Big Retail Property Buyer Feels the Sting of Manhattan Slump
Updated: Aug 30, 2019
Joseph Sitt’s Thor Equities is feeling the pinch of the downturn in bricks-and-mortar retailing
By Konrad Putzier
April 7, 2019 1100 a.m. ET
Joseph Sitt was one of the most aggressive investors during Manhattan’s retail real-estate investment boom. Now, he’s starting to feel the pinch of New York’s retail downturn.
His company’s $37 million mortgage on 115 Mercer Street in SoHo late last month was taken over by a special servicer, a company that deals with issues like defaults or renegotiations of loan terms, Fitch Ratings said in a recent note.
Mr. Sitt’s Thor Equities had defaulted on loan payments for the property, the note said. Thor has been negotiating a new lease with one of the building’s tenants, fashion retailer the Kooples, said a person familiar with the matter.
A mortgage on one of his Upper East Side properties has been in special servicing since last year, according to research firm Trepp, LLC. The building’s retail tenant, fashion company Roland Mouret, shut its store last year.
While the properties account for only a small fraction of Mr. Sitt’s multibillion-dollar property empire, they show how challenging it has become for Manhattan’s retail landlords to make a profit in some neighborhoods amid rising vacancies, falling rents and competition from online retailers like Amazon.com Inc.
Asking rents fell in 10 of Manhattan’s 12 major retail neighborhoods between the first
quarter of 2018 and the first quarter of 2019, according to brokerage Cushman & Wakefield. The availability rate, which includes vacant space and occupied space available for lease, rose in eight submarkets.
The Upper East Side has been particularly hard-hit. Asking rents on Madison Avenue between East 57th and East 72nd Streets—a prominent shopping corridor where some of the world’s top fashion brands have flagship stores—fell by 28.7% last year, and its availability rate of 28.2% is the second highest in the city. Fashion retailer Calvin Klein said in January it would close its flagship store at 654 Madison Avenue.
SoHo, where 115 Mercer Street is located, has the third-highest availability rate with 25.3%, and rents in the district have also been falling. J.Crew Group, Inc. closed its SoHo flagship store at the end of 2017 after two decades. The average ground-floor asking rent was $398 a square foot in the first quarter, according to Cushman & Wakefield, down from a peak of $556 in the first quarter of 2016.
Mr. Sitt, who founded Thor in 1986, bought 115 Mercer Street for $16.4 million in 2013. At the time, retail rents were rising across Manhattan amid strong economic growth and rising tourist numbers; investors spent billions on retail properties, pushing up asset prices.
Looking to justify the high prices they paid, some landlords started aggressively pushing for higher rents. That pressure, along with the trend of more shopping moving online, caused vacancies to rise.
Back then, “if you had stopped to look at the trend of how retailers were performing and the pending impact of online sales, it would have been clear that those rents would end up strangling the retailer,” said Nina Kampler, founder of Kampler Advisory Group.
Thor, which sometimes partnered with major investment firms like GGP Inc. now part of
Brookfield Property Partners L.P . , invested heavily in Manhattan properties between 2012 and 2015 and still owns close to $5 billion worth of real estate in the borough, according to Real Capital Analytics. Many of these properties have a valuable retail
Some of Mr. Sitt’s bets have been profitable. In June 2016, he sold 693 Fifth Avenue, an office and retail building, to French billionaire Marc Ladreit de Lacharrière for $525 million, six years after buying it for $142 million, according to Real Capital Analytics.
Other deals are turning into a headache. In late 2017, the Kooples, which occupies more
than half the retail space at 115 Mercer, notified Thor that it planned to move out in May
2018, according to Trepp. A second retail tenant, fashion company Derek Lam, is no longer paying rent, a person familiar with the matter said.
Kooples has been seeking a rent reduction and the two sides agreed to change the lease’s terms, this person said.
Representatives for Kooples and Derek Lam didn’t respond to requests for comment.
—Esther Fung contributed to this article.
Copyright © 2019 Dow Jones & Company, Inc. All Rights Reserved