Can Thor Equities survive a retail apocalypse?

As luxury retail takes a dive, some wonder if the firm’s chief Joe Sitt can keep his head above the tide

(Illustration by Kagan McLeod)
(Illustration by Kagan McLeod)

From TRD New York: It took Joe Sitt [TRDataCustom] less than 30 minutes to agree to pay Aby Rosen $132 million for a trio of buildings at 516-520 Fifth Avenue in 2011. It was a rapid-fire deal even for the Thor Equities CEO — who one friend described as New York real estate’s version of the Tasmanian Devil.

“He’s really fast, and I love fast people who can be decisive in the moment,” Rosen, co-founder of RFR Holding, told The Real Deal. “He called me up, and I gave him the price. He said, ‘I’ll call you back in 20 minutes.’ That same day, we signed the contract.”

Rosen described Sitt as one of the gutsiest players in the business: Someone who knows what he wants and who goes after it relentlessly.

“What motivates him? He wants to make money, and he wants to be famous for making money. I like that,” Rosen quipped.

The property was among more than 20 retail-driven assets that Sitt’s firm, Thor Equities, scooped up on Fifth Avenue and in Soho over the past six years — several at record-breaking prices. The spree led some in the industry to say that Sitt was overpaying to secure deals and setting a new benchmark for the market, thereby forcing himself and his competitors to lock in unprecedented rents to make transactions pencil out. While he wasn’t the only one paying such hefty amounts for luxury mixed-use buildings in prime Manhattan neighborhoods, Sitt has become the de facto poster boy of the retail bubble.

In the case of 516-520 Fifth, however, his bullishness paid off. Even though Sitt scrapped plans to redevelop the site into a residential and retail tower, he demolished the three adjacent buildings and resold the dirt for a whopping $275 million at the top of the market in 2015. That sale netted him and his investors — who had bought into the property through a private fund raised by Thor — a hefty profit.

But fast-forward to 2017, and with retail rents taking a very public nosedive, industry insiders wonder whether Sitt indeed took a larger bite out of retail than he could chew. Some also question whether he’s been ensnared by the inflated values he worked so hard to push up. Meanwhile, his firm has been hampered by a number of senior-level departures in recent months.

“Joe had a theory for a while,” said one major retail investor, who spoke on the condition of anonymity. “He said, ‘I’ll buy something, keep it vacant and sell the dream to a new buyer.’ When the market’s going up, that works great. But people are not buying into the dream anymore.”

Thor has seen the number of high-profile vacancies on its books steadily grow since Manhattan’s luxury retail market started to take a turn last year. Among those vacancies are retail spaces at 530 Fifth and 680 Madison Avenue — in the city’s priciest submarket. The firm also has a handful of empty storefronts elsewhere in Manhattan, including 11 Greene Street in Soho and 212 Fifth in NoMad.

Thor recently inked a one year lease with Lululemon Athletica
at 597 Fifth Avenue for an undisclosed price.

Moves by Sitt over the past two years to try to sell some of those properties in favor of moving into new markets have led to speculation that Thor is under pressure to lease the spaces or find some other way to liquidate its investments. Plans to pivot into the high-end rental market also appear to have floundered after two key residential executives left the firm to go it alone.

“There was a real frothy investment strategy from a lot of companies buying retail real estate, and that turned into overpaying,” said seasoned retail broker Robert Futterman, chairman and CEO of RKF. “Now an adjustment is happening, and the rents they needed to accomplish their goals have changed.”

What will that mean for Sitt?

“If he doesn’t produce, people should be a little more forgiving because he made money for them in the past,” Rosen said. “You can be the greatest operator, but if the timing isn’t there, the timing isn’t there. You may need time to fix things.”

Though Sitt declined to talk on the record for this story, Melissa Gliatta, Thor’s chief operating officer, told TRD that the vacancy narrative was slightly overstated.

“We’ve had a lot of success on Fifth Avenue, but certainly we still have some spaces we’re leasing,” she said. “But it’s become a story that’s bigger than it’s necessarily worthy of. Sometimes to get a space leased, you have to give up the rents a little. It’s a little disappointing when that happens.”

The debt game

In a bid to relieve some of the pressure, Thor recently inked a one-year lease with Lululemon Athletica at 597 Fifth for an undisclosed price. That deal would buy Sitt some time to find a longer-term solution, without putting a $105 million commercial mortgage-backed securities loan attached to the property in jeopardy.

Edward Dittmer, a senior vice president at ratings agency Morningstar, said his firm recently flagged the loan, issued by UBS, after cosmetics giant Sephora decided not to renew its lease for the 12,000 square feet of retail space — making the building a potential credit risk. While Sephora was paying a relatively low $613 per square foot, its lease accounted for a significant chunk of the 80,000-square-foot building’s rent, he said.

“Because that was such a large percentage of rent, they’ve been put in a position where the cash flow will not cover the debt service,” Dittmer noted.

That situation could repeat itself across Thor’s portfolio.

A mezzanine loan held by real estate investment trust SL Green Realty on 590 Fifth is also said to be under scrutiny, since Thor has been unable to find a tenant that could take the whole retail component as a flagship since it purchased the building in 2007. Representatives for SL Green declined to comment.

And at 680 Madison, the occupancy rate for the retail space as of December was 53 percent, including a recent 15-year lease signed with Tom Ford for 12,300 square feet. Sources said Thor has been trying to refinance a $185 million loan on the property originated by Morgan Stanley. That loan is also on Morningstar’s watch list.

The ratings agency has broader concerns about leasing prospects on Fifth Avenue, since asking rents appear to be so significantly out of sync with what tenants are willing to pay, Dittmer explained.

At the same time, the gap between face rents and net effective rents — which factor in the total amount of concessions — is widening. While a recent report by the Real Estate Board of New York showed that Fifth Avenue rents were down by just 2 percent to an average of $3,324 a square foot over the past year, sources told TRD that the real reduction is much more pronounced.

“The face rent hasn’t come down by a drastic percentage, but landlords’ contribution to construction is much greater,” Futterman said.

Susan Kurland, co-head of Savills Studley’s global retail services group, echoed that point. “In order for landlords to keep their lenders happy, many will be giving additional free rent,” she said. “The landlords need to get a certain [amount from tenants] because they’re financed at a certain rate and still need to have those numbers in the lease. They’ll be offering packages with additional free rents and money toward construction.”

In some cases, insiders say, Thor and its contemporaries were instrumental in pushing up rents on the thoroughfare — and thereby the value of their properties — by making side deals to fund construction for tenants or inking deals with retailers that they actually have ownership stakes in.

Sitt, for instance, is said to own a stake in Brioni, a high-end fashion house that inked a deal at his retail condominium at 680 Madison in 2015 — setting a near-record rent of $3,000 a foot. A spokesperson for Thor declined to comment on the Brioni lease deal or any potential investment in the  Italian menswear designer.

And when Sitt secured Valentino as the anchor tenant at 693 Fifth for an all-time high $3,000 a foot for the area, skeptics argued that the rent price was offset by the fact that he had subsidized the fashion label’s buildout. Sources close to Thor refuted that.

Some believe Sitt is reluctant to blink and sign leases below the advertised rent for fear of resetting the market at too low a price. According to several people familiar with the company’s strategy, the Thor CEO is also wary of falling short of the numbers he projected to investors.

Still, Futterman said he doesn’t expect many lenders to try to move in and foreclose on properties. “Lenders don’t really want the keys back, but I do see owners looking to shed or refinance some properties [early],” he noted.

Others said that Thor’s investors will stay patient for the time being, since Fifth Avenue will remain a trophy retail strip even if there’s a dip in rents.

Sign Up for the undefined Newsletter

“He has good fundamentals in his favor,” said Faith Hope Consolo, who heads Douglas Elliman’s retail division. “The number may not be where they were when he bought, but nothing retains value long-term like Fifth or Madison or Soho.”

Many of the industry players interviewed for this story argued that Sitt would not be defeated even in the worst of circumstances. The Brooklyn-born entrepreneur started Thor in his New York University dorm room in 1986 and grew it into an $18 billion company. He later launched Ashley Stewart — a plus-size women’s clothing company — in 1991, and the company went on to open more than 380 stores across the country. Sitt reportedly came up with the idea after having trouble bringing retailers to inner cities.

“He resents failure,” said Sitt’s friend Morris Moinian of Fortuna Realty Group.

Cashing out

While industry observers continue to debate the state of the city’s retail market and whether the bubble has burst or is still collecting hot air, Sitt appears to be slipping through the back door. Over the past 18 months, he has quietly made it known that he’s willing to sell many of his company’s prized retail assets, as well as a slew of residential properties.

Several buyers said they have received for-sale notices on more than 10 Thor properties, including its global headquarters at 25 West 39th Street and several buildings the firm co-owns with General Growth Properties.

Sitt has already disposed of a handful of his firm’s assets —some at a great premium.

When he sold 693 Fifth for $525 million last year to French billionaire Marc Ladreit de Lacharrière, the price was nearly four times what Thor paid to buy the 20-story building from the Japanese department store Takashimaya in 2010. And his firm got $38.5 million for a retail condo at 38 Greene Street, more than double what it paid in July 2014.

Thor’s spokesperson said the profits from those sales were invested in assets in emerging markets in the Midwest and on the West Coast, including several in Chicago’s Fulton Market and in tech-driven assets in San Francisco. Gliatta attributed some of the sales push to Thor’s fund-based model — in which the John D. and Catherine T. MacArthur Foundation, the University of Notre Dame and the University of Michigan, among other institutions, invest for set periods. Much like a private equity firm, Thor is contractually obligated to sell the assets purchased with fund dollars, including 520 and 693 Fifth, when the fund’s term ends.

Joe Sitt has dealt with a number of senior level departures in recent months.

On Thor’s private deals, investors have included White House chief economic adviser and former Goldman Sachs President Gary Cohn and Etienne Paris of Innovo Property Group. Sitt regularly entertains his financial backers and other partners in his sleek penthouse office on West 39th Street, where he shows them his tequila collection, according to several people with intimate knowledge of the matter. The office is decorated in thick patterned rugs and spotted with art books, horse saddles and press clippings.

“It comes off like an old-money, old-guard institution,” one source said on the condition of anonymity.

Nonetheless, some of Sitt’s attempts to sell assets have fallen short.

Thor reportedly came close to selling a mixed-use building at 875 Washington Street to San Francisco-based investment firm Shorenstein Properties this year, but the deal fell through. The firm is now in contract to sell its stake in the building to its partner, ASB Real Estate Investments’ Allegiance Real Estate Fund, TRD reported in late May.

And the New York real estate development arm of the Turkish jewelry company Gulaylar Group sued to get out of buying 685 Fifth for $150 million, claiming that Thor’s partner GGP had promised to finance the deal but hadn’t delivered.

Sitt recently hinted that his selling spree may be slowing.

“We, for the last few years, have probably been net short on New York City,” he said during a television interview on Bloomberg News in March. “But now we’re probably reversing back, as there’s a little more value in the market.”

Gliatta said Thor is likely to focus more on emerging New York retail markets in the near future. “When some of the pricier areas get very pricey and we’re a value-add player, we might step out of those markets and into Brooklyn and Long Island City, where we can execute on the value-add strategy,” she said.

The company has also been aggressively moving into foreign markets and has acquired assets in London, Paris and Madrid. Meanwhile, Thor is trying to raise between $350 million and $400 million from retirement funds and international investors to plow into retail centers and mixed-use projects in Mexico.

Resi dreams deferred

For the past year and a half, it seemed that Sitt and his associates were moving deeper into the residential sector, but industry observers say that push has lost steam in recent months.

Those rumblings began when Sitt sold his stake in Town Residential to the Manhattan brokerage’s founder and CEO, Andrew Heiberger, in July 2016.

Then just last month, the investment firm GreenOak Real Estate bought Thor out of its interest in three Upper West Side multifamily properties — at 120 and 125 Riverside Drive and 150 West 82nd Street — in a deal valuing the buildings at a combined $190 million. Thor paid $80 million for its stake in the properties in 2014.

Similarly, the firm exited a deal for a 280,000-square-foot Bronx rental building at 975 Walton Avenue after entering contract in September to buy it from Brooklyn investor Benzion Kohn for $42.5 million. Sources at Thor said the change of heart had to do with the condition of the building rather than the company’s overall strategy.

However, both purchases were led by Thor’s former top residential executives Alan Klein and Jonathan Fishman, who left the company this year to launch Weaver Street Partners, a multifamily investment firm backed by Silverpeak Real Estate Partners.

They’re not the only ones to have departed Thor in 2017. Bert Dweck — who led business development at Thor Retail Advisors and partnered on several Thor investments— recently left for Premier Equities, a company headed by Sitt’s occasional business partner Yaron Jacobi, though he remains as an investor in some of Thor’s deals. Meanwhile, retail leasing specialist Michael Worthman, whose name was famously plastered all over vacant storefronts, jumped to Vornado Realty Trust this spring.

And Michael Schurer, Thor’s longtime chief financial officer, resigned from his post this year to work primarily on investments in Mexico under the umbrella of Thor Urbana Capital. He was replaced by Fess Wofse, who previously served as CFO for Apollo Global Real Estate.

Several sources told TRD that the exodus had set off alarm bells in the New York real estate market that all was not well at Thor. But Gliatta downplayed the defections.

“A couple of people leave and you’d think it was Armageddon or something, which is absolutely not the case,” she said. “We’re a growing business.”

And not everyone in the industry thinks Sitt is down for the count.

“We’re not taking up a collection for Joe,” Consolo quipped about the recent challenges the Thor chief has faced. “He always has something up his sleeve.”

(To view commercial sales transactions from Thor Equities, click here)