Sutton in his Fifth Element & Syndicators in Default City

Sutton in his Fifth Element

"Hi, I'm Jeff Sutton."

"Who are you?"

"Nobody. But I have an idea." 🐐 

Jeff Sutton is known mainly for two things: Being the most dominant player in New York retail real estate and staying mum about his deals. So when he takes the stage to talk shop, it’s an event.

Fresh off a $1.8B whirlwind (blending at an astonishing $6K/foot) of sales on Fifth Avenue, the Wharton Properties founder dropped in to NYU Stern’s retail real estate forum Thursday and riffed at length about his career: from his move to help an irate gentleman with a leaky 🚰 roof problem that landed him his first big break (Payless 👞 ) to buying out Hugo Boss (“he threw me out of his office 4 or 5 times”) at 717 Fifth to how his entire playbook comes back to Economics 101: supply & demand

Fifth Element (cont.)

“In retail, luxury guys want to be on 1 block," Sutton said, referring to his recent marquee sales (717, 720-724) on Upper Fifth to Prada 👠 and Gucci 👛 parent Kering. “That’s 8 corners. 4 owned by tenants. 2 long-term leased. 2 I owned." Every trade on a supply-starved corridor sets up the next deal and ups the scarcity that boosts the price. Case in point: the Kering deal, which came right after the Prada (caveat: more above-grade space at Prada) one , pencils out to $8K+ foot 🤩. (The 717 Fifth deal wasn’t without pain: Sutton had to fight off a foreclosure attempt from lender New York Life Insurance, but all suits were settled prior to the sale.)

Before Sutton, I joined Will Silverman (who brokered Sutton’s deals w Eastdil colleague Gary Phillips) on stage to discuss the transactions and New York’s luxury retail landscape. The big question I had was, why this sudden surge of interest from top retailers to own their bricks? Silverman – whose zingers didn’t land as successfully 😉 as his market insights did – identified 3 key catalysts:

1. The spread between what luxe European 💶 retailers can issue debt for back home (4% ish) and the financing terms New York RE players can get is the widest it’s been in a long time - this gives the retailers a huge leg-up in the market for these assets.

2. With the help of social media and a growing 🌏️ homogeneity of brand awareness, retailers have crafted a successful “upstairs-downstairs” model - catering to the ultra HNW regulars up top and the birthday/anniversary crowd below – that necessitates bigger and bolder stores. Your Middle Eastern royal wants her shopping done separate from the hoi polloi, but the latter group is attracted to the exclusivity the former creates – and brands know this.

3. Hub & hub model: Retailers (and RE investors) have learned the hard way that spilling over to cheaper corridors (Grand/Broome/Bleecker etc.) doesn’t work. So there’s more demand for primo corridors, even at a premium price.

Sutton also shared some gems 💎 on creative deal structuring – combining tax lots and then divvying the tax bill by square footage, for e.g. – that I hope were recorded. And he closed his talk out with a story about meeting Floyd “Money” Mayweather 🥊 in Vegas: When the boxing legend, surprised that Sutton didn’t know him from Adam, explained who he was, Sutton likened his profession to being a “dentist” 🦷 - i.e. only making money when you work. Mayweather was fired up – “I’m not a dentist!” Sutton (who stood up for this part of the tale) recalled him later saying when the pair were in nightclub XS – and is today a pretty sizable real estate investor 👏👏👏.

(The amazing thing: This is not the only Sutton “dentist” story involving a major fighter 🍀 )

Troubles at the Syndicate

The cheque’s on the table, but nobody’s picking it up. Major multi syndicator Nitya Capital (Swapnil Agarwal) failed to pay off a $346M loan (backed by 12 properties, 2,700+ units) when it came due this month, per Trepp data cited by TRD. Agarwal said that his firm isn’t in default, but rather in a “forbearance period with the servicer” and needs a bit of time to figure out rate cap (good primer on how it all works here) specifics. Here’s TRD:

That one-year, 1.75 percent cap — called a strike rate — would cost about $10.8 million, according to estimates from Chatham Financial. That’s about 60 percent of the properties’ net cash flow from January through September, according to Trepp data.

And that rate cap would only protect Nitya for a year. A two-year rate cap at the same rate would cost almost $20 million, according to Chatham.

If it’s any consolation: Nitya is far from alone. I’m hearing that another major multifamily syndicator is trying to restructure its entire portfolio, which it amassed with little to no institutional backing – i.e. the equity came almost entirely from HNW retail investors. Now what this means is that each individual investor ( 🇮🇳 👨‍⚕️ )has very little muscle 💪 to bring to bear, while the sponsor in question has near-total discretion over how they will restructure. They could, for e.g., cross-collateralize deals (which could wipe out investor upside on the good deals to save the bad ones). It’s going to be interesting, and likely ugly.

A Stern Awakening in Brooklyn

Things have gotten mezzy at Brooklyn’s tallest tower. JDS’ Michael Stern defaulted on his $240M mezz at the 93-story condo/rental skyscraper at 9 DeKalb, and now Larry Silverstein’s debt arm is pushing for a UCC foreclosure June 10.

What’s the likely outcome? Will Larry put in a credit bid and own it outright? Stern had been trying to sell the rental portion (417 units) of the tower for a whopping $600M-$700M, but that didn’t take. The tower has a wildly colorful dealmaking history 👇️ 

Quickies

• If Sutton can, so can we? A new appraisal for Saks Fifth Avenue flagship values the hulking store (611 Fifth) at $3.6B. That’s up $2B from a ‘19 appraisal 🤔   

•  Blackstone sells $1B California industrial 📦️ portfolio to Rexford 

• Jorge Perez’s Related Group lands $328M from (who else?) Bank OZK for Baccarat 🔮 Residences in Brickell (If you fancy a primer on the economics of branded-condo deals, I’ve got you here)

Miami Leans Into Miami

One-Click Trauma

The more swol Bezos gets, the less he seems to have a need for office space. Amazon expects to save $1.3B annually in office lease-related costs in the next 3-5Y, through a combo of lease expirations, early terminations and giving up floors, per Business Insider. Amazon’s office-vacancy rate is a whopping 34%, per the publication, and the company aims to get that down to 10%. Landlords who lived by the TAMI ⚔️ will need to figure out Plan Bs.

NYC Happy Hour 🗽 

Time for some sincerity: One of the most rewarding things about building this from scratch is the bonds you develop with the early audience: those who’ve supported, shared and contributed to the work 🥰 . The Promote is a completely different kind of animal – no bluster here, just facts – and I’d like to toast the community that makes it so. First happy hour is in New York City.

When: Thursday, 4/4, 4:30-7pm

Where: Old Town Bar, 45 E 18th St.

What: Drinks, bites, good cheer, CRE chatter (Off the Record, no dox), OG reader appreciation speeches

Would love to see you. Basta!

Unquotable Quotes