Taking the Fifth: Joe Sitt is buying up Fifth Avenue, but is he overpaying?

Investor Joe Sitt has ramped up his building buys on Fifth Avenue, but is he paying too much?

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From left: Joe Sitt, 516 Fifth Avenue and 693 Fifth Avenue

Joseph Sitt made his fortune thinking big — and not just in real estate. Back in the early 1990s, Sitt had trouble finding retail tenants for his urban properties. So he decided to open his own upscale apparel chain to serve the most promising urban retail sector he could find: plus-size women.

“I saw a big niche area,” he told an interviewer in 2003. “I mean, have you looked at the size of the butts of women in the inner city? They’re big.”

It was a bold move at a time when most national chains were spurning the inner city. But within a decade, the conventional wisdom had changed, and Sitt appeared prescient.

By the time he cashed out most of his stake, the Brooklyn-born developer and his partners had built a 380-store retail chain with a presence in 100 cities.

That experience, along with the success in urban real estate investing that followed, helped burnish Sitt’s reputation and has proven a powerful lure for institutional investors, who have shelled out upward of $1 billion in recent years to buy into two Urban Development funds run by Sitt’s Thor Equities.

Lately, Sitt has been making another bet that’s turning heads.

In 2011, Thor snapped up seven properties in the city — all but three on Fifth Avenue at or below 49th Street, including a three-parcel development site at 43rd Street that he purchased from Aby Rosen’s RFR last month for an undisclosed price some have placed at upward of $132 million. (His biggest purchase on Fifth was his only one above 49th Street — the trophy Takashimaya Building at 54th Street, for $142 million in July 2010.)

No one doubts that the stretch of Fifth Avenue below 49th Street is on the rise — many brokers consider it the “next frontier” in retail.

Yet some say Sitt vastly overpaid to win his properties, while others are skeptical of the scale of his development ambitions, since his company has never built a major ground-up development.

Sitt, who declined to be interviewed for this story, has said he intends to construct a 350,000-square-foot retail, hotel and residential complex on the RFR site that would cost $250 million. (He has not yet obtained the air rights he would need to build such a large complex, but does have the 300,000-square-foot assemblage.)

“It seems like an awfully big bet,” said one veteran industry player. “And I think the market perception is he’s over his head on that.”

As for the already standing properties that he’s purchased: “I’m scratching my head,” said one broker. “He’s going to have to get rents that are twice as much as what others are asking … to make some of his properties work.”

Big promises

It’s a criticism that’s been heard before. At several New York sites, detractors have accused Sitt of overpaying (and overpromising) and then relying on zoning changes or city actions to bail him out.

On Coney Island, Sitt famously acquired a series of development sites promising to transform them into a luxury, Las Vegas-like destination — only, critics say, to evict tenants and raze buildings while he engaged in a protracted public battle with the Bloomberg administration over the future of the site. In the end, he sold 6.9 of his 12.5 acres to the city for $95.6 million in 2009, likely ensuring the value of the land he still owns will skyrocket.

A Thor spokesperson said Sitt has two buildings going up in Coney Island and is just waiting for infrastructure investments from the city before moving ahead with hotels and retail.

The spokesperson also dismissed the more overarching complaints about Sitt overpromising, noting that Sitt has “successfully redeveloped dozens of properties and that some could make the case that redevelopment is actually more challenging than building a project from the ground up.”

He noted that many developers specialize in buying untitled land and then getting it rezoned. “It’s the highest-risk development investing, but also the highest return, and that’s what we do there,” he said.

There are plenty of areas where Thor has followed through.

Sitt’s restoration of Chicago’s Palmer House, one of the oldest hotels in the country, which he purchased for $240 million and spent $170 million on renovating, is widely considered a smashing success.

And in New York, Sitt’s spokesperson touted his work at 88 Greenwich Street, which he redeveloped into 450 luxury condos.

He’s had other grand slams as well.

In 2005, Sitt shelled out $13 million for lots near the Cyclones’ minor league baseball stadium in Coney Island, then sold them a little more than a year later to Taconic Partners for $90 million when the city announced plans to allow them to be developed.

And in 2007, Sitt sold 321 West 44th Street — an office property he purchased in partnership with GVA Williams for $35 million in 2003 — to the Kushner Companies for $87.5 million.

Certainly the market has judged the self-made developer a winner — his ability to raise billions from institutional investors is a testament to that. Since 2001, Thor has purchased well over $1.7 billion worth of properties in New York City alone, according to Real Capital Analytics.

Some have placed his worldwide empire at $5 billion (see related story here).

But Sitt’s deals on Fifth Avenue are the ones that have the greatest potential to have a major impact in Manhattan in the years ahead. They also are classic Sitt — counterintuitive, risky and high-stakes.

First one in

Sitt launched Thor from his New York University dorm room in 1984.

At the time, the city was littered with abandoned, blighted buildings, which the Koch administration was demolishing and holding tax auctions for, to either dispose of the vacant land or unload them. The properties weren’t for the faint of heart — many were in gritty, high-crime neighborhoods. But Sitt noticed some were also located right in the middle of heavily trafficked areas that desperately needed retail.

Sitt raised money from friends and family, and settled on a 12,000-square-foot property on East Tremont Avenue in the Bronx as his first buy. He then reached out to national chains, but was rebuffed. So he filled the property with local, immigrant retailers instead.

He traded up as soon as he could, purchasing existing shopping centers, properties where “the roofs are leaking, the lighting is poor and there is typically little maintenance,” he told GlobeSt.com.

“By going in and refurbishing these assets, increasing their value so we can increase income, we found that for a few pennies we made lots of dollars,” he said.

Sitt’s concept was to repave and restripe the parking lot, replace the lighting, and redo the façade. He also equipped his shopping centers with state-of-the-art sound systems, playing jazz on the weekdays and gospel on Sundays in black neighborhoods, and salsa and other Latin music in Hispanic neighborhoods.

After three or four years, Sitt inked his first deals with national retailers, among them Rite Aid, Rainbow Shops and Payless.

Still, most chains steered clear, but Sitt now knew firsthand that the demand existed. So in 1989, he started his own retail chains, teaming up with Joseph Chehabar, the owner of Rainbow apparel. The pair purchased the Children’s Place and Accessory Place chains, with 202 stores, for $30 million from a distressed Toronto-based company that also owned Federated and Ann Taylor.

Meanwhile, Sitt realized the biggest retail void was in apparel for plus-size, career-oriented women. So in 1991, he started Ashley Stewart and opened the stores in his own properties — naming the company after Laura Ashley and Martha Stewart in tribute to his wife’s two favorite businesswomen.

Like his earlier ventures, Sitt decorated his stores with customer tastes in mind: leopard-print carpets, flatscreen TVs and “sometimes candy and food because plus-size women enjoy that sort of thing.”

As a result, noted the newsletter Real Estate Finance and Investment, the company’s first Ashley Stewart store did monthly sales of approximately $800,000 per square foot.

Kathryn Wylde, president and CEO of the Partnership for New York City, a nonprofit organization of the city’s business leaders, remembers meeting Sitt in the 1990s when she was trying to rebuild commercial corridors in distressed areas. She was struck by the passion with which he spoke about the plus-size, inner-city women, whom he insisted were “looking for style and respect.”

“He was very intent and rapid-fire, and it was surprising coming from this Orthodox guy from a very male, parochial Jewish Ocean Parkway area,” she said. “He wasn’t talking about wigs for women in Borough Park. He was so sensitive and aware of the needs of the low-income communities of color.”

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Sitt “was the first investor in many distressed, low-income neighborhoods,” she said. “He was the only retailer who was willing to take the risk.”

By the late 1990s, national retailers were catching on to the huge potential of urban markets. Gap, Old Navy, Kmart and Wal-Mart all followed Sitt in. Yet after growing his chain to 380 stores in 100 cities, Sitt decided to change his focus.

Working with others

From operating retail stores and small urban malls, Sitt moved to take bigger gambles on real estate. On some of those projects, Sitt has done joint ventures.

In 2003, he partnered with hip-hop mogul Russell Simmons, to purchase a 697,000-square-foot shopping mall in Albany, Ga., for $26.8 million. In 2010, in one of his biggest, most high-profile projects, Sitt teamed with Meyer Bergman in London to buy the storied Burlington Arcade for $163.6 million.

And last March, Thor partnered with the Moinian Group at 245 Fifth Avenue to buy a 93 percent-occupied office building, valued at $161.5 million.

Other partners in the city have included GVA Williams Real Estate, Premier Equities, Morris Moinian and Andrew Heiberger. (Sitt is an equity partner in Heiberger’s brokerage, Town Residential.)

Much of Sitt’s current money, however, comes from institutional investors.

Over the last 10 years, he’s raised about $1.1 billion for two Urban Property Funds (the first fund raised $400 million and closed to new investments in 2004; the second raised $673 million and closed in 2008), according to the alternative-asset database Preqin. Top investors include pension funds representing public employees in California, Baltimore and Houston, as well as the University of Michigan, Washington State University, and investment vehicles that funnel money from hedge funds into large investments.

Those investors are betting that Sitt will achieve his high historical returns.

On his home turf, Sitt’s biggest initial buy was the $24 million lease on the aging, glass-enclosed Albee Square Mall in Downtown Brooklyn in 2001 — on city-owned land. The purchase was followed by an announcement of ambitious plans to transform it into an upscale shopping center. As the New York Times noted in 2007, he “promised to remake it in the image of a palatial Italian villa with granite floors, national retailers like the Gap and tuxedoed greeters.”

But Sitt never delivered on his grand plans.

“He got as far as spiffing up the first floor and putting a new awning on the outside,” the Times noted. “The basement level is a mostly vacant bunker. In place of a greeter in a tuxedo stands a man wearing a sandwich sign over his parka, advertising a sale at a leather coat store inside.”

Nevertheless, thanks to Brooklyn’s economic boom, a major rezoning of the area and tax breaks approved by the city for new buyers, in 2007 Sitt flipped the property to another group of developers for almost $125 million — five times what he initially paid for it. The developers, a joint venture led by Acadia Realty Trust, recently began construction on the mixed-use City Point development.

The profit Sitt made was stunning. Yet it helped fuel the criticism that Thor acquires valuable pieces of land and then “holds them hostage.”

The “rap on him is that he overpays, can’t carry through the development, and then gets bailed out,” noted one industry source who has worked with him in the past.

A spokesperson for Sitt said at Albee Square Thor spent $15 million and “gut renovated it into a beautiful asset with tremendous annual return on investment. Only later did we do the rezoning and eventually sell it.”

Taking the Fifth

Sitt is currently sitting on parcels of land, including three properties on Broadway between Grand and Prince — at 512 Broadway, 440 Broadway and 530-536 Broadway — which he purchased in 2007 and 2008. He’s also made a series of recent buys in the Meatpacking District, one of the hottest areas of the city.

But it’s Fifth Avenue that may turn out to be his most significant investment, since he now owns more properties there than any other landlord in the city.

Fifth has traditionally been bifurcated at 49th Street. North of the divide, Bergdorf Goodman and Saks anchor a high-end retail corridor that commands some of the highest rents in the world; while south of the divide has, until recently, been wholly populated by low-end discount camera shops, cell phone stores and the like.

All but one of Sitt’s properties are below the dividing line, which means luxury retailers will have to migrate south and drive up rents dramatically in order for Sitt to hit a home run.

But many retail brokers note that has begun to happen.

In 2007, H&M moved to Fifth near 42nd Street, followed by Zara two years later. The arrivals have continued in recent months: Tommy Bahama, Diesel, Urban Outfitters and others have inked deals.

“There’s been a significant uptick in retailers of worth that have committed to the market south of Rock Center,” said David LaPierre, an executive vice president with the CBRE Group’s Global Retail Services Team. “And it has clearly changed a lot of people’s perspective on believing you might actually connect south of Rockefeller Center to the north.”

Bradley Mendelson, executive vice president of Cushman & Wakefield, said that 18 months ago, “almost half the street was vacant.” But now most of it is full.

Meanwhile, retail rents on the upper half of Fifth soared to $2,318 a square foot in 2011’s third quarter, according to CBRE data, with little availability. That, in turn, has helped steadily drive up rents below 49th.

In recent months, rents have jumped from the $300-to-$350-a-square-foot range to $583 a square foot, and now, “everybody is looking for four-figure rents,” Mendelson said.

Despite the upward trend, at Sitt’s 44th Street development site, one broker estimated he would need $1,200 a square foot for retail space to make money. But the rents below 46th still generally fetch less than $600.

“I don’t know if it is in the cards,” the broker said. “I wouldn’t have invested in that building.”

A few blocks north, Sitt paid $99 million last July for the Sephora building at 597 Fifth Avenue between 48th and 49th. The broker noted that Sitt wants $10 million to $12 million a year in rent, which is close to the total volume Sephora does in business in entirety.

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Fundamental retail shift

But Sitt appears to be banking on more than just the southward retail drift. In an interview with Bloomberg Television last month, he argued that there is a fundamental shift in retail underway.

Tourism and the growing “emerging market consumer, whether it’s Brazilians, Indians, Colombians, Chinese,” will drive up rents, he said.

“You look at London, which normally leads New York City. In London now, the Chinese represent 27 percent of the purchases on Bond Street, as an example, which is a mind-boggling shift for a consumer that didn’t exist 10 years ago. And that wave is making its way to New York City and to Fifth Avenue.”

Sitt has also argued that the rise of Internet sales will force many stores to downsize, and rely on marquee flagships with luxury addresses in big cities to showcase their products. Fifth Avenue, he believes, will benefit from that trend.

Though that argument might not yet be conventional wisdom, it’s one that a growing number of real estate experts are buying into, said Dan Fasulo, managing director of Real Capital Analytics. He points to the Apple Store — where consumers wander in, browse, then wander out and later buy on the Internet — as the prototype of the future urban retailers.

“Many investors out there believe that urban retail is fundamentally underpriced and will go through a huge structural change over the next couple of decades, with retailers using storefront space more as marketing and advertising tools, versus just pure sales conduit,” Fasulo said. “If that thought process is correct, in the future, retail is going to be willing to pay much more to rent fewer spaces but in better locations.”

One source noted that the developer has a “belief in the high streets of the world.”

“Joe believes [they] defy traditional value,” the source said. “People who bet against Joe do so at their own peril. He has a history of spotting real value.”


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