The Fremantle Myer store is to make way for a $200 million redevelopment with a 4.5-star hotel, retail and dining areas and office space for 1500 workers.
Myer announced yesterday the store would close next year after 40 years, blaming high rent and declining turnover.
Chief executive Bernie Brookes said the decision was not taken lightly and that all staff would be moved to other stores across Perth.
Building owner Sirona Capital said the decision paved the way for Fremantle to be revitalised as it unveiled plans to overhaul the ageing Kings Square precinct.
Sirona will go ahead with an $80 million upgrade, with the basement and ground floor to have shops below four levels of office space.
The company and the City of Fremantle will jointly redevelop the remaining Kings Square area, with the council-owned Queensgate centre likely to be demolished to make way for more offices and shops. The council administration buildings are also likely to be demolished and rebuilt.
Sirona managing director Matthew McNeilly said the group was in talks with up to seven hotel operators as part of a plan to build the 120-room, 4.5-star hotel.
He said finding tenants for the offices and shops was the priority and the State Government was being "strongly pursued".
"We have a strong advantage in that we are going to be able to offer it up at much lower rent than what is available in the CBD," Mr McNeilly said.
"I think we will see a significant decentralisation from the Perth CBD in the next few years."
He said the focus was about trying to create a city centre with "a buzz about it".
Fremantle acting mayor Josh Wilson said the decision marked the end of an era.
The Myer building had been operating below its potential for many years with just two of its four levels used by Myer.
"This is right at the heart of Fremantle's CBD and it's been crying out for renewal and revitalisation," Mr Wilson said.
"The redevelopment will be a more varied mix of tenancies and a much more attractive and lively structure."
At the store yesterday, shoppers and locals were disappointed Myer was leaving Fremantle, but some agreed the area needed an upgrade.
Naval architect Tanya Valova, who works in the Queensgate centre, hoped for appealing alternatives to replace Myer. "But I would rather see it stay," she said. "I don't see a problem with it."
Myer is due to open a store in Joondalup in 2015. Mr Brookes said Fremantle represented less than 0.5 per cent out of its annual revenue of $3.1 billion.
"The plans they have got for the CBD revitalisation are admirable but they don't fit the bill of an easy to park, easy access department store that's going to be able to have a full line and do significant enough volume at that site," he said.
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