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Merger partners Holt Renfrew and Ogilvy will open their flagship store in Montreal by 2020. But they won’t be the only purveyor of luxury on the block. Four Seasons is adding a hotel and residential tower next door.

Holt Renfrew/Holt Renfrew

Department stores were never just stores, back in the days of dressing well for lunch at the Eatons Grill Room in Winnipeg or taking visiting relatives to the Marine Room in Vancouver. A department store's departments and dining rooms were cornerstones of aspiration, even a little civic self-identity.

That sense, at least the aspirational side, can be felt with the plan by Holt Renfrew and merger partner Ogilvy to open their joint flagship downtown store by 2020 on Montreal's Saint Catherine Street. A key aspect is that the Four Seasons Hotel and Private Residences next door will be connected to the store, emphasizing the ambience of richesse.

If there was any doubt left about the fate of Canadian downtown department stores, this removes it.

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Department stores occupy desirable real estate, primed for a return to being cornerstones. Yet this time their multiple use isn't just about a store's various departments, but also about other attractions and businesses attaching themselves to the space.

The movement not only means upscale Holt Renfrew Ogilvy having a luxury hotel and residential attachment, and the plan for Hudson's Bay Co. to have trendy co-working spaces, leased by co-share giant WeWork, on the upper floors of its downtown Toronto and Vancouver stores, as announced in October. It's also about making the stores themselves into real estate that's even more highly coveted.

With the retail industry in flux, this push is coming from various sides – from people's preferences to live and work in urban clusters, and from landlords and developers pushing that urbanization.

"Department stores have a challenge," Ed Sonshine, chief executive officer of RioCan Real Estate Investment Trust, said in a telling interview this month on Business News Network. RioCan has an equity stake in a real-estate joint venture with Hudson's Bay which includes Vancouver's downtown Bay.

To survive, department stores must give shoppers a reason to get out from behind their computers and internet retail sites, and go back to the physical stores. He believes department stores can do this by offering a more unique experience and a large selection of high-end products. But they must also recapture that sense of occasion, that sense of place.

Yet, retailers can also make the flagship stores themselves more efficient. Mr. Sonshine noted the many possibilities for the 600,000 square feet of prime space occupied by Hudson's Bay downtown Vancouver store.

"The productivity of a department store – actually, any retailer – really goes down as you go up," Mr. Sonshine said in the interview. "So that the sales per square foot on the ground floor might be five or six times what they are on the sixth floor."

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The WeWork deal, brokered by Richard Baker, the interim CEO of Hudson's Bay, will turn the top floors of the stores into leased office space – and thus become a source of high rental income for the retailer.

"I think it's brilliant, and I think it's scalable. The net result is that his store becomes far more efficient," Mr. Sonshine said. Yet, exploring multiple options, Hudson's Bay and RioCan are also considering the possibility of selling the Vancouver property, although Hudson's Bay would still operate in the building.

James Smerdon, vice-president and director of retail consulting at Colliers International in Vancouver, noted that the price for the building is rumoured to be more than 10 times its assessment value. Speculation bandied around has the possible selling price as high as $800-million to $900-million.

"The higher value obviously assumes the site would be redeveloped by the new owners," Mr. Smerdon said, one option being adding high-end condos to the site.

Flagship downtown stores "are absolutely prime real estate, but not for retailing," Mr. Smerdon added. Everyday shoppers, as a whole, perhaps those buying for the basics, tend to prefer suburban department stores, he argued. "The highest and best use of downtown sites in major Canadian cities is generally a mix of uses, dominated by residential condominium towers."

There are a host of other possibilities for Vancouver's downtown Hudson's Bay, such as turning some of the street-level storefront into cafés and adding other retail stores that pay high rents, Mr. Smerdon said.

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Kitty corner from Hudson's Bay, Nordstrom's downtown Vancouver store (originally the modernist Eatons store) has already long set an example with its mixed-use upper floors, housing office tenants such as Microsoft and law firm Miller Thomson.

Meanwhile, RioCan has let it be widely known that it is looking to renovate many of its retail properties, adding residential units to shopping sites, to the extent that RioCan would like to see revenue from residential properties climb to about 10 per cent of annual revenue.

The push to extract more revenue from the retail property itself is fierce. "What we should've done and what we should be doing as quick as possible is IPO-ing our U.S. real estate portfolio and/or IPO-ing our Canadian real estate portfolio," Mr. Baker of Hudson's Bay said during the announcement of the company's quarterly financial results last April.

The talk of this has echoed for months. Mr. Sonshine noted this summer that various options could include sale-leasebacks, financing or subleasing. "It shouldn't be hard because it's great real estate," he told Reuters.

Even historically, when the core of the downtown shifts a few blocks over the course of many years, older department stores can remain coveted real estate with prominent second lives, as with the old, downtown Hudson's Bay store in Victoria converted into high-end residential units and the mixed-use renovation of the Woodward's Building in Vancouver's Downtown Eastside.

Scarcity of downtown space helps the process, especially for companies today looking for large, core downtown office space. "You can always free up space somewhere, but it's getting harder and harder," said Ross Moore, senior vice-president in Vancouver with Cresa Corporate Real Estate, a company that offers advice and services to commercial tenants.

"We're working with a group now looking for 30,000 square feet, and we're probably going to find them something. But if you want to get larger than that, it's all but impossible."

Then, on top of that scarcity of space, is the added shortage of a trendy address in a distinctive, older building. Some tech companies and newer companies are especially interested in character buildings.

"Their preference is for old, cool buildings. Well, that's a finite product," Mr. Moore said. There aren't that many old, cool buildings sufficiently suitable for cool, modern offices. Flagship downtown department stores are among the few that fit the bill.

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