There and back again

Over the past 20 years, Thor Equities founder Joseph Sitt has moved from urban real estate investing to the retail business and back again. Here, he speaks with PERE about his days hawking goods at flea markets, his fascination with Wal-Mart and why he took all the mini-bars out of the Palmer House Hilton. By Aaron Lovell

The walls of Joseph Sitt's Manhattan office are covered with mounted newspaper reprints, photographs and lucites, in addition to the occasional framed copy of a Thor comic book. Among the memorabilia of two decades spent in the real estate business, there is also a small blue ticket dated October 11, 1981

The Thor Equities founder received the ticket, which he later framed, when he first set up a flea market stall at the Aqueduct Race Track in New York City.

“You'd have to wait on line to be a vendor and be able to get a spot,” Sitt explains. “You used to have to wake up at about 2 o'clock in the morning and get there and be on line by about 3 o'clock in the cold weather to be able to get the right spot in the right location. I guess that was my first experience understanding the real estate principle of location, location, location.”

As a teenager, Sitt would set up shop at the popular flea markets in the city's outer boroughs, selling the toys, children's clothing and jackets that he bought from friends and family in the retail distribution business. It was the young entrepreneur's first foray into the world of both retail and real estate. Sitt saw how the out-of-towners came to the flea market looking for a bargain, while the Brooklyn locals came because of the dearth of discount stores and large retailers in the neighborhood. To this day, he points out, there is only one big-box Target store serving the borough of Brooklyn.

“That was my first stint in the entrepreneurial world and it made me realize how underserved the cities truly were,” he says.

The mission of Sitt's New York-based private investment firm Thor Equities can be traced back to those frigid mornings at Aqueduct. Since founding his firm in the mid-1980s, Sitt has created retail companies targeting urban shoppers, as well as repositioned and developed retail space in underserved urban markets.

After closing Thor's second discretionary private equity real estate fund this spring, Sitt has also embarked on ambitious mixed-use projects like the rehabilitation of Chicago's Palmer House Hilton and the high-profile redevelopment of Coney Island on his home turf of Brooklyn. The firm Sitt founded in college has now acquired more than 13 million square feet of US property valued at more than $2 billion (€1.5 billion).

School of retail
The son of a salesman trading in children's clothing, Sitt traveled with his father one summer to Bentonville, Arkansas, where his father had business with Sam Walton, the founder of Wal-Mart. At the time, Sitt recalls, the chain was doing $180 million in sales and turning a profit of $3 million. The subsequent growth of Walton's retail empire became a source of fascination for the young Brooklyn native, one which influenced his own, very different, retail business.

“What affected me most was my dad's relationship with the company and with Sam Walton,” Sitt remembers. “[Walton] wanted to venture out and do something different: bring products people had never seen before to places they had never been before. It was very smart: clean stores, big box, a common-sense approach to business, giving a customer value.” While studying business at New York University in the mid-1980s, Sitt started Thor Equities, buying properties in the Bronx with money raised from parents, friends, roommates and the parents of roommates. He focused on acquiring cheap, vacant land on secondary streets in tough neighborhoods, with an eye towards building one-story retail strips. His first acquisition was a plot on East Tremont Avenue.

At the time there wasn't much competition and Sitt was able to profit from the same supply-and-demand mismatch he had seen back in Brooklyn. Sitt says he tried to build nicer stores with the sorts of amenities suburban shoppers took for granted, like floor-to-ceiling windows. “People did not expect that in an urban, inner-city location,” he says.

Sitt soon moved from developing retail strips to looking for retail malls that he could upgrade via better parking lots, refurbished facades, new lighting and improved sound systems. But one of the biggest challenges Sitt faced was attracting highquality retail tenants. “It was just killing me that I couldn't get the good operators to come to the city,” he says. “They laughed at me.”

Recognizing the retail void in urban areas, Sitt shifted his focus from real estate to retail. He launched Ashley Stewart, retail chain focused on plus-size, working clothes for women. Contrary to many of the outlets then operating in US cities, Ashley Stewart stores offered amenities like granite floors, comfortable couches, good customer service and complimentary coffee.

Back to real estate
Around 2000, after helming Ashley Stewart for the better part of the 1990s, Sitt says he felt that the pendulum had swung back towards property. He credits retail professional Mickey Drexler with encouraging his move back into real esate investing.

Drexler was known as the “merchant prince” around Wall Street for his successful turnaround of The Gap and the launch of that company's Banana Republic and Old Navy chains. Texas Pacific Group, the majority owner of J. Crew, tapped Drexler to spearhead the turnaround of the preppy retailer in 2004.

“[Drexler] wanted to tap my brain about how to expand and where to expand the Old Navy concept in urban areas and inner-city areas,” Sitt says. “I would constantly call him for merchandising advice and he would constantly call me for real estate advice.”

Before long, Sitt realized the potential upside in being an urban landlord. The $4 trillion US retail business, which had long ignored urban areas, had refocused its sights on US cities. “The day had finally arrived when retailers in America had realized the potential of both downtowns and inner-city locations,” he says. “They had started to realize the untapped potential of those markets. Years earlier, the greater void was finding the retailers interested in that market. As a landlord, I had had trouble finding retailers. Now, the bigger void was in quality platforms and locations that quality inner-city retailers could grow and expand their businesses into.”

Sitt and about half of the senior management team at Ashley Stewart reactivated Thor Equities with a focus on acquiring and repositioning, as well as developing, urban, retail-focused real estate and mixed-use properties. Thor initially launched its fund business with a non-discretionary property portfolio valued at $130 million. In 2004, the firm raised $400 million for Thor Urban Property Fund I, a discretionary vehicle with backing from a group of institutional investors. A source close to the firm says Thor's next vehicle is set to close this spring with more than $500 million in capital.

“Operating at the flea market gave me my first sense of retail and how much demand there was from customers. That shaped and framed a lot of my thinking.”

Despite the growth in his private equity real estate business, Sitt says his firm's business philosophy is rooted not just in property fundamentals, but primarily in retail. “That's been our greatest secret to success,” he says. “We're the only large-scale developers in the US that are ex-retailers. Having had that experience of being a tenant, we have a better perspective in terms of what is the best location to cater to a consumer. We think down to the consumer level, more so than the landlord, because they think about their customer—the tenant.”

It's a strategy the firm has employed in retail malls across the US. One notable example is the South Dekalb Mall in Decatur, Georgia, near Atlanta, which Thor bought in conjunction with hip-hop mogul Russell Simmons in 2003. The seller was Japanese bank Nomura. Like many Thor acquisitions, the mall was tired, rundown and in a neighborhood that had been largely written off.

The firm renovated the shopping center by installing marble floors, adding skylights and repaving the parking lot. Sitt adds that the investor group improved the shopping mix by filling 50 percent of the mall with new tenants, as well as adding the only movie theater in Dekalb. The 12-screen multiplex, which includes a restaurant, martini bar and live music, is slated to open this spring.

Kept in the loop
But Thor has also been looking at more ambitious mixed-use projects as well. The firm is currently rehabilitating the Palmer House Hilton in Chicago's Loop, which was built in 1873 and, according to Sitt, is the oldest operating hotel in the US. Thor acquired the 1,640-room property, as well as its first-floor retail space and an accompanying office tower, for $230 million in 2005. It's a project that Sitt says could end up being Thor's most successful turnaround to date.

“It was really a diamond that was very rough,” he says. “It needed a lot of polishing. People looked at it as an old, old hotel, as opposed to what we looked at, which was an asset with multiple asset classes that needed to be maximized.”

Though the firm had previously invested in hotels, the Palmer House provided some unique challenges, not least of which were the mini-bars and room service operation. Both were losing hundreds of thousands of dollars a year.

“How the heck can it be that in a 1,640-room hotel, we can lose money on room service and the mini-bar?” Sitt asks. “People said, ‘We kind of think of it here as a perk.’ I said there is nothing I've ever done in my experience in the retail business where I bought something and sold it to a customer and said it's okay to lose money because it's a perk.”

Sitt says the room service menu was “five times as big as it needed to be” and featured hamburgers priced well below the competition. As for the mini-bars, guests at the Palmer were, more often than not, business travelers or conference delegates who didn't want to admit what they took out of the mini-bar.

“People had every excuse in the world about why they weren't the ones that ate the nachos, but we were the ones paying for the nachos,” Sitt says, adding that keeping the refrigerators in the rooms would have also forced a $10-million electrical system upgrade.

The firm's solution is one that Sitt says is unprecedented in the hotel world: They took all the mini-bars out of the rooms, which pushed hungry travelers to the re-priced, more-focused room service menu. The mini-bar loss was eliminated and room service was pushed into the black. They also kept the nicest refrigerators on-site to rent out to guests for $30 a night.

“There's been no negativity on behalf of the customers,” he says. “That out-of-the-box thinking came from our retail experience.”

Along with more aggressive marketing—the Palmer House became the official hotel of the Chicago White Sox when it was apparent the baseball team was headed to the 2005 World Series —the firm has been able to double the hotel's income in its first full year of ownership, jumping from a historical average of less than $16 million annually to $30 million in 2006.

Downstairs in the shopping arcade, the firm realized that the retail space could be opened up onto the downtown thoroughfare State Street, as opposed to being treated as the back-end of the hotel, which had its entrance on the other side of the block. In fact, Thor owned retail space across State Street, which could fetch up to $105 a square foot—almost five times as much as the $20-range seen in the Palmer House retail arcade. Sitt proudly announces that, once plans for the rehab were in place, the first lease signed in the redeveloped arcade was for $150 per foot. Thor plans to increase ceiling heights, gut interiors, add a second floor of retail and redo the building's facades.

Inside the hotel, the main floor had long been used as a passthrough for Chicagoans looking to avoid the city's more extreme weather. To take advantage of the natural foot traffic, Thor has plans to add retail here as well. The two-level basement was also converted into indoor parking.

Sitt guesses that many potential buyers underwrote the retail arcade for approximately$2 million. “I can see the day when we sell just the retail alone for in excess of $100 million,” he says.

New York City boy
Closer to Thor's headquarters, which sit on Fifth Avenue in the shadow of Manhattan's Flatiron building, Sitt and his firm are perhaps best known for being an investor in Coney Island, the Brooklyn seashore that has long been a summer destination for New Yorkers seeking fun in the sun. A quick glance around his office suggests Coney Island is something close to Sitt's heart: In addition to growing up in south Brooklyn, his office is dotted with Coney Island paraphernalia, including a miniature model of Nathan's Famous hot dog stand and Peter Granser's coffee table book featuring photos of the seaside resort.

“We're the only large-scale developers in the US that are exretailers. Having had that experience of being a tenant, we have a better perspective in terms of what is the best location to cater to a consumer. We think down to the consumer level, more so than the landlord, because they think about their customer—the tenant.”

Thor has plans for a $1.5 billion development on the Brooklyn waterfront, which it hopes could attract well-heeled visitors year-round. The proposed project could feature entertainment venues like Cirque de Soleil and the House of Blues, as well as a hotel, time-share units and luxury condos. In Tom Wolfe fashion, New York magazine recently described the project as “the incredibly bold, audaciously cheesy, jaw-droppingly Vegasified, billion-dollar glam-rock makeover of Coney Island.”

Thor has been buying up plots in the area, including the famous amusement park Astroland, which it purchased last November. The firm already sold—for a healthy profit—another patch of Coney Island in 2006.

Nevertheless, the project is not without its detractors and there are plenty of questions from the city about whether or not residential units will be permitted in the project—something Sitt has said is essential for the firm's grand plans to be feasible.

Since the firm is still waiting for the city's decision regarding the zoning of Coney Island, which is scheduled sometime in the next 6 to 12 months, Sitt is reluctant to discuss the project. He points out that the firm's bread-and-butter is the redevelopment of retail assets, like the Cheltenham Square Mall in Philadelphia or the Eastpoint Mall in Baltimore.

In fact, these projects go back to the lessons Sitt learned on those chilly mornings at the Aqueduct Race Track. In selling kid's clothes to the residents of Brooklyn, Sitt was not only trying to make a buck, he was also filling a gap in the urban retail market. More than 25 years later, few things have changed.

“Operating at the flea market gave me my first sense of retail and how much demand there was from customers, as well as just being a kid growing up in Brooklyn,” he says. “That shaped and framed a lot of my thinking.”