The Nation s Business

Mining the riches of urban real estate

Peter C. Newman September 22 1997
The Nation s Business

Mining the riches of urban real estate

Peter C. Newman September 22 1997

Mining the riches of urban real estate

The Nation s Business

Peter C. Newman

The God damn real estate business,” Peter Munk is telling me. “It’s a graveyard of the human ego.” Why, then, is he getting deeper and deeper into it, while taking a $535-million hit by shutting down four of his gold mines? “Why did I switch?” he shoots back. “Because I’m not going to go bust. With TrizecHahn, we’re building the first global real estate operation. You’ll see. Just give us two or three more years, and you won’t believe what we can do. We’re already second in North America in terms of our $4.5-billion market capitalization, and we haven’t really begun.” Munk, whose Barrick Gold Corp. last week announced it was closing and writing off half its mines to concentrate on its lower cost operations, cutting the average cost of producing an ounce of gold to $208 from $264, explains: ‘We’re not in the gold business because we’re in love with gold.

We’re in the gold business to make money for our shareholders.”

Since Munk invested in the near-bankrupt Trizec from the Edper group in 1994, later renamed TrizecHahn, he has dramatically added to the company’s holdings in North American city cores. The company now owns 71 properties, totalling five million square metres, including such high-profile structures as Toronto’s CN Tower. Now, he wants to take over the historic Chinese Theater in Hollywood and turn it into a $200-million entertainment centre with a new auditorium for future Oscar ceremonies.

“Euphoria is so common in real estate because the more you win, the bigger bets you play,” explains Munk, sounding downright euphoric. “Gambling is when you roll the dice and double your assets if you win; and if you don’t win, the banks lose. But I don’t confuse gambling with doing business. When we bought Trizec, there wasn’t a Canadian real estate company that could raise a buck. We injected some serious money with our partners in New York City and now have almost unlimited access to capital in this low-interest rate environment. Next, we’ll be moving to Europe and Asia, where the population is doubling every four years.”

“Why stay just in gold?” he asks, rhetorically. ‘We’re the world’s most profitable gold company right now, but gold by definition is a limited commodity. In Bar rick, we’ve built up a $ 14-billion company in an industry that has total market capitalization of $110 billion— that’s less than Microsoft. In real estate, at $10 billion, you haven’t scratched the surface. At $100 billion, you’re a factor. We want to become the General Motors of real estate.”

That said, Place Ville Marie also celebrated an important 35th anniversary last week. Probably one of the most important buildings he owns in Canada is Place Ville Marie, architect I. M. Pei’s famous crucifix-shaped skyscraper in downtown Montreal. Built in 1962 on

a vacant lot bought from Canadian National Railway, the 53-storey building, which contains 250,000 square metres of office space, is currently 91 per cent occupied. It remains the head office of many firms, including the Royal Bank of Canada. Built on top of the city’s main commuter and other railways, it pioneered the underground shopping malls that now spread over most of the downtown area.

Unlike every other Canadian real estate firm, including those based in Quebec’s largest city, TrizecHahn is currently expanding in Montreal. “Prices are so far down, the only way they can move is up,” says Munk. “Besides, Montreal has a terrific location, a good airport, and the advantage of the French presence. For conventions, hotel rooms are half the price of New York, and it’s 50 minutes away. Houses are cheap, there’s great skiing, the girls are better looking, and there are great restaurants a third of the cost of New York’s. Why wouldn’t you go to Montreal? You’d have to be a nut case.” That geography lesson ignores the threat of separatism, which Munk dismisses as a nonstarter. TrizecHahn has already floated a $250-million debenture to refinance Place Ville Marie’s debt, and is upgrading the building itself, including construction of Pei’s original lobby ceiling that was specified but never completed as designed.

There’s a personal footnote to all of this. I was Maclean’s business editor when Place Ville Marie was first proposed, and once interviewed Bill Zeckendorf, the legendary New York developer who had won the building contract. Zeckendorf worked in a huge round office on the top of one of his Manhattan skyscrapers, and while we were talking he was simultaneously carrying on two telephone conversations, and giving his secretary instructions about a future lunch date. At the end of my visit, I couldn’t resist asking the harried tycoon whether he got ulcers working at such a frantic pace. “No,” Zeckendorf replied. “I don’t get ulcers, l give them.” But Zeckendorf met his match in James Muir, the no-nonsense Scotsman, then-chairman of the Royal Bank that was financing the project. “Jim keeps things simple,” Zeckendorf told me. “If you’re his friend, you can do no wrong; if you’re his enemy, you can do no right. And if you’re worth considering at all, you’re in one category or the other.”

The many financial and personal differences between the two titans were resolved only when Muir agreed to become Place Ville Marie’s lead tenant, for a then unheard-of annual rental of $2.6 million. The bank chairman was partly persuaded to move in because Zeckendorf assured him that by using a telescope from his top-floor office, he might be able to see into the private headquarters dining room of the rival Bank of Montreal.

Real estate and banking were more primitive in those days, but Peter Munk is maintaining the same drive and imagination that made Place Ville Marie possible in the first place.

Peter Munk is moving from gold mines to property development and is already number 2 in North America