NEWS ANALYSIS : Olympia & York’s Fall Sparks Economic Jitters : Realty: Giant landlord’s bankruptcy filing shocks the financial world. It could dim hopes for a U.S. recovery.
Olympia & York Developments Ltd. admitted Friday in U.S. Bankruptcy Court in New York what seemed unthinkable just one year ago: that even the world’s biggest commercial landlord could be brought to its knees by the current “severe recession” in the world real estate market.
The bankruptcy filing by Olympia & York companies in New York and Toronto, though not a surprise given the developer’s well-known financial problems, nonetheless sent shock waves through the global financial community.
Beyond fears that the action by the Toronto-based firm would prolong the already deep real estate downturn, there was renewed worry Friday about a possible impact on the fragile U.S. economic recovery, on efforts to prod lenders into opening up the credit tap, and on hope for restoring public confidence in the economy.
“This adds one more heavy brick on an already overburdened commercial real estate market. If real estate was going to require five years to recover, now it will take seven,” said one financial executive with close ties to major U.S. banks.
The Olympia & York case on Friday spawned a flurry of activity worldwide:
- Surprisingly, financial markets in the United States and Canada reacted modestly to the news, which analysts attributed to the fact that Olympia & York’s problems have been known publicly since March. The Dow Jones Industrial Average registered a small, 15.79-point decline. But markets reacted more sharply in Tokyo, where the Nikkei average closed down 730.33 points, to 18,074.27, and in Europe, where stocks closed down in London and Paris.
- Olympia & York officials in London, seeking to calm financial markets, promised there would be no “fire sale” of buildings, adding that the development company still has “a fundamentally sound and valuable real estate business.” The company said it is negotiating with lenders and plans to restructure its huge debts.
- Olympia & York’s complex bankruptcy filings also left unclear the fate of some of its biggest and best-known properties, including the World Financial Center in New York and the troubled Canary Wharf project in London.
- Some analysts estimated that lenders worldwide could lose as much as $3 billion on their loans to the company, which is loaded down with $17 billion in debt. Even still, U.S. banks are relatively protected and California banks face no significant losses. New York’s Citicorp revealed its exposure at $380 million, the biggest of any U.S. bank, adding that it has completely wiped off its books about $100 million of its loans to Olympia & York.
- Bankers and analysts said the development is unlikely to cause an immediate tightening of credit to the real estate industry because so few loans are being made now anyway.
Few companies could generate the kind of nervousness that Olympia & York has sparked, testimony to its size and reach. It has 40 office buildings and 43 million square feet of rentable office space in North America alone, nearly as much rentable office space as there is in all of downtown Los Angeles. Of that amount, 15 buildings and 23 million square feet of rentable space are in New York City, one of the nation’s weakest real estate markets.
Olympia & York was built by Toronto’s Reichmann family, Orthodox Jews who are famous for requiring construction on their projects to cease before sundown on Fridays, the start of the Jewish Sabbath. They also have even given orders to their lawyers not to do any legal work on Saturdays.
The Reichmanns built their empire on debt. Such was their reputation for financial acumen--and such was the eagerness of lenders to put out cash in the go-go ‘80s--that banks often lent money to the secretive family without fully inspecting their financial statements.
The economic boom of the 1980s and generous real estate tax shelters generated huge amounts of construction of office space for which there is little demand and which is too expensive for most tenants, causing a sharp downturn in the fortunes of such well-known developers as Donald J. Trump and Atlanta’s John Portman.
But if anyone was going to survive the merciless real estate slump that has humbled so many developers, many experts believed, it was Olympia & York. The Reichmanns have a history of deftly avoiding downturns, carrying out their ambitious plans in a secretive, workmanlike way, devoid of the hyperbole characteristic of developers such as New York’s Trump.
The developer’s failure on Thursday to make a $14-million payment on the First Canadian Place office tower in downtown Toronto triggered the filing late that night in courts in New York and Toronto.
One banker who has worked closely with the Reichmanns said it could take as long as 10 years to straighten out Olympia & York’s problems, which would cast a cloud for the rest of the decade over already depressed commercial real estate markets. And one Canadian judge warned that a full-scale collapse by Olympia & York would be “startling, far-reaching and worldwide.”
Olympia & York’s bankruptcy filing suggests that it could take the remainder of the decade to fully recover from the excessive commercial building that took place in the 1980s.
“You didn’t need this one to confirm it. It’s another example of how when you get overextended and the banks are liberal with financing that it can cause some real pain,” said Washington lawyer Robert L. Clarke, formerly the nation’s top bank regulator.
The bankruptcy filings in New York and Canada shed light on one of the world’s most secretive organizations. In an affidavit filed in New York, which was made public Friday, Olympia & York Senior Vice President Bernard Baum outlined the company’s problems, blaming them on the real estate downturn in such cities as New York, London and Toronto.
Office rents are falling, he said, while vacancy rates are rising. On top of that, other businesses Olympia & York is involved in--energy, forest products and transportation--have been experiencing “their own worst recessions in years,” Baum said. The resulting downturn in Olympia & York’s cash flow coincided with increased cash needs for the huge, $7-billion Canary Wharf project in London’s Docklands, started in 1987.
“Construction began at Canary Wharf in anticipation of a substantial increase in the demand for new, modern and efficient office space and at a time when office rental rates were increasing dramatically, often by as much as 10% to 50% per year,” Baum said.
But the downturn in demand for office space forced Olympia & York to slash rents on Canary Wharf, turning the project into a cash drain that helped bring the company down.
Olympia & York’s problem was that it needed further credit at a time when lenders have virtually shut off commercial real estate development. The liquidity crisis grew unmanageable, Baum said, on March 18, when Dominion Bond Rating Service issued an alert on Olympia & York’s commercial paper “and it became impossible” for Olympia & York to refinance short-term borrowings.
“Despite these problems, Olympia & York has a fundamentally sound and valuable real estate business,” Baum said. He said the Chapter 11 filing provided the best opportunity for restructuring the company’s $17 billion in debt. The company’s total assets are $18.5 billion, he said, but this figure is unaudited.
Baum’s affidavit said the company employs 1,000 people in the United States, 700 in Canada and 400 in England.
Two U.S. banks, Citicorp and Chemical Banking, are owed more than $500 million, with Citicorp’s $380 million the largest single exposure for any U.S. bank. Most banks have far less exposure. BankAmerica, for example, is said to be owed somewhere around $50 million in loans unrelated to real estate, which sources said have substantial collateral.
Analysts said the Olympia & York bankruptcy could have done far more damage had it come before the banking industry’s first-quarter profit recovery.
“The banking system, as a whole, is in a much better position to cushion the impact of Olympia & York than it would have been 12, six or even three months ago,” said David M. Jones, chief economist at Aubrey G. Lanston & Co., a New York securities firm. Moreover, he added, “it looks as if the debt was well spread out and that this will not put any individual banks in jeopardy.”
Jones, who has close ties to the Federal Reserve Bank, said that he assumed that banking regulators around the world had looked into Olympia & York’s woes and concluded that the firm “was not too big to fail.”
Banks and other financial institutions are considered “too big to fail” when, in the view of bank regulators, their failure would trigger panics, crashes or other severe financial crises around the world.
“From the (U.S.) stock market’s benign performance, it appears that markets have been adjusting (to the possibility of an Olympia & York failure) over time,” Jones said.
“Olympia & York made a fundamental miscalculation by assuming that it was too big to fail,” Jones said. “Their strategy failed miserably.”
Bates reported from Los Angeles, and Zonana reported from New York. Times staff writer Donald Woutat in Toronto contributed to this report.
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