Sitt Tight: Thor Equities Pulls Out of NYC Retail to Focus on Industrial [Updated]

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The urban development company is looking to move into the last-mile warehouse site space. And if Thor fares well in the sector, it may even create a division for it, a source with intimate knowledge of the Manhattan firm’s dealings said. There’s also the plunge the firm has taken into Miami. And Chicago. And Latin America and Europe. And the hospitality sector. And coworking.

One of the first things on Thor’s agenda is industrial, and getting into this would be coming full circle for Sitt, who founded Thor in 1986.

After graduating from New York University, the now-54-year-old Brooklyn native joined a family-owned manufacturing company and worked in its real estate department, building industrial properties in far-flung places like Istanbul as well as in local ones, like a 388,000-square-foot industrial project in Dayton, N.J.

Today, with retail still sluggish, a lot of commercial developers have been seeing the value in industrial and logistics business, including Thor.

“Industrial is kind of the flavor of the month these days,” one investment sales broker said. “Everyone wants to get into it.”

But the fact that a New York City-focused firm like Thor—with its portfolio, which the company values at $10 billion on its website—is getting into industrial outside of Gotham raises its own questions.

“What does this tell us about the long-term thought processes of long-term players in New York?” one leasing broker said. “What does that say about their thoughts for the New York City market?”

Nevertheless, the developer’s transformation is well underway. At 280 Richards Street in Red Hook, Brooklyn, Thor is turning the site into a last-mile warehousing site, as The Real Deal reported. (Thus far, that’s the only site Thor has revealed it is turning industrial. However, last August, Thor’s then-spokesman emailed Commercial Observer to say the firm is “actively looking for industrial properties throughout the U.S.”)

The move into industrial makes sense for Thor even though it might be very surprising to those who know Thor through retail and office.

“Joe is an extremely intelligent and macro thinker, as someone who was an operator and now an investor in retail real estate,” said former Thor Retail Advisors head Matthew Seigel. “The reality is that industrial and logistics is intersecting with retail, so it is somewhat a natural extension.”

That “operator” side comes from Sitt’s time at plus-size women’s clothing company Ashley Stewart, a company he founded and ran with his current COO, Melissa Gliatta. By the time he sold the company in 2000, it had over 350 stores across the country.

Thor likes to say it pulled back from the New York City market overall about six or seven years ago because it “thought the downturn was coming,” according to the source close to the firm. The source added “pricing was getting too high,” and “New York was overbuilding itself.”

But that’s not entirely accurate. In just 2015 and 2016 the company picked up nine properties in Soho, two in Harlem, one in Noho, one in the Bowery and another two in Brooklyn. (Thor declined an interview for this story.)

Still, it is very fair to say that the company has expanded its horizons. Thor has influence around the world with its Thor Retail Advisors, Thor Equities Europe, Thor Equities North America and affiliate company the Mexico-based real estate development and investment firm Thor Urbana.

Today Thor has interest in roughly 160 properties globally, per its website, more than half of which are in Manhattan and Brooklyn.

But one can see how its focus on retail has been an albatross for the firm; Thor has come under fire over the years for high vacancies in Manhattan, in particular on Fifth Avenue and in Soho, thanks to demanding exorbitantly high retail rents.

In a 2017 TRD article, a number of market participants said Sitt overpaid to get deals done, which in turn pushed up retail rents and created vacancies. For example, after purchasing the office and retail property at 693 Fifth Avenue in 2010, Sitt left the retail portion vacant for several years. This might have worked out to Thor’s advantage, as he eventually landed Valentino as a tenant, with a then-record rent of $3,000 per square foot—but the general slowness of the retail market has had reverberations for Thor.

For example, last year Thor lost an equity investment to SL Green Realty Corp. when Thor couldn’t pay off SL Green (SLG)’s mezzanine loan on an Upper East Side retail and residential property Thor owns, according to Crain’s New York Business.

SL Green’s loan helped Thor buy 1231 Third Avenue for $52.5 million in 2013. But even though Thor rented out a portion of the 15,000-square-foot retail space to tenants including Sprint and New York Sports Club, it apparently couldn’t drum up enough revenue from retail rents to stay above water, per Crain’s. Thor was forced to relinquish ownership to SL Green in July.

“At 1231, [Thor] sold it and paid transfer taxes,” the source close to Sitt pushed back. “[The company] never defaulted on even one penny in [its] loan.”

But the strife at 1231 Third Avenue wasn’t an isolated incident. Last year Thor also gave up equity stakes in three Midtown properties—218 West 57th Street, 685 Fifth Avenue and 530 Fifth Avenue—to GGP, its equity partner. (GGP has since been acquired by Brookfield (BN) Property Partners, which did not respond to a request for comment.) The source close to Thor explained, “GGP gave [Thor] upfront payments for bringing deals and for [Thor] leasing the three deals for them. Combined [they] got about $80 million for those deals.”

One shouldn’t believe that the developer has lost its attractiveness to lenders, however. “Thor has purchased a number of high-quality buildings and has been able to attract tenants paying strong rents,” said Michael May, who runs Silverstein Capital Partners—Silverstein Properties’ lending platform. He acknowledged that the landlord, like his peers, has been up against significant headwinds in retail.

“All owners of retail properties are exposed to negative changes in the retail market which have affected many areas including Manhattan,” said May who has originated and underwritten debt to Thor at a previous employer and found Sitt to be good counter-party. “We underwrote several financings for with him and they were positive. If he presented me with a loan today, I would consider it.”

But though Thor’s retail portfolio might not suffer from systemic problems, the landlord is facing nagging vacancy issues, as one can see through Thor’s commercial mortgage-backed securities debts.

Most of Thor’s 45 outstanding CMBS loans—against properties in New York, Chicago, Miami and San Francisco—are performing well, with no signs of trouble, according to Trepp data. But the loan on one retail asset, 1006 Madison Avenue on the Upper East Side, has been sent to special servicing because it’s at least 60 days delinquent, after the sole tenant, the Roland Mouret fashion house, closed up shop in December 2018, according to Women’s Wear Daily. Sitt owes $17 million to CMBS investors on the building—the entire original principal—and there’s also a $3 million mezzanine loan, but the lender on that debt class hasn’t been disclosed. It will be up to Berkadia, the loan’s special servicer, to approve any arrangements Thor makes to defease the debt or find a new tenant. (Berkadia declined to comment.)

No other loans are in special servicers’ custody, but six of Thor’s other CMBS loans are on special servicers’ watchlists, which means that though no default has occurred, the servicer has cause for concern. Three of those properties, 115 Mercer Street and 725 Eighth Avenue in Manhattan and 152 Geary Street in San Francisco, are retail holdings, and a fourth, New York City’s 597 Fifth Avenue—the Scribner Building—is a mixed-use tower with a retail component. Occupancy issues plague all four, per the Trepp data. (A source close to the company said that leases have since been signed at 725 Eighth Avenue and 152 Geary Street.)

One source familiar with Thor’s borrowing strategies said that the landlord’s mezzanine lenders could swarm if occupancy issues like those persist.

“Thor did a lot of acquisitions with debt and when it can’t work its way out of the loans, the mezzanine debt holders are moving forward,” the source said. “How many of Thor’s properties have mezzanine debt? How many have been taken, and what will be taken?” (A different source claims that only two of Thor’s properties have mezzanine debt.)

Another area in which Thor seems to have changed its strategy is residential. On that front, the firm has been shedding a huge number of assets.

In July 2016, Sitt sold his stake in Town Residential to the firm’s founder and CEO Andrew Heiberger. The pair had launched Town Residential together in 2010.

And in May 2017, TRD reported that Thor pulled out of three Upper West Side rental investments at 120 and 125 Riverside Drive and 150 West 82nd Street by selling its stakes to joint venture partner GreenOak Real Estate for $190 million. (A source close to Thor said the company made a small profit on the deal.) And Thor and Rockwood Capital sold 838 West End Avenue at West 101st Street in January 2018 for roughly $64.5 million according to property records, a tad less than the price they purchased it for in 2014. Today, the firm has fewer than 10 residential assets in the Big Apple.

Along with the residential assets and a decreased interest in New York, Thor’s U.S. staff has been shrinking, too.

In 2017, a source said the firm laid off 25 percent of the staff in the New York office, between 50 to 75 people.

That year, other high-profile executives were let go or left of their own accord. In January 2017, after nearly a decade, Thor CFO Michael Schurer resigned. He was replaced by Fess Wofse, the former CFO of Apollo Global Real Estate Management, who left about six months ago. Scott Sherman, a director of acquisitions at Thor who had opened the Miami office, departed, followed by leasing specialist Michael Worthman in April and Adam Rappaport, a vice president of office leasing, two months later.

Last year, Bert Dweck, Sitt’s “left-hand man” at Thor Retail Advisors defected in favor of Premier Equities (Gliatta is his “right-hand woman”) and Cory Elbaum, who headed up Thor’s North America acquisition team, left this January.

When asked about the staff shakeups, one former in-house broker would only say, “The turnover in the last six years tells you what’s going on there. It’s not worth going into. They have trouble keeping people.”

Today, there are 75 people in the New York office, according to internal data, including two at Thor Retail Advisors, although a a spokeswoman for Thor said that the total number in New York is 122. In Miami and San Francisco there are no longer offices, just one staffer each. In the Houston and Paris offices, there are two employees. Thirteen people work out of the London office, and 180 people work in the Mexico office.

Seigel said fewer dedicated in-house leasing people are necessary as vacant spaces have been snapped and the company focus has shifted. With “less vacancy in the portfolio and changing acquisition criteria, the needs for your professional team have changed.”

None of this means things aren’t working out well for Thor financially. It was in these quieter New York City years for Thor that the company sold the office and retail building at 693 Fifth Avenue for a 268.4 percent upsell of $525 million in June 2016.

That deal is a great example of the Thor formula: Buy, renovate, lease it up and sell it for a significant profit.

Thor acquired the 105,422-square-foot property between East 54th and East 55th Streets for $142.5 million in 2010, three years later secured Valentino as the anchor tenant in 19,600 square feet paying $3,000 per square foot in rent. In the summer of 2015, London-based Carpenters Workshop Gallery took 5,300 square feet of gallery space on the building’s top two floors. By the time French tycoon Marc Ladreit de Lacharrière came along to snap it up, it was an extremely attractive property.

And in the markets where it has made sense to hold, that is precisely what Thor has been doing; the firm has about a dozen properties in Chicago and another nine in Miami.

The firm acquired Chicago’s second-largest hotel, Palmer House Hilton, in 2005 for $230 million. And Thor has become active in Chicago’s Fulton Market District neighborhood—once populated by cold storage facilities and wholesale meat companies—with a number of projects under development.

“Joe was one of the first investors in Fulton Market [a submarket within the] West Loop,” Seigel said. “He saw in that area a lot of parallels to Meatpacking District years earlier in New York City.”

One Chicago broker commended Thor for doing “a really good job at accumulating a number of properties in Fulton Market area. They’re having success with their investment in the Fulton Market. That’s really where they staked their initial investments in Chicago…and the Palmer House.”

In Miami, Thor has “taken significant positions in the Design District and Wynwood, which are on the rise,” a Miami broker said, citing Wynwood Plant at 2801 NW 3rd Avenue, which comprises seven properties and 50,344 square feet and Wynwood Walk at 2800 NW 2nd Avenue, which will have 63,000 square feet of new retail and restaurant space, both in Miami’s art and cultural epicenter.

Another relatively new direction for Thor is investing in the hotel industry both domestically and internationally.

Sitt owned a hotel in Virginia before snapping up the Palmer House Hilton in Chicago, which marked Sitt’s “entrée into the hotel business,” one source said.

At the end of 2017, the company purchased the James New York hotel at 27 Grand Street in Soho for $65.8 million, and last year opened Montage Los Cabos in Mexico. Hotels in the works include Ritz-Carlton, Mexico City; the Four Seasons Resort and Residences Caye Chapel in Belize, coming in 2021; and a Four Seasons hotel on an entire 280-acre island off the coast of Belize, opening in 2021.

“The opportunity to bring luxury hotel product throughout Latin America is very visionary,” said JLL’s Jeffrey Davis, who brokered the Palmer House sale, has refinanced the property twice for Thor, and asset manages it. Davis added about Sitt, “He’s really good at finding the right operating partner to execute on his vision. That’s what makes him successful.”

Some competitors and investment sales brokers said in addition to the real estate transactions themselves, Sitt makes a steady stream of income on fees for investing, consulting, constructing and managing properties. But the firm is outsourcing a lot more, the source close to Thor said, “because of the scale and volume of development.”

In June 2017, Thor brought Avison Young on to oversee the leasing of its existing office portfolio in New York City following the departure of Rappaport.

Arthur Mirante, the tri-state president of Avison Young, put the portfolio at 800,000 square feet in eight or nine buildings. In the last four or five months, the Avison Young team started also managing a few assets for Thor: 545 Madison Avenue, a townhouse at 60 East 66th Street and 590 Fifth Avenue.

The office portfolio is “80 percent occupied going to 90 percent in the next couple of months,” Mirante said, adding that Thor is making additional rent on non-occupying tenants.

And like nearly every other landlord in New York, Thor is exploring coworking. It has been operating Doodle Studios on one floor in two different company-owned buildings for about a year—25 West 39th Street and 446 West 14th Street. Sitt’s son, David, was running it while getting his MBA at Columbia University. (Sitt’s son Jack is in retail leasing at Thor. Son Joshua Sitt is a co-founder of clothing label Madhappy. Sitt and his wife, who reside in Brooklyn, also have young children.)

Thor is not the only New York City real estate firm—which has success in one realm of real estate—to venture into other product types or into markets outside the city, state and even country, and it won’t be the last.

At the end of the day, one investment sales broker said, “no one wants to be pigeon-holed.”

With reporting by Matt Grossman.

Update: This story has been edited to including a comment from Thor regarding the number of employees.