Hudson’s Bay operated 80 of its namesake stores across the country, as well as two Saks Fifth Avenue and 13 Saks Off 5th locations.Graham Hughes/The Canadian Press
When Hudson’s Bay Co. closed the doors of all of its department stores for the final time on Sunday, it marked not only the disappearance of a historic retailer, but also a new problem for landlords across Canada: millions of square feet of empty space.
On March 7, when it filed for court protection from its creditors, Hudson’s Bay operated 80 of its namesake stores across the country, as well as two Saks Fifth Avenue and 13 Saks Off 5th locations.
A court-supervised process to sell off the leases for those stores and the retailer’s distribution centres drew 12 bidders. Mall owner Weihong Liu has agreed to acquire up to 28 leases, pending discussions with landlords and court approval, and Hudson’s Bay has been holding discussions with other bidders. Canadian Tire, which recently struck a $30-million deal to buy Hudson’s Bay’s intellectual property, has also bid on some leases.
But no bids were received for 62 of the properties, which the retailer is preparing to hand back to landlords.
Opinion: The Hudson’s Bay Company lost its heart and soul decades ago
“That’s going to drop a huge amount of square footage on the marketplace,” said John Crombie, executive managing director of retail services in Canada for commercial real estate giant Cushman & Wakefield. And it comes at a difficult time in retail: there were 536 major store closures in Canada last year, Mr. Crombie added, and in the first half of this year alone, there have been almost 500.
And The Bay is not just any store: the locations are unusually large, spanning multiple floors, and averaging around 300,000 square feet, Mr. Crombie added. In Canada, only a handful of retailers operate stores larger than 100,000 square feet.
In the past, such as with the departure of Target Canada, landlords have split those spaces up to attract tenants to rent out smaller stores. Other landlords may want to tear down the stores to build towers with residential, hotel or office space. All of these options require significant investment.
“For the landlords, it’s the capital cost associated with either tearing it down, or doing smaller boxes. Because frankly, you’re never going to find anybody to fit those shoes,” Mr. Crombie said. “So you’re going to get stuck with a huge capital outlay to reconfigure your mall. And that’s really causing a lot of trepidation with many of these landlords right now.”
The impact of the Bay closings is already being felt in the market. Last week, RioCan Real Estate Investment Trust filed a motion in court to place a joint venture it co-owns with Hudson’s Bay into receivership. The joint venture gives RioCan a stake in 12 properties where Bay stores were located, including buildings in downtown Montreal, Vancouver, Calgary and Ottawa, and locations in high-profile malls such as Yorkdale and Scarborough Town Centre in Toronto.
The Bay's deal with Canadian Tire will allow it to sell items under these brands across its 1,700 Canadian Tire, Mark's, SportChek, Party City and Pro Hockey Life stores.
The Canadian Press
What happens to some flagship properties will have a big impact on major downtown streetscapes.
“I’m terrified about the future of that part of the city,” said industry consultant Félix-Antoine Joli-Coeur, speaking of the neo-Romanesque Bay building on Sainte-Catherine street in downtown Montreal. “It’s a beautiful building, but the way it is designed, I would be very surprised if a big brand bought it and developed a new concept – for fashion and retail, it’s way too big.”
Also last week, Primaris Real Estate Investment Trust announced plans to spend $50- to $60-million to redevelop five locations it owns where Hudson’s Bay found no bidders for the leases. In some cases, large-format tenants are considering taking over the entire space; others will be subdivided or may be demolished to make way for new developments, according to a company press release.
Such redevelopments can be complicated by the presence of a large anchor tenant like Hudson’s Bay. Such tenants often hold legacy leases – signed at a time when those department stores played a much bigger role in drawing traffic to malls – that gave them below-market rents and rights to block new construction projects in the malls. Those rights had generated revenue in the past for Hudson’s Bay, which secured payments for allowing projects to proceed. The disclaimed leases have now “removed obstructionist barriers” to improving the properties, Primaris chief executive officer Alex Avery wrote in the release.
“Having anchor tenants in traditional shopping centres go away is not something that we’re unfamiliar with dealing with in the retail world,” said Susan Thompson, associate director of research at commercial real estate firm Colliers. She cited a long list of such anchor tenants that have disappeared over the years, such as Target Canada, Nordstrom Canada, Sears Canada, Eaton’s, Simpson’s and Woodward’s. Hudson’s Bay is now added to the list of retail failures that have caused landlords to rethink the future of their properties.
“Every time it happens, it brings about further evolution within the retail landscape,” Ms. Thompson said. With fewer shoppers drawn to department stores, some mall owners have used that space in the past to add a wider variety of tenants to convince people to visit, she added, such as fitness centres, medical clinics, gaming venues and pickleball courts.
“I think it will open up some opportunities,” Mr. Crombie said, adding that retail vacancy in Canada is only about 2 per cent currently, making it challenging for new tenants to find quality spaces at reasonable rents.
“That said, these spaces are so large, and if they’re not easily dividable they could be challenging spaces to deal with,” he said. “The average-sized tenant is 3,000 to 5,000 square feet; they’re not 140,000 square feet.”