The Co-op has been refused permission to knock down its old department store in London Road, Brighton, and replace it with 407 student flats.
The application was made jointly with Watkin Jones, a construction company that specialises in building student homes.
The sale of the site to Watkin Jones is dependent on planning permission and the company is considering whether to appeal against the decision.
Officials advised Brighton and Hove City Council Planning Committee to turn down the scheme and councillors from all parties – Green, Labour and Conservative – agreed unanimously.
Among the objections were concerns about the loss of the façade of what was described as a landmark building.
The council accepts that the building may have to be demolished but would prefer the front to be retained.
Planning officials are to look at what protection can be given to the building, which is not listed.
The new student block would have been up to six storeys high with four shops at street level and a service yard entered from Baker Street.
The four shops would have been able to stay open until 11pm, if the plans had been approved.
The proposal included parking for 152 bicycles but none for motorbikes, cars or disabled drivers.
Karen Ashdown, a neighbour, spoke for dozens of objectors and said that they opposed the scale of the scheme and the loss of light.
Paul Gillespie, from Campus Estates, spoke on behalf of those behind the scheme and said that only two properties – in Kingsbury Road – would suffer a loss of light. He said that it would be unlikely to be noticeable.
He said that the developers had held three public consultations and reduced the mass and scale of the scheme in response.
The original aim had been to build 450 students flats on the site which, he said, had stood vacant since 2007.
Mr Gillespie also said that it was not viable to develop the site in a way that retained the façade and that design experts had said that it was not worthy of retention.
The scheme was expected to create at least 70 jobs, according to the Co-op and Watkin Jones, and was devised with the support of Sussex University.
He added: “The provision of purpose-built managed halls of residence will result in many houses going back into family use.
“This is the core objective of the city’s student housing strategy and proposed city plan for student housing.”
Councillor Carol Theobald, a Conservative representing Patcham, said: “I would like to see the retention of the façade. It’s such a landmark building.
“This is a poor design and it’s too big. There’s no disabled parking. It’s going to impact a lot on the neighbours.”
Councillor Lynda Hyde, a Conservative representing Rottingdean Coastal, said: “My main concerns are the loss of light and the overshadowing of the neighbours. It’s the bulk, the mass and height – and it’s an overdevelopment.”
Councillor Geoff Wells, a Conservative representing Woodingdean, said: “Student accommodation should be further out of town.”
He was concerned to hear that people living behind the old Co-op felt that they might have to move out if a student block proved too noisy for them.
He said that he sympathised at the threat to the community having been moved out of his own home as a child.
He said that the area where he had lived was “two thirds destroyed by the Luftwaffe and one third by Brighton Council in the name of slum clearance”.
Councillor Christopher Hawtree, a Green representing Central Hove, said: “It’s very much boil in the bag architecture and London Road deserves better than this.”
After the meeting a spokesman for the council said: “After consideration, it was decided that the proposal did not justify the loss of the existing building which is valued by the local community due to its architectural and historic interest.
“It was also clear after viewing the proposed design of the building that it would relate poorly to other buildings in the surrounding area and would be an overdevelopment of the site.
“The building would appear to be out of scale with neighbouring properties and would disturb views from Preston Circus and the New England Quarter.
“A full assessment of the proposed building’s effect on the neighbourhood and its impact on sunlight levels on the rest of the area could not be made as insufficient information was submitted.
“Possible noise disturbance to the area also played a role in the Planning Committee’s decision.
“The applicant did not provide information on how the proposed roof terraces and open service yard would impact the noise levels in the area.
“The applicant also did not address the need for disabled parking.”