Retail landlords brace for impact as Canada's oldest department store files for bankruptcy
The impending liquidation of Hudson’s Bay is putting Canada’s commercial landlords under pressure, forcing property owners to reevaluate their portfolios as one of the country’s oldest department store chain faces collapse.
The retail chain, which has sought creditor protection, is pushing to suspend lease payments while it attempts to offload assets.
RioCan Real Estate Investment Trust, one of Hudson’s Bay’s largest landlords, is particularly vulnerable. The company co-owns 12 store locations through a joint venture, including flagship properties in Montreal, Vancouver, and Calgary.
In a statement, RioCan called the retailer’s recent creditor protection filing “disappointing” and pushed back against its request to halt lease payments.
“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 real estate trust said in its media release.
Hudson’s Bay owns a 78% stake in a joint venture with RioCan, which holds the remaining 22%. The retailer has argued that, due to this structure, its lease payments should not be treated as conventional rent, a claim that RioCan opposes. The trust also has a 50% ownership stake in two additional Hudson’s Bay properties in Oakville and Barrie, Ont., as well as another location near Ottawa.
In total, RioCan estimates that its Hudson’s Bay-related properties span roughly 842,000 square feet of leasable space. The company also provided $88.7 million in credit support to the retailer, further increasing its financial exposure.
Other landlords are also at risk. Cadillac Fairview, for instance, purchased Hudson’s Bay’s Toronto flagship store and the adjoining Simpson’s Tower for $650 million in 2014, with Hudson’s Bay leasing back the space for 25 years.
Meanwhile, landlords across Canada are bracing for potential vacancies at all of Hudson’s Bay’s 80 store locations. The retailer has signaled that it may keep some stores open if it secures financing, but observers remain skeptical about its ability to execute a turnaround.
Can it be a ‘phenomenal win’
The loss of such a large retail tenant is expected to create downward pressure on rental prices in the short term, as landlords rush to fill vacant space. However, some industry experts see an opportunity for property owners with premium locations.
“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,” said Kate Camenzuli, vice president of retail at CBRE.
At high-demand malls like Toronto’s Yorkdale Shopping Centre, the departure of Hudson’s Bay could allow landlords to divide the space into smaller retail units or bring in entertainment and grocery tenants.
“They can figure out what they want to do for the rest of their centre, and there’s an enormous amount of tenants that want to get into that shopping centre,” Camenzuli added.
However, not all locations will be as fortunate. Some weaker shopping centres that were already struggling could face a tougher road ahead, as traditional department store anchors have become less critical to foot traffic.
Instead, retailers such as Apple, Sephora, and Lululemon have taken on the role of drawing shoppers, alongside entertainment and dining options.
RioCan CEO Jonathan Gitlin expressed confidence in the company’s ability to navigate the situation, stating that the trust’s properties “include prime real estate that have value either as retail centres or redevelopment opportunities.”
“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,” Gitlin said.
Read next: Hudson's Bay not making the most of its real estate portfolio – investors
However, not all industry players are convinced that Hudson’s Bay’s restructuring plan will be successful.
RioCan lawyer Joseph Pasquariello questioned whether the retailer had waited too long to act, arguing that its approach “doesn’t scream out a well-organized restructuring opportunity.”
Similarly, analysts see the potential for prolonged leasing challenges, particularly for properties in weaker retail markets.
“I think it depresses overall prices because you have lots of space coming,” said Shalabh Garg, an analyst at Veritas Investment Research.
Still, he noted that major landlords such as RioCan maintain high occupancy rates and have experience repositioning properties after department store closures. He pointed to Nordstrom’s departure from Canada as a comparable case, where landlords ultimately secured new tenants at higher rents.
Certain locations, such as outlet malls, may face more difficulty in repurposing the space, as grocery stores and other high-demand tenants may not be a suitable fit.
Poor track record
Hudson’s Bay filed for creditor protection under the Companies’ Creditors Arrangement Act (CCAA) on March 7, citing financial struggles and the need for restructuring.
Initially, the retailer planned to close roughly half of its operations, but, on March 14, it announced that a full liquidation was likely unless it could secure emergency financing.
In a March 17 court hearing, Hudson’s Bay lawyer Ashley Taylor argued that an immediate liquidation process was necessary to “maximize the value of the business and preserve whatever chance there is of a restructuring.”
The closures will impact approximately 9,300 employees, bringing an end to one of North America’s oldest continuously operating businesses. Founded in 1670, Hudson’s Bay built its legacy on the fur trade and evolved into Canada’s largest department store.
Make sure to get all the latest news to your inbox on Canada’s mortgage and housing markets by signing up for our free daily newsletter here.
