Lessons from the Real Estate Dynasties of New York


No city is more synonymous with deal-making than New York, and its skyline automatically conjures up images of commerce and finance. So it was a pleasure to read Tom Shachtman's "Skyscraper Dreams" (reviewed here), and learn more about the history of the personalities and buildings that shaped the city. Here are some lessons from the book:

1. Real estate has a singular and complex relationship with the city. At times, real estate in New York has boomed as a result of thriving industries such as the garment business or financial services. At others, real estate is itself a driver of the city's prosperity with its construction jobs and contribution to the tax base. This is particularly true as real estate in global cities has come to be seen as a safe asset, demanded by locals and foreigners alike. Yet that demand for real estate as a safe asset can suck the vitality out of the city. Writing about the 1980s, Shachtman warned, "Two New Yorks were rapidly being shaped, one for the rich and comfortable who lived in luxurious buildings and could afford to shop at the boutiques and eat at the restaurants that paid the higher rents, and another for those who could not. Soon there would be no space, services, or amenities for anyone else. Apocalyptic visions began to be voiced, of a twenty-first century metropolis in which the rich lived in a high-walled, armed camp and the poor were an envious, angry rabble at the gates." This sounds remarkably like the concerns being voiced by current writers like Richard Florida, and is proof that these issues have only deepened after 30 years.

2. Macro matters. I never get tired of beating this drum, and covered it in discussing John Paulson's success shorting real estate-linked assets in 2007-08. While many cycles are national (even global, like the Great Depression), some are local, such as the travails facing New York in the 1970s. Shachtman reflects on the flight of big corporations from New York to the suburbs in the early 1970s. "Second-guessers in the industry analyzed the Tishmans' every move and concluded, to their dread, that the Tishmans had done nothing wrong. Forces larger than any individual or family could control were at work in the disaster of 1166 [Sixth Avenue]. That was frightening." As always, using macro trends can be a double-edged sword. While Percy Uris benefited from taking "calculated risks based as much on his considered opinions of the strength and direction of the economy as on his sixth sense for property", others were less successful.

3. Ambition and opportunism can easily turn to hubris without risk management. It goes without saying that ambition and drive are necessary in real estate. The book opens with a quote from renowned architect Daniel Burnham: "Make no little plans. They have no magic to stir men's blood and probably themselves will not be realized. Make big plans: aim high in hope and work." The book is full of examples of savvy deal-making, particularly when rivals were nervous or financially constrained. And yet hubris is never far away from tipping the successful developer into ruin. Two characters in Shachtman's tale that best exemplify this are A.E. Lefcourt and Bill Zeckendorf Sr. One of the city's most prominent developers of Art Deco buildings, Lefcourt "understood the concept of leverage on the up side but, like so many others, he never contemplated the disastrous things that could happen, due to leverage, on the down side." With his empire unravelling in the Great Depression, Lefcourt suffered a series of heart attacks, leading to his death. Zeckendorf, another larger than life character, also created a formidable empire. "He controlled more diverse urban and suburban properties than anyone else on the North American continent. He held, for example, more hotel rooms in Manhattan than anyone else." But Zeckendorf had several tragic flaws. First, he was "addicted to risk" and "Byzantine" deals. Second, he seems to have chosen the wrong objective function. Shachtman notes, "[Building one of the greatest companies in the world] was his goal - not wonderful buildings, but an enormous company." Finally, at the peak of his powers, Zeckendorf "began to think that his touch was magic, and ranged beyond real estate", leading to failed forays into copper and the short-lived Freedomland amusement park.

The key to navigating these extremes, as well as macroeconomic shifts, is prudent risk management. While Shachtman's book isn't a tome on risk management, it clearly defines the successful families. This involves more than controlling leverage. The Rose family,"for example, continued to build throughout the 1930s and never lost control of a building "through caution and pluck, artful financing, careful cost control and attention to detail." Harry Macklowe benefited from national diversification in the 1990s, and avoided the downside of New York's link to finance.

4. Partners matter in business. The book is full of partnerships that worked - and many that didn't. "In acquisition real estate, partnerships are always desirable. What you looked for was someone (preferably a relative) with a body of expertise that overlapped your own but was different, who could follow your logic, correct fallacies or inaccuracies, and then bet with you on a common project and accept the gains or losses from it without breaking stride or quitting the field of play. You tested the partner on one or two transactions; if you were still in tandem after several, you kept going and grew closer together and more bold in your outside reach."

Larry Wien and Harry Helmsley offer the best example of a successful partnership. Alvin Lane, a former law partner of Wien's, remarked upon the common mathematical language the two used: "If you were in a room with them...you wouldn't know what the hell they were talking about. It was sort of a volleyball game of numbers."

5. Partners matter outside business. Choose the right role models. The telepathy between Wien and Helmsley highlights even more sharply their eventual divergence. Writing about some of the less savory characters in the real estate industry, Shachtman writes, "They were what Helmsley might have become had he not teamed up with Wien." As Wien devoted himself further to charity, Helmsley's business expansion was littered with dubious practices such as double-billing syndicate partners. His new partner, wife Leona Helmsley, was a less salutary influence than Wien.

Wien, meanwhile, comes across as a model, "[setting] the mold for many people in real estate in regard to charitable and civic endeavors." It's little wonder that younger men like Fred Rose - soon to be a renowned philanthropist in his own right - sought him out as a mentor. One of the best Wien stories goes directly to his "deliberately low-key and self-effacing" style in philanthropy. After donating a large sum to a Federation of Jewish Philanthropies summer camp, he turned down the offer of a testimonial dinner in his honor. Years later, "when he went to visit the new facility, he discovered it had been renamed "Camp Vacamas on Lake Larriwien," and that visitors assumed the lake's name was of American Indian origin."

Shachtman traces some of the real estate industry's charitable impulses to the concept of tzedaka, which obligated Jews from the Pale of Settlement region to help the less fortunate. The Rose family made this a central tenet of their family firm's philosophy: "French peasants, at the moment of the harvest, toast and pour a little wine onto the soil, a ceremony returning something to the earth for what it has given them. The counterpart at Rose Associates - tempered with moderation, of course - is that some portion of your day must go into pouring back. Take your time and find charities that interest you; if you don't find some within a reasonable amount of time, one will be found for you."

Keeping in mind again that this book was written in 1992, it's perhaps remarkable that one prominent real estate developer of the era draws mention for his lack of philanthropy (and risk management). I'll leave it to readers to read Shachtman's book themselves for these nuggets, but one cannot help but raise an eyebrow that this developer would go on to become President.