Nordstrom Canada’s sudden swoosh into the department store drain will leave empty anchor space in some of the country’s top-performing and most prestigious regional malls, adding to a decade of challenges thus far for retail landlords. The U.S. based retailer filed for insolvency protection under the Companies’ Creditors Arrangement Act (CCAA) late last week and announced plans to close 13 physical stores by late June. Sales through its Canadian e-commerce platform ceased as of March 3.

“This will enable us to simplify our operations and further increase our focus on driving long-term profitable growth in our core U.S. business,” Erik Nordstrom, chief executive officer, said as the company released results for the fourth quarter of 2022. “Despite our best efforts, we do not see a realistic path to profitability for the Canadian business.”

Looming closures include six large-footprint Nordstrom stores in enclosed shopping centres and seven mid-sized Nordstrom Rack stores in a mixture of enclosed malls, open-air centres and urban streetfront locations. That will empty out anchor space in five of Cadillac Fairview’s regional malls: Pacific Centre, Vancouver; Chinook Centre, Calgary; Rideau Centre, Ottawa; and Toronto Eaton Centre and Sherway Gardens in Toronto. Oxford Properties will also see vacant anchor space at Yorkdale Mall in Toronto, while Ivanhoé Cambridge awaits the departure of Nordstrom Rack from Vaughan Mills in the Greater Toronto Area and Calgary’s Deerfoot Meadows.

Nordstrom’s move comes just days after the U.S. parent of Bed Bath & Beyond announced the shutdown of 65 outlets throughout Canada, and is the newest in a string of retail closures in recent years. In that context, industry analysts suggest it’s both a shock and a somewhat foreseeable event.

Closures called unexpected, but not necessarily surprising

“Bed Bath & Beyond wasn’t really a surprise at all. Nordstrom is more unexpected,” observes Lisa Hutcheson, managing partner with the retail strategy consulting firm, J.C. Williams Group. “I don’t think we’re surprised, but it’s unexpected that there weren’t more warning signs.”

On the latter front, credit rating service DBRS Morningstar recently downgraded the retailer’s status from positive to stable after lower-than-expected earnings over the past two quarters. In a March 3 statement, DBRS Morningstar projects the termination of Canadian operations will have a positive effect on Nordstrom’s profitability and operating efficiency, but undermine the company’s geographic diversification efforts along with a “lesser extent” hit to its market position and size.

“In aggregate, the closures do not have a material effect on Nordstrom’s overall credit risk assessment because of the relatively small size of the Canadian operations, which account for less than 3 per cent of total sales,” the statement advises.

Looking at the total distribution of stores, Canada accounts for six per cent of Nordstroms and fewer than three per cent of Nordstrom Racks. However, Hutcheson notes they’re more densely concentrated into a few markets with the six stores in the Greater Toronto Area perhaps eroding each other’s market share as high-end fashion and goods providers.

“I think they have two Nordstrom stores and one Rack store in all of New York City and Chicago only has one Nordstrom store so it’s kind of not a surprise that we just don’t have the density (of consumers) for these big category killers and large-format stores,” she reflects.

Hutcheson attributes the over-abundance in part to a misperception that it could be an easy plug-in replacement for Sears. That’s coupled with the waning stature of department stores in general and the COVID-19 pandemic’s wallop to the fashion retail category in particular, making it unlikely that any single contender will arise to fill the void Nordstrom now leaves behind.

“The quick answer is not going to be: oh, there’s some other amazing retailer that’s just going to fit that space perfectly,” she warns. “I think we’re at a tipping point where the anchor is not going to be an anchor in the traditional way that we have defined them as department stores or grocery stores. We’re going to start to see them be much more catered to the unique proposition of each shopping centre and the demographic and psychographic needs of those customers.”

As with Target’s insolvency and retreat from Canada eight years ago, affected landlords will now be entering negotiations to see what losses can be recovered from abandoned leases. For now, there are few details of their ranking among creditors.

Prestige malls deemed well positioned to navigate upheaval

There are also concerns about possible reduced traffic and associated repercussions for other retailers in the vicinity of shuttered stores. However, Raymond Wong, vice president, data operations, with Altus Group maintains this group of properties has both the prestige to draw replacement tenants and the depth to weather the loss of an anchor.

“Granted, Nordstrom is a large and significant tenant, but when you look at the number and quality of retailers at malls like Yorkdale, the Eaton Centre or Pacific Centre, they are still going to be a destination for consumers and for tourism as well,” he submits. “This could also mean an opportunity for a retailer that’s looking into Canada and this would give them an opportunity to get into some of these great retail locations.”

Among some of the touted potential newcomers, Hutcheson reports talk of Primark, a fashion and household goods retailer that has expanded beyond its main base in Ireland and the United Kingdom into the United States and throughout Europe, and Quebec-headquartered Simons, which currently has 16 Canadian stores including six outside Quebec and is already Cadillac Fairview’s tenant in four locations.

As well, both she and Wong cite a burgeoning introduction of mixed uses, bringing in fitness facilities, professional services and co-working space. To date, that has largely occurred in community and lower-tier regional malls, but sudden emptying of hundreds of thousands of square feet presents an opportunity to test the concept in prime retail real estate.

“It’s not going to be a one-size-fits-all. If I think about the Eaton Centre, it’s really primed for something that’s more entertainment and tourism focused,” Hutcheson suggests. “Other spaces are going to get carved up and there’s going to have to be a lot of creativity.”

“Owners are constantly looking at and getting inquiries from other retailers, whether it’s domestic or on a foreign basis, and they are well versed with the international retailers that are expanding. So it’s not like they’re starting from zero,” Wong says. “You have a lot of smart owners that will come up with new solutions, new configurations to get that space leased up or reused to ensure there’s alternative income in that space. It will be interesting to see what type of pivot-and-change the space takes.”

He argues retailers will continue to seek out physical retail space where, statistics show, they’re more likely to generate impromptu extra purchases than through e-commerce, while consumers will continue to see in-person shopping as both a practical and social exercise. Elsewhere, the demise of Nordstrom Canada’s online platform could be good news for a handful of prospective industrial tenants and/or landlords positioned to capture rent gains.

“Depending on where the Nordstrom warehouses are located and how they service the client, it may free up a little bit of additional space in a really tight market,” Wong says. “It will help slightly, but the demand is still outpacing the supply so it’s not a significant change in the industrial market.”

Barbara Carss is editor-in-chief of Canadian Property Management.