Why Trump's Troubles Are Far From...


It was one of those sunny, spacious apartments that make Manhattan life look so glamorous in the movies but that the average New Yorker rarely sees in real life. The address was the fashionable United Nations Plaza complex, and the apartment had a prime East River view, two bedrooms and a formal dining room.

But the prosperous couple who put the apartment on the market for $1.7 million were more than slightly chagrined when the first offer came in at $620,000. They dropped their price to $1.3 million, but the bids continued a determined slide until the couple's attorney declared that he would buy it at the prices bidders were talking about.

After 14 months on the market, the property sold recently for $710,000. "And they were happy at that," said Barbara Corcoran, president of the Corcoran Group, a brokerage that specializes in higher-price New York real estate.

The couple's experience was by no means typical, but it says much nonetheless about the cold winds blowing through what was once one of the country's hottest real estate markets. The effects of a regional recession have combined with the legacy of years of overbuilding to shake both the commercial and residential sectors of the New York market.

Commercial vacancy rates are edging steadily upward; single-family home prices are off as much as 30% in some suburbs; Manhattan apartment rents are falling, and so far 11 sponsors of cooperative apartment conversions have filed for bankruptcy.

These problems weren't the sole source of Donald Trump's difficulties, but they hurt him in several ways.

In the rising real estate market of the '80s, Trump could continually mark up the value of his assets on paper to raise money for new acquisitions, or to persuade lenders to refinance existing debts. Now those values are falling, lenders won't give him more--and want to be paid back on loans for such assets as the Plaza Hotel, Trump Tower and Trump Parc.

Naturally, with a weak market, Trump is also finding fewer buyers, and lower prices, as he scrambles to try to sell some of the "trophy" properties.

And he reportedly has only sold about one-third of the condominiums in Trump Palace, a lavish project under construction on Manhattan's East Side. That's far below agents' earlier expectations.

The difficulties besetting the New York market are painfully evident up and down the Eastern seaboard as well. The Boston area, which has lost 22,000 jobs in the past year because of defense cuts and a high-tech slump, is also in tough shape. Washington is slightly better off but has a glut of suburban office buildings and is also suffering the loss of defense work.

"Some of us have been watching these problems on the horizon for a long time. Now they've arrived," says Abe Wallach, executive vice president of First Capital Partners, a Manhattan-based real estate investor and developer.

The psychology of New York's market changed with the October, 1987 stock market crash, which began to throw out of work the Wall Street professionals whose rising pay had driven the boom in housing prices during the 1980s. (Figures compiled by the Corcoran Group show average per-room prices in the higher-price category of Manhattan real estate rose 600% between 1977 and 1987, while the median compensation of securities and commodities brokers grew by almost the same percentage.)

About 40,000 have lost jobs in New York's financial services sector since the crash, and 15,000 to 20,000 more may join Wall Street's displaced this year. Meanwhile, some major employers, such as J. C. Penney, Mobil Oil and Exxon, have left the city.

And Manhattan has undergone a boom in the building of both commercial and residential properties. To spur redevelopment of the seedy Times Square district on the West Side of Manhattan, the city offered a special tax abatement to developers who broke ground on new projects by the end of 1987.

The tax break brought in a swarm of developers who borrowed heavily and whose projects wouldn't have been viable without the special dispensation.

More than 5 million square feet of office space has recently become available on the West Side or soon will be available, says First Capital's Wallach. Another 2 million to 3 million are being added on the East Side.

Vacancy rates in midtown, which hovered at about 9% for much of the 1980s, have drifted up to 16% and have edged up to 16% downtown as well. But those numbers tell only part of the story, since many commercial real estate companies are filling space only by offering cut-rate rents and other inducements that may prevent them from getting the revenues they need to cover costs.

When First Capital went looking for 12,000 feet of space, a landlord offered a lease with a rent-free first year, assumption of their existing lease and the option to spend up to $80 per square foot on improvements. "This is like what they were offering in Houston three years ago," Wallach says.

Even with such deals, some new buildings are said to be finding new tenants painfully scarce. A new 50-story building at 712 Fifth Ave., owned by a partnership of Salomon Inc. and Taubman Co., has filled perhaps as little as 10% of its space, according to knowledgeable real estate investors. Carnegie Tower, a new 60-story structure next to Carnegie Hall owned by Rockrose Group, is said to be similarly unpopulated.

Some real estate people are predicting that major companies will go bust before it's all over, and that's not including Trump.

The industry has recently been jolted by the difficulties of about 200 New York companies that have sponsored the conversion of rental apartments to co-ops.

Most of the problems have centered around buildings that have unsold shares and continue to have many tenants paying below-market rents. These sponsors' income has too often proved insufficient to cover their rising bills and real estate taxes.

New York State's attorney general jumped in last January and now requires special financial disclosure from conversion sponsors that get into difficulty. But the troubles have sent a scare through lenders, who are now typically requiring 25% down payments and often won't lend to finance purchase of co-ops in buildings that have a large number of rentals.

Meanwhile, owners of rental residential real estate have felt a pinch.

An analysis of 6,000 rental units by a brokerage called Feathered Nest found that rents have declined steadily since 1987. In one category, for example, single bedroom rent-stabilized apartments without doormen on Manhattan's East Side, average rents fell to $1,100 last month from $1,400 in December, 1987.

Naturally, news of such declines has been received gratefully by the tens of thousands of New York renters who have been wondering for years if prices would ever stop rising.

Property owners in the suburbs, meanwhile, have little reason to be pleased. One sign of the mood was the decision by the Long Island town of Rockville Centre to adopt an ordinance that charges $60 per "For Sale" sign and requires such signs to be smaller than they ordinarily are. The panicky town fathers were trying to halt a trend that made it look like almost everybody in town was trying to sell, with too little success.

The median home price in the New York region rose 150% between 1982 and its peak of $194,000 in the spring of 1988, but the price has since declined about 10%, says Rosemary Scanlon, chief economist with the Port Authority of New York and New Jersey. It now takes six months on average for a home to sell here, compared to half that during the hot market of the late 1980s.

Income figures for the region suggest that home prices may continue to sag. They show that a home buyer making the median salary in the New York area can only afford to buy a home that costs two-thirds of the region's median price, Scanlon notes.

Overall in the Northeast, the median home sale price rose 2% to $146,200 between the first quarter of 1989 and the comparable period of 1990, says the National Assn. of Realtors. That compares to a 7.6% rise for the West, to $144,000.

For Los Angeles alone, the rise was 6%, to $212,000; for Orange County, it was 4%, to $234,000.


Comercial vacancy rates in the Manhattan market

May, 1986 May, 1988 May, 1990 Midtown 6.2% 12.9% 16.2% Downtown 11.9% 13.3% 15.8%

Source: Cushman & Wakefield

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