The city slicker

Starting from an NYU dorm room in the early 1980s, Joseph Sitt began purchasing property in the blighted neighborhoods of New York and converting them into inner-city shopping strips. Along the way, he built up his own retail chains, renovated outer-borough shopping centers and built Thor Equities into an investment firm with more than $2 billion invested in urban mixed-use strategies across the US. Thor, which closed its first commingled fund in 2004, recently purchased the Palmer House Hilton in downtown Chicago. Here Sitt speaks about urban retail, the need to think multi-dimensionally and the importance of a good sound system.

How did you grow your business after your initial purchases?
We started buying shopping centers, but they were run-down and beat-up. The concept was: Re-pave the parking lot and re-stripe it. Replace the lighting. With municipal incentives and energy efficiency, you can get a payback within a couple of years. Re-do the facades. Another thing—which 99 percent of the shopping centers in the US don't have to this day—is spending $200 on a nice sound system. We play jazz on the weekdays, if it's an African-American neighborhood, and gospel on Sundays. In a Hispanic neighborhood, we'd play salsa or Latin-oriented sounds. People who develop shopping centers will spend $1 million on a fountain, but they won't think to spend $200 on a sound system. It's shocking if you think about it. They only think about the effects in a consumer's mind being visual; they don't think of the effects of hearing and smell.

You also started your own retail outlet?
We studied both the outer-urban areas and the downtowns and found where the biggest retail voids were. The biggest retail [sales are] in woman's apparel and yet that consumer market was extremely underserved, particularly at the higher-end or betterquality levels and particularly for career wear. You'd see $10 leggings or $5 t-shirts, but you weren't seeing quality working woman's clothing. By their nature, a downtown or outer-urban consumer will tend to be more career-oriented, working in an office, a law firm or even a hospital. Yet you didn't have workforce clothing. Having seen that, I founded my own retail business within my own properties. I started a company called Ashley Stewart. The concept was we would be the first national urban retail chain offering an upscale lifestyle experience. Your needs were taken care of from head-to-toe for career clothing in a complete quality environment.

Why did you shift back to real estate after your retail focus?
I noticed the pendulum started to shift at the end of the 1990s. The same way I saw in 1990, while i was executing urban retail real estate, [that] the real void was having retailers interested in coming to the urban market, ten years later the retailers had woken up to the potentials of the urban market. Now the greater void was having a developer to develop a quality urban retail real estate platform to help those consumers be able to grow. By 2000, I started concentrating on urban real estate, with our first project on 125th Street in Harlem.

What are the differences between urban infill developing and developing in the suburbs?
In urban, you're not buying vacant land. Odds are, you aren't even buying retail, because most non-retail asset owners don't know how to maximize the value of their own properties and don't know how to think multi-dimensionally about their assets. We bought the Palmer House Hilton Hotel in Chicago. It's the oldest hotel in the United States. The prior owners operated it purely as a hotel: what they didn't focus on is that the back of the hotel fronted on State Street. What we realized is how much pedestrian traffic is there and how much demand there was for retail to be there, so in our acquisition and redevelopment of that asset, while we are remodeling the hotel and bringing back its grandeur, we unlocked the retail value. We're converting three levels along State Street into a commercial strip. Because Chicago has such cold weather, people would want to shop inside: We're turning the whole ground floor pass-through into an arcade and putting better retailers into the project. You've got to think very differently. You've got to make the best with the cards you're dealt, instead of buying vacant land in a cornfield.

Are there other differences?
There is also an educational process that you have to go through with retailers. Normally when retailers lease up in a mall, they go to the real estate convention in Las Vegas in May and they lease off a blueprint. They don't even have to visit the asset. Here, it takes a lot more hand-holding to educate them. In New York, every block has its own flavor: Queens, Manhattan, Downtown, Uptown, Greenwich Village, NoLita. Everything has its own idiosyncrasies. So it is a process of educating the retailer as to the different neighborhoods and the traffic patterns. Sometimes the sunny side of the street versus the shady side of the street can affect what side you're on. In traditional suburban real estate, the retailers look at it as cookie-cutter. With urban, they look at it as something that they need to hold hands on and they need a credible real estate partner on the other side.

What is important about being multi-dimensional?
When you develop urban, you're developing vertical. When you're in a suburban market and you're thinking retail, you build a strip center or you build a one-story mall. When you're going vertical, you're not taking retail up past two levels. So, by its nature, if you're an urban retail developer, you're really an urban retail mixed-use developer. If you're not in the office business, the condominiums business and the hotel business, you can't really be an urban retail developer. Whether you like it or not, something has to go above those two stories. One of our best assets is knowing how to maximize all the various components. At Coney Island, we're doing entertainment and retail at the base, then doing a hotel at the next level and at the third level were doing condos. So we have a three-prong strategy. You've got to think multi-dimensionally.