New Debt City!

“Look at Harry’s deal, for example. He bought how many billions of dollars of real estate for only $50 million?”

“Look at Harry’s deal, for example. He bought how many billions of dollars of real estate for only $50 million?”

Adelaide Polsinelli sells real estate all day for her clients as a top broker at Besen & Associates. She was talking last Thursday about developer and landlord Harry Macklowe’s recent troubles. In February 2007, Mr. Macklowe bought several New York office towers for $7 billion in one of those titanic deals that perfectly reflected this decade’s rowdy, triumphant real estate market.

It was big, first of all: The portfolio included seven prime office towers in Manhattan, North America’s most coveted office market. It had big names: Mr. Macklowe is one of the most well-known landlords in New York, with a portfolio that includes the General Motors Building at 767 Fifth, which he bought in 2003 for $1.4 billion. It involved big amounts: Worldwide Plaza at 825 Eighth Avenue sold for $1.73 billion as part of the deal, the second-biggest building buy in U.S. history.

And, like so much of the recent real estate market, it included a lot of debt.

Mr. Macklowe’s Macklowe Properties put up $50 million for the portfolio; the rest came from lenders. Now, the bills are coming due in early February—one year to the month since the purchase—and “Harry” has put his prized building up for sale: He’s retained ace brokerage CB Richard Ellis to market the GM Building, arguably the world’s most valuable.

Mr. Macklowe is perhaps the most extreme example of real estate debt as the animating factor of the New York City economy right now. Without debt, the city would go broke.

Not exactly, perhaps, but it would be a very different place. It would not be as shiny or as profitable for investment, nor as largely buffeted as it is now from the housing market woes afflicting most of the United States. It would be New York, but it would not be the record New York of the past several years.

The creation, securitization and trading of large-scale debt has sustained the city for so many consecutive years now that it’s difficult to imagine New York since 2001 without it. We owe so much to it.

It’s simple, really��ironic, though, considering the complications it’s now causing. Banks would sell mortgage debt to Wall Street houses, which would, in turn, sell the debt to investors as securities. The initial debt was plentiful because interest rates for borrowing were incredibly low.

It was a terrific run. Wall Street’s year-end bonuses set records for four consecutive years through 2006. The amount of major property traded in Manhattan shattered records every year starting with 2003. Home sales nationwide boomed, and locally too: Manhattan saw 10,000 home sales in 2007, a feat not reached since at least the Koch administration.

But so much of it hinged on debt, whether a mortgage to buy a $400,000 studio apartment; a sophisticated loan to buy a $7 billion office tower portfolio; or debt to back securities, the trading of which swelled the profits of investment houses (whose employees, in turn, became even busier buyers of New York homes).

A lot of the debt was understandable. One couldn’t blame investors for wanting to get in on the boom times or people in general for pursuing the ur-ingredient of the American Dream, homeownership, when the money was cheap and the interest rates low. Top office towers in this town cost more than $1,500 a foot; top apartments, about the same. And debt has always been a part of trading New York real estate.

Also, the debt created jobs. Residential and commercial brokers, mortgage brokers, real estate appraisers, interior designers, architects, construction workers of all sorts, publicists and marketers, advertising reps (reporters, too!)—all found ample work via a real estate industry high on debt.

Plus, the city found ampler monies via the taxes involved in property trades. The combined revenue from the mortgage recording tax and the property transfer tax jumped 255 percent between 2000 and 2005, according to the city’s Independent Budget Office.

The fallout from the subprime mortgage defaults has finally ebbed this tide. The defaults spooked lenders, whether lenders were directly affected or not. Going into debt has gotten a lot more difficult for buyers.

“There has been a huge spillover effect [from the subprime crisis] because the fundamentals of the commercial market couldn’t be better and are very solid,” said Howard Michaels, chairman and CEO of the Carlton Group, a real estate investment bank. “There’s a lot less capital now.”

Indeed, lending has decreased in the past few months—“January is terrible,” said Ms. Polsinelli—and investors have soured on mortgage-backed securities. The reverberations have forced some of the most august names in finance into embarrassing write-downs on 2007 profits, as well as mass layoffs. And the Wall Street year-end bonus total did not set a record in 2007, slipping 4.7 percent from 2006’s $33.9 billion.

Is debt no longer a popular Street drug? Will it lose its grip on the city and its real estate?

The Real Estate Board of New York, the powerful industry trade group, held its annual gala last Thursday evening at the New York Hilton in midtown. At the after-party, a leading investment-sales broker, the sort who regularly trades multimillion-dollar building portfolios, said the housing market downturn nationally and the attendant economic troubles were good news for the city.


Interest rates will drop again, he said. That will make borrowing money cheaper.

In a speech on Jan. 10, Federal Reserve Chairman Ben Bernanke suggested that the Fed would lower interest rates to stem the bad economic tide first sparked by subprime defaults. He made the same suggestion in Congressional testimony a week later (on the day of the REBNY gala, as it turned out). The Fed then did so on Jan. 22.

Borrowing money may soon get easier. Again. Let the good times roll.

New Debt City!