News broke last week of the Hudson’s Bay Co.’s long-time financial woes finally getting the best of the more than 350-year-old retailer. Some suggest it could be curtains for the Canadian icon.
The news has prompted furious speculation in the commercial real estate industry about the fate of the vast amount of retail space the company still occupies, much of it leased.
To get a sense of what could happen to such spaces, Green Street News spoke to Darren Kwiatkowski, principal and executive vice president of new development at Shape Properties, a real estate investment company that owns several high-profile shopping centers in Western Canada and Ontario.
The retail sector has seen a rebound in recent years, but The Bay didn’t get in on it, why is that?
Simply, I think Canadian consumers were no longer interested in shopping at The Bay. They didn’t have a compelling value proposition. Their stores were uninspiring. Canadians are loyal, but they’re not stupid and they voted with their feet.
And what kind of opportunities do you think the downfall of The Bay leaves for other retailers and why?
The location of the Hudson’s Bay stores, they’re extraordinary, but I would describe the majority of the buildings as functionally obsolete. They’re going to require extensive upgrades and capital to retrofit the stores. The best use in most instances will be to demolish the exiting store and start over.
With another large-space store or multiple retail outlets?
Most of the demand from large retailers in the market was satisfied over the last decade with the opportunities provided by the closing of other department stores and midsize box stores. Accordingly, the demand is low. Furthermore, under the business model of most large-footprint retailers, they can’t or don’t pay relatively high rent. As such, in 2025, with escalated construction costs, it’s going to be very difficult to either retrofit the existing store or build new stores for large-footprint retailers in a manner that provides a sufficient return on the new capital required.
It also seems large retailers are more often big box stores than department stores now anyway.
Correct, and there’s fewer of them and they already have locations in most major markets. The large communities where they are not located are most likely very challenging for them to get into because the primary form of development where their land use is permitted is higher density. High-density development in an urban context is expensive to build, and their business model is traditionally based on very cost-effective, single-purpose buildings.
What type of organizations do you see filling some of those spaces that The Bay occupies now?
I think that the largest demand is going to come from restaurants, health and beauty, fitness and daily needs type tenants that service the local community. Canada’s regional shopping centres have sufficient existing space within the malls themselves to satisfy the demand from most expanding fashion tenants without the need to expand into the Hudson’s Bay stores.
“In many cases, the most profitable redevelopment plan will be mixed-use with a significant ratio of residential uses. “
Retrofitting The Bay stores in a manner to suit these tenants’ requirements will be costly and challenging. Accordingly, redevelopment will likely be the most viable option. In many cases, the most profitable redevelopment plan will be mixed-use with a significant ratio of residential uses. In some cases, no new retail will be best. The mix of uses and the appropriate amount of new retail space in a redevelopment will vary from site to site and market to market.
Is there an appetite for any kind of traditional department store anymore?
It depends on how you define traditional. If you go back 50 to 80 years when department stores were exciting, vibrant, dynamic social spaces full of interesting merchandise, augmented by enticing food options, there will always be interest from consumers in that. You can see it in other countries. If you go to London, you have Selfridges and Harrods — super exciting, super interesting, super successful.
Unfortunately, department stores in North America are not delivering that experience and it’s going to be very difficult for them to change or self-correct. The stores are large, they have many locations, and a lot of new capital would be required to make the changes necessary to become culturally relevant in 2025 and I don’t think the capital is there.
How do mall owners ensure that they don’t miss the opportunity that happens when The Bay does leave — if it does leave? What’s the best course of action if you’re a mall owner and you’re about to lose this one big tenant?
My suggestion is that the best path forward would be for owners to step back and undertake a holistic deep-dive analysis on the entire property and come up with an overall comprehensive asset plan. If The Bay stores close, it will provide an extraordinary generational opportunity. [To achieve] the optimal redevelopment plan — including the ratio of residential to commercial and new build versus adaptive reuse — the formula is going to be different for each property.
Ideally, you end up with a redevelopment plan where new development benefits the existing, and the existing benefits the new development. There is a synergy. Most of the malls that the current Bay stores are attached to are well-performing. That’s an attractive amenity for new mixed-use residential development and the vibrancy of adding hundreds or thousands of new residents on site is a benefit to the existing mall. Done well, together they can be super synergistic.
What has been done with spaces left by the stores like Sears and The Bay in the past?
There have been two general approaches. The approach that Shape has taken with our respective partners at CF Richmond Centre, The Amazing Brentwood and The City of Lougheed was we demolished the former department store spaces and created a new mixed-use setting that has vibrant and dynamic social spaces that are synergistic to the mall. There has been a benefit to the new homes being built and there’s a benefit to the existing property. That’s been one approach.
The other approach was for landlords to backfill the Sears boxes with an assortment of larger retailers. Walmart took a number of former stores, as did several grocery stores and an assortment of midsize tenants. However, the demand from potential backfill tenants has since declined significantly, and the construction costs have escalated significantly making it difficult to make the economics work for large-format retailers in today’s market.
Which brings me full circle to the hypothesis that redevelopment is the highest and best use. But that doesn’t mean that redevelopment is going to happen in the case of all the Hudson’s Bay stores. In today’s market, new capital for development projects is scarce and risk-averse.
Are mall owners going to want to invest significant money in a redevelopment project? Some will, others will backfill the Hudson’s Bay stores with short-term tenancies, that will take the premises on an as-is basis. However, mall owners are going to be cautious. They’re sitting on very good real estate and will be hesitant about doing temporary short-term deals that might detract from the brand of the shopping centre.
