The Hudson’s Bay Company has announced the launch of a real estate arm to capitalize on assets at a challenging time for the company. The division, called HBC Properties and Investments, will look to convert some of Hudson’s Bay’s real estate into mixed-use developments.
The Hudson’s Bay Company owns or controls (either entirely or with joint venture partners) about 40 million square feet of gross leasable area across North America, including retail banners Hudson’s Bay in Canada, Saks Fifth Avenue and Saks OFF 5TH. As part of the HBC Properties and Investments initiative, the company is utilizing the 40-year-old large-scale US-based property development company Streetworks Development, which HBC acquired last year, to create “transformative multi-use environments” that marks a milestone in the Hudson’s Bay Company’s shift to a holding company structure with distinct portfolio businesses that operate “at the intersection of retail and real estate”.
“This is an exciting phase of our company’s transformation and provides us with a significant opportunity to unleash the full potential of our real estate and investments business, said Richard Baker, CEO and Executive Chairman of the Hudson’s Bay Company. “Under this new organization, we will build upon our strong foundation of valuable real estate assets in key demographic areas.”
“We will also continue our strong track record of maximizing our portfolio and generating value from these assets, as we did through the sales of the Lord + Taylor flagship building (on 5th Avenue in New York City) and our interest in European real estate assets,” said Baker. “With the team’s deep expertise and forward-thinking approach to capitalizing on the intersection of retail and real estate, HBC Properties and Investments is well-equipped to further elevate and increase the value of our portfolio.”
Ian Putnam has been appointed as President and CEO of HBC Properties and Investments — he previously served as President, Real Estate and Chief Corporate Development Officer of HBC. Putnam will lead the real estate portfolio and investments including Streetworks Developments.
Real estate veteran Kenneth Narva, Chairman and Chief Development Officer at HBC, will direct the Streetworks Development team in the planning and execution of projects that modernize properties to “unlock value-enhancing opportunities across the company’s real estate assets”. The new division will focus on creating multi-use spaces that feature a range of services and experiences across the workplace, retail, residential and entertainment categories.
Mr. Putnam said, “With HBC’s valuable portfolio of real estate and investments, including marquee flagship properties in prime metropolitan markets, coupled with Streetworks Development expertise, HBC Properties and Investments is well positioned to succeed in today’s landscape. As consumers continue to change the way they live, shop, and work, we are committed to capitalizing on these shifts while maximizing the productivity of our properties, including the physical locations of HBC’s retail operating companies”.
“At the end of the day, this is a strategic play to split real estate assets from retail operations. Is the intent to launch a REIT or sell off real state that’s more valuable than the retail operations?” said George Minakakis, CEO of Inception Retail Group. “There is no way to be certain in this climate. However when the virus gets under control you want to be in a position to dispose of underperforming assets or develop real estate for additional uses that would create more value. I believe it’s about ensuring you are prepared to exit. But as a holding company the only reason you make these releases is because you have a bigger plan,” he went on to say.
“The viability of Department Stores as a ‘species’ of retail has been in question for many years, first with the advent of enclosed malls, more recently with the vast array of brands selling directly to shoppers,” said David Ian Gray, Principal and retail strategist at Vancouver-based DIG360. “The DIG360 2017 study of Department Stores in Canada highlighted the rocky footing of The Bay in the wake of the demise of Sears Canada. This was in the face of the tremendous success of Winners and the growth of Nordstrom, La Maison Simons and the threat of Nordstrom Rack. HBC failed dramatically with Saks in Canada and has not overcome the gap in shopper experience between a few flagships and the suburban stores. More importantly, the ongoing erosion of easy to find, well-trained service staff means a reduced advantage over those selling similar fashions online.”
He went on to say, “For a number of years the mantra from the financial sector has been ‘HBC is a real estate play’. Is this move another signal that Mr. Baker is throwing in the towel on retailing? If so, this chain still represents a substantial dollar value and volume of apparel across the country in a ‘normal’ year. Large reductions in its footprint would mean a lost option for the older demographic that was continuing to patronize The Bay, even if less frequently. Of course, this would have a disruptive impact on vendors.”
Already, development applications are being made to transform some of the Hudson’s Bay Company’s storefronts in Canada. A recent proposal to the City of Montreal to modify the historic 655,000-square-foot downtown Hudson’s Bay flagship store could result in the building of a massive office tower along with a reduction in the footprint of the retail space within in the building. What would result is a real estate asset that would feature substantially more office space than retail space.
The proposal seeks permission to demolish the unattractive circa 1964 back-end of the Bay building facing onto Blv. Maisonneuve (intended at one time to become a 200,000-square-foot Saks Fifth Avenue) and replace it with a 400-foot-tall office tower with 25 floors. The total office space, including levels five to eight of the retail store as well as the new tower, would span 678,000 square feet. The retail space in the building would be downsized to five levels (basement up to level four) spanning about 295,000 square feet.
The Sainte-Catherine Street side of the Bay building, referred to as ‘Colonial House’, is proposed to be restored as well as to see the addition of a public terrace overlooking Philips Square. The new grey glass and aluminum-clad office tower would feature a staggered design at floors nine, 14, and 20. A green roof is proposed as well.
The Montreal Bay store was built between 1891 and 1964, with the oldest part of the store facing onto Ste-Catherine Street. It was built as an upscale Henry Morgan department store which catered to the carriage trade (Macleans in 1953 referred to it as “most courtly department-store keepers in Canada”). Morgan’s expanded into Ontario before going into decline and being acquired by the Hudson’s Bay Company in 1960. In 1972 the Ste-Catherine Street Morgan’s store was converted to the current Hudson’s Bay store.
A French language report in La Press noted that the Montreal Hudson’s Bay building had been for sale through brokerage CBRE, as was the Vancouver Hudson’s Bay flagship store recently. The Hudson’s Bay Company still owns some of its stores, though in years past some assets have been sold including the flagship Queen Street Hudson’s Bay building and adjacent office tower in Toronto which Cadillac Fairview bought in 2014 for $650 million. The Hudson’s Bay Company exited European operations in markets including the Netherlands and Germany last year and also shut down its Canadian Home Outfitters division, among other recent moves.
Hudson’s Bay stores are currently unprofitable according to Mr. Putnam. Store shutdowns in March of this year created a major financial issue for the company which began canceling and downsizing orders from some vendors while extending payment terms. Now that stores have reopened, consumers are still hesitant to return to Hudson’s Bay stores or to shop at all for that matter. Some have complained that Hudson’s Bay had not done enough to ‘COVID-proof’ stores which feature credit card point-of-sale devices requiring manual password entry, for example.
The fall in sales during pandemic shutdowns were massive at some locations according to recent court filings by Cominar REIT which is suing the Hudson’s Bay Company for outstanding rents with threats of eviction. Cominar said that HBC hasn’t paid rent since April at Rockland Centre in Montreal (monthly rent $86,200), Mail Champlain in Brossard (rent $110,200/month), and at Centre Laval in Laval (rent $20,500/month). Notices of default were sent in June and notices of termination followed last month. In total, damages and unpaid rents claimed amount to $3.68 million for Rockland Centre, $26.95 million for Mail Champlain, and $2.21 million for Centre Laval. All three Bay stores in those malls are currently open.
Oxford Properties is suing HBC for more than $2.29 million in unpaid rents at two shopping centres including Galeries de la Capitale in Quebec City (monthly rent of $220,000) and Promenades Gatineau near Ottawa ($145,900/month rent). Litigation documents noted that HBC had not paid rents for eight of the 11 Oxford-owned malls in Canada containing Hudson’s Bay stores.
The Hudson’s Bay Company claimed that the Oxford-owned malls are no longer “first class” and are not doing enough to attract shoppers. As a result, HBC says it is withholding rents. It wasn’t revealed which of the three Hudson’s Bay stores’ rent was paid, though one might guess that Toronto’s Yorkdale location and Square One were likely included given past sales numbers and the overall importance of those stores.
In April, at the worst of the pandemic, the number of transactions at the Promenades Gatineau Bay store near Ottawa fell by 99.1% (from 16,090 to just 149) compared to the same month of the previous year. Sales were down a whopping 99.5% (from $1.07 million to $ 7,926). Five months later, in September, transactions were still 35% lower than a year earlier (9,962 versus 15,337 12 months earlier). Sales were down nearly 29% (from $1.07 million to $759,000) over the same period.
The return to previous sales numbers were even slower at the Galeries de la Capitale near Quebec City, with sales in September being 39% lower than a year ago (from $1.73 million to $1 million). As for the number of transactions, it was down 43% from 22,425 to 12,684 over the same period.
In Quebec as well, Dorval Property Corporation, a Toronto real estate company that owns the Les Jardins Dorval shopping centre in Montreal, is suing HBC for unpaid rents amounting to almost $ 660,000.
Larco, owner of Park Royal in West Vancouver, is suing HBC for outstanding rents estimated to be about $365,000 and growing. Hudson’s Bay’s monthly rent is about $61,000 at Park Royal.
Hudson’s Bay is said to be in material default for its remaining shuttered real estate once occupied by home furnishings retailer Home Outfitters.
In the United States, 24 Lord & Taylor and 10 Saks Fifth Avenue locations are the target of a US $846.2 million foreclosure lawsuit by Wilmington Trust. Hudson’s Bay held the Lord & Taylor locations despite selling the retailer to Le Tote last year. The complaint alleges the borrowers missed the April 1 payment on a $846.2 million loan and have failed to make payments since. The April payment was the first one due after the COVID-19 outbreak caused widespread shutdowns.
Saks Fifth Avenue stores targeted for foreclosure under the loan include the following locations:
- Tysons Galleria near Washington DC in McLean, Virginia,
- Phipps Plaza in Atlanta,
- Fashion Show Mall in Las Vegas,
- Dadeland Mall in Miami,
- Walt Whitman Shops in Huntington Station, New York,
- Chicago Place (700 N. Michigan Avenue) in Chicago,
- Beverly Hills, California (9600 Wilshire Blv.),
- Somerset Collection near Detroit in Troy, Michigan,
- North Star Mall in San Antonio, Texas, and
- Beachwood Place near Cleveland in Beachwood, Ohio.
Employees from HBC’s offices in Brampton Ontario are being moved to offices on Lawrence Avenue in Toronto. The company notes that it’s part of a “new way of working” as the world shifts amid the COVID-19 pandemic.
The Hudson’s Bay Company is the oldest continuously operating corporation in North America. It once owned much of Canada’s land mass and is now a retailer with 89 stores across Canada as well as an e-commerce site. Recently Hudson’s Bay announced that it would shutter stores in downtown Edmonton and in downtown Winnipeg, marking the end of a history where the Hudson’s Bay Company founded those communities and anchored retailing for decades.