The scenario is familiar. An embattled tycoon meets privately with dozens of his creditors—fighting to salvage a real estate empire that spans the Atlantic. Born into a Jewish family that fled persecution in Eastern Europe before the Second World War, the magnate bought and built properties in New York, London and other major cities. During the 1970s and 1980s, his family’s wealth and influence soared. But after two brutal years in which real estate values have plummeted in Britain and North America, his company is in danger. Earlier this month, he pleaded with his lenders for more time to pay back the billions of dollars he has borrowed.
Paul Reichmann? No. The tycoon is 52-yearold British developer Gerald Ronson, chairman of the London-based Heron Group of companies. Like Reichmann and dozens of smaller developers, however, Ronson is only now feeling the full impact of a wave of overbuilding that has glutted almost every British and North American city with excess commercial space. The number of vacant office buildings, retail malls and light-industrial plants has forced their owners to offer ever greater inducements to attract tenants. Those inducements, ranging from free renovations to years of free rent, have in turn reduced the income from many buildings—in some cases, to less than the cost of their upkeep. That has driven down their value and, at the same time, made it more difficult for their owners to pay off mortgages and bondholders. And with prospects fading for an early economic upturn, many experts say that it will take years to restore demand for new commercial real estate. “The office rental market is lousy here—it is lousy globally,” said David Bosley, the general manager of mortgage investments for the Prudential Insurance Co. of America in Vancouver. “It is the Olympia & York situation spread large.”
And it is unlikely to change soon. Like the Reichmanns, who started their $7-billion Canary Wharf project in London in 1987, many developers began massive new projects late in the 1980s—just as demand for office and other commercial space was beginning to wane. Some of those projects are only now being completed, adding further to the glut of vacant space. According to Toronto-based Royal LePage Ltd., in fact, office vacancy rates in downtown London, New York, Toronto and Los Angeles have all doubled over the past two years to close to 20 per cent. And in Toronto, predicts commercial real estate agent Tony Amoldi, it could take four years before those rates fall below even the 10-per-cent level of 1990. It will take longer still, he adds, to fill the backlog of available industrial buildings. Prospects for an upturn in depressed resi-
dential real estate markets appear to be better. Last week, the Canadian Real Estate Association reported that home sales in Canada’s 25 largest cities in March jumped by 10.1 per cent from the same month in 1991. But the impact of that recovery is uneven. Sales and prices in Vancouver, for one, both increased. But in Toronto, sales declined and the average price of a house dropped by 6.1 per cent to $218,438.
In business and commercial districts, the glut of empty space has been a boon for tenants. In downtown Toronto, for instance,
Amoldi says that landlords have had to lower annual office rents to around $35 per square foot from around $45 per square foot two years ago in order to sign new leases.
But those falling rents have proved devastating for overly optimistic developers—and the financial institutions that backed them. In Heron’s case, its difficulties stem largely from properties in the resort community of Sun Valley, Ariz., and in Manhattan. But Heron is only one victim of a collapse in commercial real estate in both the U.S. southwest and northeast. Hundreds of savings-and-loan institutions in those regions have collapsed since the late 1980s because of an estimated $600 billion in bad loans for speculative housing and office developments.
In Canada, meanwhile, the inability to collect payments on real estate loans led to the col-
lapse last year of Toronto-based Standard Trustco Ltd. Bad real estate loans also contributed to the current crisis at Halifax-based Central Guaranty Trust Co., which is selling off almost all of its assets and branch offices to cover its losses.
Inevitably, the slump has produced a buyer’s market in commercial real estate. But there are few solvent purchasers left to take advantage of it. Many of those who profited from earlier downturns in the market, including Reichmann and Ronson, are now swamped with debt and more likely to put their own properties up for sale than to snap up more.
For buyers with cash, however, there are bargains. Last October, Hong Kong billionaire Li Ka-shing bought the mortgage on a twothirds-empty Reichmann office tower in New York’s Wall Street financial district for $66 million. The purchase gave Li a half-ownership stake in the building for barely one-third of the mortgage’s 1984 value of $207 million. For its
part, the Ontario Municipal Employees Retirement Board, which manages a $ 16-billion pension fund, has purchased over $1 billion worth of commercial real estate in the past 14 months. Among its holdings: the Water Park Place office complex near Toronto’s lakeshore, and minority stakes in the Canterra Tower in Calgary and three office buildings in Vancouver. Said Charles Magwood, president of the board’s real estate division: “This is a unique time. These are buildings that existing property owners would never sell otherwise.”
As for the celebrated real estate tycoons of the 1970s and 1980s, they may have hunches about the direction of the market. But they are in no position to follow them.
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