Hudson’s Bay Company (HBC) is expected to close at least 40 large-format stores across Canada after filing for creditor protection under the Companies’ Creditors Arrangement Act, a move which would put millions of square feet of retail space back onto the leasing market.

HBC has 80 stores in seven provinces and sells online through TheBay.com. The company also operates three Saks Fifth Avenue and 13 Saks Off 5th stores in Canada that are under a licensing agreement and separate from the bankruptcy protection proceedings.

HBC store closures could mean up to five million square feet, or more, of retail space could become available and need to be absorbed in one way or another. 

But with many of those HBC stores occupying prime locations, the news may not be as dire for landlords as it might seem at first glance. In fact, it could create opportunities for some owners.

“A lot of those sites are very well-located and not at their highest-and-best use,” Sherman Scott, vice-president of Colliers’ Vancouver brokerage, told RENX.

“There’s value in those leases that were signed so many years ago.”

Many HBC stores could be redeveloped

Markets have shifted over the years, particularly in urban areas, and many HBC stores are prime candidates for redevelopment. 

“These spaces are huge and I think it would be a rare scenario where somebody comes along and recasts the space as is,” Scott said. 

“There's not a lot of large retailers in that size range, maybe a handful, but with the current configurations and ceiling heights, it's probably going to be cheaper to demo those spaces and redevelop them.”

Scott speculated that a lot of HBC space not eaten up through demolition and new construction could also be divided into smaller units to accommodate multiple smaller users.

“Many landlords have been trying to get those boxes back for years,” Scott explained. “Many of them would like to reconfigure that space and, in some cases, build mixed-use.”

Lessons from past department store failures

Retail property owners and managers can also draw upon lessons learned from past mass Canadian closures of Target, Zellers and Sears stores.

“I think a lot of the landlords will cope just fine if they can get control of those spaces again,” Scott said, emphasizing that long-term leases with below-market rents were often a hindrance to owners of buildings in strong urban locations.

Scott acknowledged, however, that owners of properties with HBC stores in secondary markets could take a hit, as there could be much less demand for retail space or mixed-use development in those areas.

Scott is unsure of how long it would take to liquidate merchandise from HBC stores slated to close. 

The creditor protection filing is no surprise to major retail property owners. The company's financial struggles have been well documented in recent years.

Primaris REIT issued a media release on March 10 stating it has exposure to 10 HBC locations totalling 1.12 million square feet of gross leasable area that account for approximately $11.6 million in total gross rental revenues.

Primaris president and chief operating officer Patrick Sullivan said the REIT has been preparing for this eventuality for years and “although there could be an impact to our financial and operating metrics in the short term, Primaris has detailed plans for all 10 locations, and is ready to take action if and when any locations are disclaimed.”

Canadian retail leasing remains strong

Canadian retail leasing has been extremely active over the past couple of years. Scott said the vacancy rate for suburban grocery stores is just 0.7 per cent and the urban high street retail vacancy rate is about four per cent.

“With inflation, higher interest rates and now tariffs, it’s just been one thing after another, but retail still seems to be quite strong,” Scott said.

Construction of large, stand-alone, single-storey shopping centres and even smaller strip malls has essentially stopped in Canada and much of the retail that’s planned is tied to mixed-use condominium developments. With the condo market in the doldrums, many of those projects have been put on hold.

That means demand for the limited retail space that’s available should remain high and support rent growth.

HBC’s property mortgages and distribution centres

HBC has $724.44 million in mortgages tied to some of its real estate holdings as part of the $1.13 billion of secured debt it was carrying as of Jan. 1. On that date, it had cash on hand of about $3 million.

“I imagine the lenders aren't going to want to be in the real estate business, so they’ll be cooperative to the extent that they extract as much value as they can,” Scott said. “That could mean selling to somebody else.”

HBC also leases four primary distribution centres: Vancouver Logistics Centre in Richmond, B.C.; and Scarborough Logistics Centre, Eastern Big Ticket Centre and Toronto Logistics Centre in the Greater Toronto Area. It also leases distribution space in Winnipeg and Calgary.

It's not yet clear what impact a major downsizing of the retail segment could have on this space.

While the industrial real estate market remains strong, vacancy rates have crept up and the explosive rent growth from earlier in this decade has moderated. There should still be enough user demand, however, to eventually fill those spaces if they’re vacated by HBC.