Shade of the Past

I've seen a number of articles like this one noting that foreign investors have been buying up "trophy" properties in New York City.  Reading these reports reminds me of my first job, working in the real estate investment banking group at Goldman in the early 1990s.  This was during the workout of the savings & loan debacle and I remember well the Resolution Trust Corporation selling off huge portfolios of bank-owned real estate for pennies on the dollar.

I also remember the sale of Rockefeller Center to Mitsubishi Estate, an arm of Mitsubishi Group, in 1989.  There were similar articles at the time predicting that the Japanese would soon own all of New York and America.  Flash forward to 1996 and Mitsubishi took a bath on the deal (they paid $1.4BB for the property) and eventually lost control of the buildings.  In retrospect, what the Japanese buyers had done was buy up a lot of property at the top of the market.  Indeed, one of my first assignments at Goldman was to go out to LA and report on various large assets owned by a Japanese bank.  Every quarter, we'd prepare a report for them that said the same thing - you're fucked.  But in the corporate culture of Japanese banks, I later found out, up and coming executives being groomed for the top would be rotated through different departments for one year stints.  The result was a system that rewarded managers who kept the problem from exploding on their watch.   So, they would hire Goldman to give them an appraisal of the situation and then do nothing and hope they would get to the end of their year to pass the turd onto the next guy.

I can't help but feel that history is repeating itself.  For one thing, the properties mentioned so far, the Chrysler Building and the Flatiron Building, may be iconic, but they are not Class A office space by a long shot.  The office space inside the Chrysler Building is cramped and filled with columns.  The elevator system is atrocious and not up to the requirements of a modern office building.  Like its sister building, the Empire State, it is not a prized office space.  It does well only because of its location.  The Flatiron is a wonderful building, but suffers many of the same defects and is not in the same desirable location.  If and when the New York office market goes into a downturn, these are the kinds of assets that start to hurt first.

It is also interesting to read that investors are seeing the buildings as a bargain because of the weak dollar.  No doubt this makes sense at the moment, but the weak dollar is not going to continue forever and this kind of currency exposure can whipsaw an owner who will not be able to sell these assets quickly.

Things may work out for these guys, but I can't help but fell a strong sense of deja vu all over again.