COLUMN ONE : Boom, Bust and Back to Basics : Much of New England shared in the 1980s riches of New York and Boston. Then recession hit. Now beleaguered cities like Portland, Me., are relying on old Yankee virtues.
Facing the harbor, on a seedy section of Commercial Street notable for empty storefronts, People’s Heritage Bank has opened what gloomy local brokers deride as a real estate “soup kitchen.”
Like other New England banks, People’s Heritage has become the reluctant owner of acres of land and buildings. The bank has resorted to garage-sale tactics to unload its inventory of foreclosed condominiums, houses, office buildings and other properties.
People’s Heritage is trying to lure buyers with rock-bottom prices and deals with no closing costs. But local brokers complain that the overhang of real estate will keep prices, and the Portland economy, depressed for months or years.
The bank’s tawdry real estate store is the latest proof that a trapdoor has opened under the New England economy. From the paper mills and resorts of Maine, the high-technology corridor of Massachusetts and the service industries of Connecticut and Rhode Island to the farmland and hostelries of Vermont and New Hampshire, New England remains stuck in the deepest recession of any part of the country.
Many medium-sized New England cities like Portland rode to unprecedented prosperity on the back of the “Massachusetts Miracle”--the boom in high technology and services that spread from Boston in the early 1980s. They also were boosted by New York’s financial windfall as the stock market soared and corporate mergers made investment bankers wealthy.
But the bottom began to fall out with the stock market crash of 1987. Merger mania subsided. The Massachusetts “miracle” became a mirage as the high-tech industry slumped and the real estate speculation bubble burst.
The economic collapse rippled through the region, proving particularly devastating to places like Manchester and Nashua, N.H.; Holyoke, Springfield and Worcester, Mass., and Providence, R.I. In Portland, the crash in real estate prices has led to bank failures, rising unemployment, bankruptcies by businesses and a sense of gloom worsened by the expectations that had been raised so highly in the 1980s.
“All of the elements of New England’s problems are found here,” said Charles S. Colgan, an associate professor of public policy and management at the University of Southern Maine here.
Many here say recent developments in Portland indicate that the region’s recession may actually be deepening, and that a recovery is still some time away.
Basic industry is continuing to retrench, with announcements of major layoffs almost a daily occurrence in southern Maine. There is little that bodes well for the real estate market. And economists and business consultants in this state say a shakeout is just beginning in other sectors, such as retailing, restaurants and hotels.
The population boom needed to sustain Portland’s economic boom never materialized. Karl E. Case, an economics professor at Wellesley College in Massachusetts, says the main hope for recovery lies in the fact that rents and wages in the region have fallen back enough to make it economically competitive again.
Occupying a peninsula that juts into Casco Bay, the city of 65,000 (the metropolitan area has 243,000) is blessed with clean air, a lovely harbor and magnificently preserved 19th-Century port district. As the New England economy heated up after the 1981-82 recession, Portland’s low real estate prices and cheap labor drew an influx of service industries and second-home buyers. Rehabilitation of the historic port district made the city a magnet for tourists.
Portland’s allure as a place for businesses to relocate was enhanced by its closeness to beachfront suburbs and vacation-home islands.
But the boom ended with a suddenness that has left Portlanders reeling. Today, notices of vacancies, foreclosures and auctions festoon the city’s downtown business district like the sorry remnants of a parade that has passed by. Bankruptcy cases filed in Portland are up 60% from 1989. Unemployment has climbed past 6% from only about 1.5% three years ago. The Portland city manager laments that many financially strapped businesses have simply stopped paying their real estate taxes.
“I don’t think we’re anywhere near the bottom yet,” said Joseph V. O’Donnell, a former treasurer of the Greater Portland Chamber of Commerce and head of The Pilot Group, a Portland firm that specializes in helping companies to get out of bankruptcy proceedings.
He said the deep regional recession, which already has ravaged the real estate industry, has only begun to sap two other sectors that over-expanded: retail stores and the hotel/motel industry. He says a wave of closures and bankruptcies has begun to build.
The financial sector also has been devastated. The Bank of New England failed as a result of a huge portfolio of bad real estate loans. The bank was sold last month to Fleet/Norstar Financial Group, with $283 million provided by the leverage-buyout firm Kohlberg Kravis Roberts & Co., a move that some see as a sign the smart money believes the worst is over for the New England economy.
But Portlanders have not been rejoicing. The banking shakeout has made Rhode Island-based Fleet/Norstar the owner of the two largest local institutions: Maine Savings Bank and Maine National Bank, a unit of the Bank of New England.
The consolidation means that a single bank now owns all of what once were dozens of competing branches. Colgan said the inevitable closures to result will add not only to the roster of vacant commercial space but to Portland’s already severe problem of white-collar unemployment.
Attesting to the severity of that problem is Nancy Trinward, who after seven months of desperate searching landed a few weeks of temporary work helping to run the People’s Heritage foreclosed-real estate office.
An insurance executive in Portland for 13 years, Trinward was laid off in October and has been unable to find anything in her field. Although a diabetic with strict dietary requirements, she has had to lower her food budget to $22 a week. Trinward is two months behind in her mortgage payments, and said if she cannot scrape the money together this month she will lose her home.
The former executive, who organized a self-help group for white-collar unemployed while she was out of work, has managed to remain upbeat. But she confessed that she tried to make ends meet by cleaning friends’ houses for $10 an hour.
“One day I cleaned nine toilets,” she said. “I used to have a cleaning lady.”
The economic fall is all the more painful because southern Maine before the boom was less prosperous than the rest of New England. It has less capital and a weaker industrial base to fall back on.
Portland, which became a city in 1786 when residents on the peninsula seceded from Falmouth, made its living in the early years from its deep-water port, which supported fishing and the shipping of lumber and shooks--pieces for making wooden boxes and barrels. When Maine statehood came in 1820, Portland flourished briefly as the capital, but it lost that distinction a dozen years later to more northerly Augusta.
Supported by a few basic manufacturing industries such as paper mills and shipbuilding, Portland by the 1970s was mainly a somnolent tank town where oil transports off-loaded crude to be piped to Canadian refineries or used in northern New England.
But lower interest rates after the recession of the early ‘80s, and the boom in high technology and service industries that spread from Boston bestirred the local economy.
“Maine had been sleepy for a long time,” said Roxane A. Cole, a broker at the Ram Harnden Commercial Real Estate firm. “There hadn’t been any downtown building in Portland in decades.”
Tasteful new office buildings that did not clash too harshly joined the 19th-Century brick structures that make up much of the city. Condominiums were built to accommodate newly prosperous investment bankers and professionals who came to the region to buy second homes. Art galleries, boutiques and restaurants prospered in the port district.
But soon speculation took hold on a scale never before seen in this economically conservative Yankee state.
“It was the funny-money era,” said Frank B. Akers, founder of Akers & Acres, a Portland real estate brokerage. “The guy who bought the building didn’t care what he was going to pay.”
Most economists now agree that the real estate frenzy was the single largest cause of the region’s deep slump. “It created lots of jobs, giving us the illusion of great prosperity and doing severe damage to the underlying economy,” said Case, the economics professor at Wellesley.
It also transformed the area from a low-cost region to a high-cost one. Unemployment was virtually wiped out by the late ‘80s. And wages, which in New England had been 7% below the national average before the boom, rose to 5% above. The result was that by about 1987, companies that had expansion plans began to look elsewhere.
Much of the vaunted expansion of service industries was real-estate related. Architect George B. Terrian, vice chairman of the Portland Chamber of Commerce and founder of his own company, said his architectural firm grew rapidly with construction work. But now, he has laid off most of the firm’s employees, cutting its staff to 15 from 45.
The boom also touched off a proliferation of stores. The Maine Mall, to the south of the city, doubled in size, becoming the largest shopping mall in northern New England.
“It used to be that around here you could find anything that you wanted to buy, but in only one place,” said O’Donnell. “Now you can buy it in six or seven places. These stores are stocking items for which there is literally a market of only three or four people.”
In the state that bills itself as “Vacationland,” the frenzy also spread to the hotel industry. Experts say there is a surfeit of rooms in southern Maine, and many proprietors are saddled with huge debts. Even the landmark Shawmut Inn, which catered to reporters and White House staffers during President Bush’s vacations nearby in Kennebunkport, has filed for bankruptcy reorganization.
The turning point, local bankers said, was 1987 when the major changes in the federal tax laws did away with many real estate tax shelters. The October, 1987, stock market crash also caused many big-city dwellers to think twice about buying a Maine vacation home.
“The second-home market didn’t gradually go down, it died,” said John E. Menario, chief operating officer of People’s Heritage.
Exposure on condominium loans and loans for commercial development prompted a local banking disaster. Not only did the Bank of New England and its Maine National Bank subsidiary fail, but so too did other venerable local institutions.
One whose conservative instincts enabled him to benefit from what he refers to as the “sleigh ride” of the ‘80s was Akers, who is regarded reverentially here as a visionary. It was Akers who in the late 1960s recognized that the brick buildings of the old port district, then the decrepit haunts of winos and prostitutes, were worth preserving and restoring.
Now 62, Akers sits behind an antique roll-top desk in a second-floor office in the Old Port that more resembles a 19th-Century ship owner’s office than a modern real estate firm. “At one time I owned every piece of real estate that you can see out of the windows here,” he said. But he sold out as the real estate boom neared its peak.
Akers said he bought the small four-story building his office is in for $10,000 in the early 1970s, and sold it in 1987 for $1 million. He claims that Maine Savings was so convinced that the property value would continue to appreciate that it actually loaned the purchaser more than the $1-million price.
But based on the rent paid by the building’s tenants, Akers said it was actually worth no more than about $300,000.
“The people never left the bank and never found out that (the building) doesn’t have an elevator, and it doesn’t have heat and ventilation,” he said. “They never did their homework.”
When the new purchaser could not meet the payments, the bank foreclosed. It’s still trying to sell it.
Portland’s bankers acknowledge that they were partly to blame for the real estate crash. “There was a lot of appreciation (in prices) driven by what appeared to be insatiable demand,” said Menario of People’s Heritage.
But he said banks and developers ignored basic facts--for example, that local population growth just did not justify the level of residential building, especially the proliferation of condominiums. Now, 55% of the People’s Heritage portfolio of condominium loans are in default, Menario says.
Portland has bounced back from catastrophe before. On the 4th of July in 1866 an errant firecracker touched off a fire that leveled much of the city. The handsome brick buildings that make up the Old Port date from the reconstruction. Over the entrance to city hall is etched Resurgam, the Latin motto meaning “I will rise again.”
And the spirit that led Portland to rapidly rise from its ashes seems still alive here. By tightening their belts and adopting conservative business practices, some local business owners are finding that they are able to tough out the recession.
Dennis Marchesi, owner of the fancy F. Parker Reidy’s Restaurant that caters mainly to a business clientele in downtown Portland, has laid off workers, returned to the kitchen himself to help with lunch preparation and wash dishes and increased his already long work week by an additional 15-20 hours. His wife now comes in to do the bookkeeping he no longer has time for. And he has bought washing machines so the restaurant can do its own laundry.
“We’ve finally steadied out,” he said, adding that the restaurant is again profitable. “Thank God I still own the business.”
Case and other economists said that while a real recovery may be some time off, New England still has economic advantages that will eventually form the basis of renewed growth. Among them are the entrepreneurial high-technology companies that seem to spin off from the region’s concentration of prestigious universities. Because of the severe recession, the region again compares favorably with the rest of the country in wage costs and real estate prices. Labor again is plentiful.
Meanwhile, Portland and other smaller New England cities continue to suffer. In Holyoke, Mass., things are so bad that there has been an epidemic of thefts of basic necessities such as diapers and baby formula. In Nashua, N.H., applications for food stamps and welfare rose 50% last year.
To some, there is a beneficial lesson to be drawn from the wreckage left by the economic exuberance of the past decade.
Cole, the Portland real estate broker and Maine native, said many residents are going back to basics. “People are going back to the things their parents taught them: You work hard, you save money, and you don’t leverage yourself more than you can pay back.”
