Retail sector faces disruption as major department store heads for liquidation

The potential liquidation of Hudson’s Bay is raising concerns about its extensive retail footprint and the impact on other companies, according to BNN Bloomberg.

While the immediate effects could put pressure on property owners, experts suggest the long-term outlook for the sector remains stable, particularly for well-located properties.

RioCan Real Estate Investment Trust is particularly affected by Hudson’s Bay’s financial difficulties, as the two companies co-own 12 store properties, including key downtown locations, through a joint venture.

RioCan addressed this exposure in a news release, calling Hudson’s Bay’s creditor protection filing “disappointing.”

The retailer has requested court permission to liquidate all its stores and pause lease payments to the joint venture, a move RioCan opposes.

“RioCan understands that restructuring can be a necessary step for companies to stabilize their operations and financial position; however, it is essential that any restructuring steps are on fair and balanced terms,” the company stated.

RioCan owns 22 percent of a joint venture that holds 10 Hudson’s Bay stores, including flagship locations in Montreal, Vancouver, and Calgary. Hudson’s Bay owns the remaining 78 percent, and these properties are tied to mortgages worth hundreds of millions of dollars.

Due to the co-ownership structure, Hudson’s Bay argues that lease payments should not be considered conventional rent. The joint venture also owns half the stores in Oakville and Barrie, Ontario, with RioCan holding the other half.

Additionally, RioCan has 50 percent ownership of an HBC location near Ottawa, which is not part of the joint venture.

In total, RioCan says it controls 842,000 square feet of net leasable space tied to Hudson’s Bay stores.

Kate Camenzuli, vice-president of retail at CBRE, noted that while Hudson’s Bay’s bankruptcy marks the end of Canada’s last major department store, it creates new opportunities.

“From a Canadian retail real estate perspective, it might have some challenges in the short term, but I think that in the medium and long term, this is a phenomenal win.”

Camenzuli pointed to high-demand locations like Yorkdale Shopping Centre in Toronto, where space could be repurposed for multiple smaller stores or new entertainment and grocery options.

“There’s an enormous amount of tenants that want to get into that shopping centre.”

However, weaker shopping centres may struggle more to fill the space.

Camenzuli noted that the traditional anchor tenant model is less critical now, with retailers like Apple, Sephora, and Lululemon drawing customers, alongside added amenities and developments.

RioCan CEO Jonathan Gitlin highlighted the value of the company’s locations, emphasizing their potential as retail or redevelopment sites.

“Our team has a proven track record of finding solutions for vacant space and will work to protect the value of the real estate in the JV.”

RioCan, which has provided credit support totalling $88.7m to Hudson’s Bay, plans to use all legal and business avenues to safeguard its interests.

Other landlords also face potential exposure, including Cadillac Fairview, which acquired Hudson’s Bay’s Toronto flagship store and the adjacent Simpson’s Tower for $650m in 2014.

Hudson’s Bay leased back the properties under a 25-year agreement with an optional extension.

Across Canada, other landlords could also be impacted, as Hudson’s Bay leases all 80 of its store locations.

Shalabh Garg, an analyst at Veritas Investment Research, said the influx of retail space could temporarily lower rents, though major operators like RioCan remain resilient.

“I think it depresses overall prices because you have lots of space coming,” he said, but added that most spaces should be easy to fill.

RioCan maintains high occupancy rates in the upper 90s, with Hudson’s Bay properties accounting for just three percent of its overall holdings.

Garg compared the situation to Nordstrom’s exit, noting that while it took a year or two to replace tenants, new renters often paid higher rates than previous anchor tenants.

However, outlet malls may struggle to find suitable replacements, as certain categories, like grocery stores, do not fit those locations.

The fate of Hudson’s Bay remains uncertain as the company awaits court approval to proceed with liquidation. The retailer has suggested it may exclude some stores from liquidation if it secures additional financing.

Joseph Pasquariello, a lawyer representing RioCan, questioned whether Hudson’s Bay waited too long before seeking “unprecedented relief,” suggesting that its approach “doesn’t scream out a well-organized restructuring opportunity.”

He, along with lawyers representing Hudson’s Bay employees, urged Ontario Superior Court judge Peter Osborne to consider the potential risks of granting the company’s full request. 

“We don’t want to set up a system that is doomed to fail from the get-go,” Pasquariello warned.

The challenges faced by Hudson’s Bay are part of a broader trend of retail bankruptcies in Canada. In recent years, several prominent retailers have filed for bankruptcy or closed operations:

• Nordstrom: The US-based department store chain announced in March 2023 that it would be closing all six of its Canadian stores, citing an inability to sustain profitability in the Canadian market.
   
• Le Château: The Montreal-based fashion retailer filed for bankruptcy in October 2020 and subsequently closed all 123 of its stores across Canada. The company had been struggling with financial difficulties exacerbated by the COVID-19 pandemic.
   
• Bed Bath & Beyond: The home goods retailer filed for bankruptcy in 2023, leading to the closure of all its Canadian stores. The company faced challenges adapting to the competitive retail environment and shifting consumer preferences.
   
• Frank and Oak: The sustainable fashion chain filed for bankruptcy in December 2024, burdened by $71m in debt. The company had previously filed for bankruptcy in 2020 but continued to face financial challenges.
   

These closures reflect the ongoing challenges in the Canadian retail sector, as companies grapple with changing consumer behaviours, economic pressures, and the rise of e-commerce.

The closure of major retailers like Hudson’s Bay has significant implications for commercial real estate, particularly in urban centres. Large retail spaces, especially those in prime locations, present both challenges and opportunities for property owners and developers.

In Vancouver’s Union Square, the building at 150 Stockton St., previously housing Neiman Marcus, was acquired by Saks Global Enterprises LLC, a new entity formed by Hudson's Bay Co., in December 2024 as part of a $2.7bn acquisition.

This transaction has fueled speculation about the potential exit of another major retailer, Saks Fifth Avenue, from its current location at 384 Post St.

The departure of anchor tenants can lead to decreased foot traffic, affecting smaller retailers within the same vicinity.

However, it also opens up opportunities for redevelopment and diversification of commercial spaces.

Property owners may consider repurposing large retail spaces for mixed-use developments, incorporating residential units, offices, or entertainment venues to adapt to evolving market demands.