Many real estate investors in New York find it a struggle to hold on to their properties at a time of plunging prices and scarce refinancing opportunities, but others can’t wait for things to get worse.
When most investors are crouched in defensive postures, it’s a near certainty that the next John Jacob Astor or the next Harry Helmsley is out there building or expanding their empire.
For nearly 200 years, market downturns have provided opportunities for those with initiative and intelligence.
During the Panic of 1837, for example, Astor amassed one the largest real estate holdings ever assembled in Manhattan by purchasing distressed and foreclosed properties. Astor had nerves of steel, and he was considered ruthless.
“He had to have guts to buy properties at those reduced prices, and he would foreclose on people,” said Kenneth Jackson, professor of history at Columbia University and the editor of “The Encyclopedia of New York City.”
“And if you foreclose on people, the danger is: Who are you going to sell it to next?” Jackson asked.
In any downturn, cash is king, and Astor used part of a fortune that he had already accumulated trading furs to buy sizeable tracts of Manhattan. However, in some cases, a deep downturn also offers opportunities for ambitious entrepreneurs with little or no start-up capital.
For Harry Helmsley, a young man in his early twenties who only a few years earlier had been working as an office boy in the Flatiron Building for $12 a week, the Great Depression was an opportunity to buy distressed properties at giveaway prices.
By the time history books include the current crisis, there undoubtedly will be chapters on the latest crop of entrepreneurs who took advantage of the current economic crisis to build their empires. Indeed, some individuals are already on their way.
“I am going to make my fortune in this downturn,” declared David Schechtman, senior director of the turnaround and distressed group at Eastern Consolidated Real Estate and Investment Services.
According to Schechtman, the smart money is already scavenging the city for deals. He said, “A ton of people are calling and saying, ‘Are we [at the bottom] yet?'”
The following sketches offer examples of how prominent real estate investors turned past downturns to their advantage.
John Jacob Astor
Astor’s fortune enabled him to buy countless foreclosed and distressed properties during the Panic of 1837, but he was not a good role model for the contemporary investor. Today, rent stabilization laws and city Building Department regulations prohibit many business practices that contributed to his success. Most properties Astor bought were rundown tenements. According to the history books, Astor gouged his new tenants, refused to do basic building improvements, extracted exorbitant rents and evicted those who couldn’t pay.
For those who had money to buy property during the Panic of 1837, Manhattan real estate was one of the best investment opportunities going because the downturn did not stop the city’s growth spurt. Between 1820, when Astor began investing in real estate, and 1860, the island’s population quintupled in size. But nobody had the resources or the foresight to profit from the Panic to the extent that Astor did.
“At that early date, Astor was the one who did it the most systematically and on the largest scale,” said Jackson.
While Astor gambled by investing in foreclosed properties when prices were in freefall, he minimized his risks by leasing land to other speculators and letting them develop it. When a developer’s lease ran
out, Astor would either raise the rent or buy the building.
Another way Astor made money was by buying distressed mortgages. When interest rates rose and property owners could no longer make payments, he would promptly foreclose on them.
Evidently, Astor’s real estate ventures succeeded beyond his wildest dreams, because on his deathbed in 1848, he reportedly exclaimed, “Could I begin life again, knowing what I know now, and had the money to invest, I would buy every foot of land on the island of Manhattan.”
Harry Helmsley
Many New York City real estate barons hemorrhaged vast sums of money during the Great Depression. Landmark hotels such as the Plaza and Pierre changed hands for a fraction of what their owners paid for them.
While many of the city’s tycoons were scrambling for the exits, Harry Helmsley, who had recently been promoted from the position of office boy to that of collector of delinquent rents at a small Manhattan brokerage, set about building one of the city’s great real estate fortunes.
In his book “Skyscraper Dreams,” author Tom Shachtman describes how Helmsley started out hanging around the Metropolitan Life Building, making deals to manage properties that the insurance firm had foreclosed on. Using the skills that he developed turning around distressed properties, Helmsley started buying buildings himself.
His first purchase was a loft building whose owner couldn’t afford the payments on a $100,000 mortgage. Helmsley used all of the money he had saved from his job to buy the building for $1,000 and the agreement that he would assume the mortgage payments. He cut the building’s operating costs and even hired his unemployed father to serve as its superintendent.
Helmsley was a genius at squeezing money out of buildings, said Kenneth Patton, associate dean and director of New York University’s Schack Institute of Real Estate, who worked for Helmsley in the 1980s.
“The secret of Harry is that he could work well with the bottom line,” said Patton. “He would tighten ship, doing things like automating the elevators and getting rid of the elevator operators — and then he would borrow $10,000 and roll it over into the building next door.”
Helmsley was also cagey about lease renewals, which enabled him to make money during inflationary periods. “When I went to work for Harry, most of his income came from escalation and electricity,” said Patton. “On whole buildings, the only money that he made was a dollar per square foot on electricity and a dollar and a half on escalation — he used to say, ‘Inflation made me rich.'”
Seymour Durst
In the late 1960s and early 1970s New York was in the midst of a slump from which many thought it would never recover. The city,
increasingly abandoned by middle- class white residents and corporations, both headed for the suburbs, was on the verge
of default.
One area emblematic of the city’s distress was Times Square, which had turned into a bustling hub of strip bars and peep shows. However, Seymour Durst, a scion of one of the city’s great real estate dynasties, took a long-term view. He saw Times Square as the perfect location to assemble large parcels of real estate for bargain-basement prices. Durst predicted if the neighborhood could only be cleaned up, it had the potential to be redeveloped as a thriving mixed-use district with offices one day.
However, Durst was not content to sit on the sidelines and wait for Times Square and New York City to recover. He engaged in efforts to resuscitate the city. In 1975, Mayor Abe Beame appointed him to a task force devoted to turning around Times Square.
Seymour Durst’s story illustrates the special challenges of investing in a place that is down on its luck. Only months after he was appointed to the task force, Durst suffered a public relations setback when a New York Times article revealed that one of his Times Square properties happened to be the site of an infamous massage parlor. Durst resigned from the task force in disgrace and sold the massage parlor property for a loss. But he didn’t allow his public humiliation to dampen his optimism for Times Square’s potential.
Durst died in 1995 before the investments that he made in Times Square realized their full potential. However, because of the groundwork that Durst laid during the bad old days of Times Square, his descendents were able to later develop of a string of marquee properties, including the Condé Nast Building and the Bank of America Tower.
David and Samuel Rose
Developing property during the Great Depression may have seemed like a foolhardy endeavor to dethroned moguls. But at the height of the Depression in 1931, David and Samuel Rose, two brothers who founded Rose Associates in the late 1920s, broke ground on a project to build 474 units of low-income rental housing at Clason Point in the Bronx. At the time, the development was the largest such project ever undertaken under a New York State housing program.
Building during such lean times required innovative engineering strategies. David Rose, in particular, took an interest in learning about and improving the aspects of the construction process. To save on energy costs, the Roses developed an on-site plant that recycled waste heat. The success of the Clason Point development led to other large Depression-era projects such as their first Manhattan development, a 400-unit apartment complex near Columbia University’s Baker Field, which was undertaken in 1938.
The Roses rode out the Great Depression by working closely together. The brothers and their families celebrated the Jewish Sabbath together, and their children spent time on construction sites after school and on summer vacations. In “Skyscraper Dreams,” Shachtman links the success of the Rose family business to cultural values associated with their Eastern European Jewish heritage.
He wrote that both visionary risk taking and pragmatic business practices were part of the brothers’ successful working partnership.
“Each respected the other, relied on one another and knew the other had qualities that he himself lacked.”