Punchline in Trump Jokes Isn’t So Funny

The whole country is having a good laugh at Donald Trump’s expense, but the smiles will fade when people realize that the loudmouth New York developer’s financial troubles are only a symptom of a much more serious national problem.

Trump, with roughly $2 billion in bank loans (plus $1.3 billion in bond issues) on his casinos, office buildings and hotels, has borrowed only a tiny fraction of the $365 billion in bank loans to commercial real estate developers. The 1980s saw an unprecedented explosion in such lending; today’s level is nearly three times what it was in 1982.

And unnecessary. “Excess lending exacerbated already overbuilt conditions,” says David Shulman, head of real estate research at the Salomon Bros. investment firm. The result is rising vacancy rates in office and apartment buildings in almost every part of the country and a big increase in delinquent loans at banks.

The problem is potentially huge for U.S. banks, which have loaned more to commercial developers than they have to developing countries, or to oil drillers and real estate projects in Texas and Oklahoma in the 1970s and early ‘80s.

Ironically, Texas is recovering after a decade of economic depression. But elsewhere problems are widespread. From the Northeast down through the Washington, D.C., area to Florida, real estate values are falling--as they are in Arizona.

Vacancy rates are rising in the Midwest, and in the West conditions are mixed. Commercial real estate is not a problem in the Northwest or in Utah, says Jeff Thredgold, chief economist of Key Bank in Salt Lake City. However, he adds, hotels are overbuilt in Las Vegas.

And in California bankers cautiously acknowledge that commercial office space is overbuilt in Orange Country and Los Angeles, but say rental-rate decreases are “modest to date.” Last week, the Home FedBank of San Diego caused a stir by raising loan-loss reserves because of troubled commercial loans in its home market.

One thing is certain: Because the overbuilding of offices, apartments and shopping centers has been so extreme, real estate problems will be more than short term.

“With few exceptions, almost every community has a sufficient supply of commercial real estate for the foreseeable future,” says Benjamin Lambert, head of EastDil Realty, an affiliate of Nomura Securities. How long is foreseeable? “That depends on how fast the economy grows,” Lambert says.

And right now the U.S. economy is hardly growing at all. “We’re in for a real tough time,” says a real estate dealer glumly. “A lot of big people are hanging on by their fingernails--a lot more out there like Trump.”

So what does it mean to you? The decline in real estate values and troubles in the banks could tip the economy into a recession.

Construction shutdowns will lead to layoffs in businesses from architecture to cement; insurance companies--the long-term real estate lenders--will see growing defaults in commercial mortgages starting next year, says Shulman of Salomon Bros. Declining real estate values will be deflationary.

It should be noted that home prices are not yet widely affected--although values have come down sharply in the Northeast, less so in California. But if there is a general deflation, home prices won’t be immune.

So Trump’s troubles are no joke.

Now let’s put it in perspective. A recession--a period usually of a year to 18 months when the economy declines--isn’t the end of the world. Indeed, the U.S. economy is almost in recession now, with growth of less than 2% and retail sales falling as people spend less, save more.

But it is unlikely to be a deep recession. As noted, savings are increasing and banking experts predict that there will be no shortage of money for home mortgage and consumer loans in the years ahead. Small businesses suffer as banks cut back on loans, but benefit as lower commercial rents encourage new ventures--as they’re doing in Houston.

So the nation will probably avoid a long and severe recession such as Texas went through in the 1980s, when almost every bank in the state failed.

But that’s small consolation for the current peril to jobs and home values. And questions arise: Why did the banks lend so much to real estate developers? Because they wanted to expand their business just like everybody else. U.S. banks collectively may have earned more than $6 billion in fees, not to mention what they earned in interest, on $365 billion in real estate loans. “You never lost your job for lending to Donald Trump,” says a sage former banker, “you probably got a promotion.”

Simply put, bankers like most everybody else got caught up in the cycle of economic enthusiasm; as the economy grew, so did the illusion that more people with more money would need more condos and shopping malls and offices. Now the building has stopped, and we find we don’t need as many condos or malls or offices. And we probably don’t need as many banks either.

Maybe that’s why bankers see no humor in Trump’s troubles.