is retail; 812,000 square feet is now office space, largely occupied by Bank of America and the Interpublic Group.

“The Manhattan Mall has always been a disaster — this property was re-merchandised about 10 times and nothing worked,” says Howard Davidowitz, chairman of Davidowitz & Associates, a New York-based retail consulting and investment banking firm. “Every other owner has fallen on its face, but there is nobody better at redevelopment.”

Vornado would not comment on the deal.

“This property could only get better under Vornado, because they will really take advantage of the thriving location,” Futterman says. “But I think they will take their time in determining what's appropriate to do with the air rights and whether to combine the Mall with Hotel Pennsylvania.”

Retail rents at the Manhattan Mall are currently around $150 per square foot according to Argent — less than half the average of the $300 to $400 per square foot rates that prevail in the Herald Square/33rd Street area. Office rents are in the $45 to $49 per square foot range.

The Mall has been doing better in recent years — sales per square foot went up to $1,000 in 2005 from $650 in the early 2000s, according to Argent. Average sales on 33rd Street are in the $1,500-per-square-foot range, according to market sources.

The property boasts Manhattan's only Steve & Barry's University Sportswear and Jimmy'Z locations, but the rest of its tenant list is taken by the likes of Express, Strawberry and Victoria's Secret — retailers that can be found in street-level locations throughout Manhattan.

“When you go in that area today, you'll see that the place is mobbed, but the question is: who are the right tenants?” says Futterman. “I think somebody should complete a feasibility study on the mall to make it appealing to a combination of people who work and commute to the area.”