Boom, Slump, And Recovery
( Originally Published 1930's )
DURING the World War, New York City fell behind in its building, owing to shortage of men and materials; but as the nation's leading port its trade increased, and inflation had its usual effect on the greatest of all credit marts. A terrific spurt in construction followed, continuing into the golden twenties with but a brief let-down in 1920-21, during which real estate weathered the storm better than other investments. For the next eight years New York let itself go in a building orgy beyond all precedent, trying to live up to its temporary position as the money center of the world.
The building orgy outlasted and outdid all others in New York real estate history because ways and means were found for getting the little fellow's money into big deals. In early times real estate had remained largely a personal matter, with one owner and one mortgagee for each property. Later appeared large realty holding companies whose stocks were for sale in the open market; one could become interested in New York realty by buying shares, a process easier than buying sugar. Also one could put his savings into mortgage bonds, the mortgage having been split up to accommodate the dear public, a procedure borrowed from railway experience. The better to intrigue small investors, who sought security rather than adventure and accepted a fixed return in the expectation of always having it, mortgages were guaranteed as to title or revenues or both by companies which for a time loomed large in the city's financial life.
Companies flourished on the pledge of guaranteeing the investor's income; their participation in the financing was considered as stabilizing values and assuring sound management, a strong selling point among cautious persons of small resources. So assured, a public, ignorant of risk, was drawn into the risky game of real estate speculation. A single mortgagee has not only rights but the ability to avail himself of his rights; presumably, if he comes into possession of the property through foreclosure, he will be able to finance other charges against it, enter into possession, and proceed to manage it for his own benefit. But a thousand owners of a split mortgage are in an entirely different position. They are owners in varying degree; unity of action can be secured only through protracted meetings of per-sons who have no other interests in common, and some of these persons may be quite unable to contribute to funds necessary for the defense of their legal rights. The owner of a small part of a large mortgage is almost as vulnerable as the owner of a few shares of stock in a large corporation; while he has more protection under the law, there are practical difficulties in the way of his claiming that protection, and in addition he has no open and active market in which to salvage, on any desired business day, part of his investment when things are going badly.
It was to meet this argument against partial real estate mortgages that the guarantee system arose; but when guarantors were faced in many instances with demands to make good on their guarantees, a general disinclination to do so developed. Instead of enforcing the guarantees, both the courts and the State, the latter drawn in as conservator, have shown a disposition to temporize in the hope of returning values rather than to force guarantors to the wall. The chances are that the larger guarantee companies will emerge as going institutions while many of their clients will have been ruined by inability to hang on. In July, 1934, the New York State Superintendent of Insurance recommended that seventeen of these title and mortgage companies should be liquidated, with reorganization of more than half of their $834,237,000 worth of certified mortgages. Hence it came to pass on the same day that unemployed have paraded New York streets to convince the public of their need of jobs and bread, in another part of the town mortgage bondholders have been parading to convince the public of their needs of justice and interest.
While small investors were being sucked into the vortex, real estate values were rising on the strength, largely, of the easy money they contributed. In 1926, 13,932 pieces of property were sold in Manhattan for $982,656,000, or a rough average of $75,000 apiece; in 1929, 18,875 pieces were sold for $1,431,945,000—rough average, $120,000 apiece. All favorably situated realty on the island had risen in three years in something like that proportion of 100 to 160.
Then the boom broke into splinters. In Manhattan building permits fell off, and conveyances under foreclosure increased, as follows:
BUILDING PERMITS FoRECSOSUIES
No. Amount No. Amount
1929 1,685 $562,468,415 350 $62,728,100
It is worth noting that the average foreclosure for each of these four years is close to $180,000. The Manhattan realty market is evidently no place for small fry.
Also note the swift decline in building permits as contrasted with the sluggish increase in foreclosures during the first three of these years. The big borrowers and operators were still optimistic in 1931. They were riding along on unmatured leases; banks and mortgage holders were inclined to carry on in-stead of forcing liquidation; tenants might pay sometime even though they could not pay their rents on the nail. Also to be considered were the tradition that land is the safest investment, the general sluggishness of real estate to get under way either up or down, and the terrific ballyhoo which the press always keeps going in behalf of local real estate interests, a ballyhoo as earnest in New York City as it is in the most ambitious county-seat town on the wide-open prairie.
The ballyhoo had worked beautifully during the boom. With publicity reduced to a system, daring new-comers in the construction and operating field drew the public money into their coffers and rose to be commanding figures in the news. There were the Chanin brothers, who, from humble beginnings in Brooklyn, went on to build theaters and to shoulder forth at the peak of the boom with the Chanin Tower, once worth $14,000,000, and for a few weeks the highest (sixty-two stories) building in the Grand Central zone. The Chanins built well in Sutton Place and in Central Park West, where two gigantic apartment hotels, the Century and the Majestic, arose under their guidance even after the boom had slipped around the corner. In all they erected $80,000,000 worth of Manhattan buildings with great style and dash, working out schedules for routing materials which saved a good deal of time and have been generally followed.
Men of soaring imaginations and a lively sense of publicity could go far in those days, when it seemed a virtue to pay too much for land rather than too little. The Chanins paid the Henry Astor estate, so it is said, as much per square foot for their Lincoln Hotel site in 1929 as old John Jacob Astor paid for two whole acres—$353—in 1803. What's more, the Chanins bragged about it. That was the big Chanin year, what with the Lincoln site purchase, the opening of Chanin Tower, the announcement of the $12,000,000 Century, and the planning of the even larger Majestic. No wonder that Irwin, the more vocal of the brothers, let himself go a little in print. He announced that Paris and London would soon see the Chanin system at work on their sky lines, while in New York his firm would erect a glass tower beyond all present proportions.
Even in 1930 and 1931 the Chanins kept the flag of hope flying. The depression, said Irwin Chanin, would be of short duration. Wasn't his firm still buying sites (notably the Doelger Brewery) and weren't the Chanins keeping 3,000 men at work for a year on the Century and Majestic? By 1931 Mr. Chanin was convinced, and he was never one to keep a cheering conviction like that to himself, that money would soon be so cheap that it would have to find outlet in construction. It is melancholy to record that money did not get cheap in time to let the Chanins retain undisturbed possession of all their magnificent properties; but it is pleasant to record that they are by no means as flat as some of their competitors in the mad building boom of the Golden Twenties. They are still collecting rents on Chanin Tower under a plan for the benefit of mortgage bond holders, there being three mortgages, a trustee, and plenty of complications.
Less fortunate was Abraham E. Lefcourt. Mr. Lefcourt earned his first dollar as a bootblack, grew up in the garment trades, succeeded there and went on to twenty or so skyscrapers, more or less with other people's money. For twenty years he averaged one skyscraper a year, in the course of which he destroyed more landmarks than any other New Yorker, among them the Spanish Flats in Central Park South, said to have been the city's first apartment houses. Touched by the Napoleonic complex, he named eight or nine of his buildings after himself, Lefcourt National, Lefcourt Normandie and so on, until the midtown areas were spotted with Lefcourt this and Lefcourt that. He even had his own bank. In a single year he had $50,000,000 worth of buildings under way. Fortunately he hired good architects; his works remain and are worthy. In one instance, by erecting a Seventh Avenue clothing center, a $7,000,000 grouping between Twenty-sixth and Twenty-seventh streets, he definitely changed the industrial geography of Manhattan.
So far this runs like an Horatio Alger tale, but alas, misfortune closed in on him early in the depression, when a stormy meeting of creditors and share-holders alleged fraud and demanded prosecution. This was soon followed by the sale of Lefcourt Realty Corporation to the General Realty and Utilities Corporation, at which time nine skyscrapers changed hands. It was disclosed that these nine buildings had lost $3,000,000 to $4,000,000 within the year. One of these buildings, the Lefcourt Normandie, occupied the site of the famous old hotel before which Abraham E. Lefcourt had shined shoes as a poor boy. Buying and improving that site had been his most satisfying triumph. After it went, one can understand how the proprietor had no further interest in life. Within two years he was dead, at the age of fifty-five, leaving an estate of $2,500, as against a will drawn in 1928 which disposed of properties then reckoned as worth $100,000,000.
Henry Mandel also did things in a large, sophisticated way. Having landed in New York as an immigrant lad of seven, in 1893, he was riding the crest of fortune at the age of thirty-five. Extraordinary boldness marked his rise. When his total resources were only $25,000 he gaily bought a $2,900,000 property. When he planned a building at Thirty-second Street and what was then Fourth Avenue, he prevailed upon the city fathers to stretch Park Avenue south for two blocks in order that his building might become No. 1 Park Avenue, which proved that street names are as elastic as official consciences. Since it seemed that death was about all that could stop Mr. Mandel, his precious life was insured for $3,000,000.
Even in 1930, when the damps were beginning to descend upon most of us, the Mandel fever still raged in print, perhaps to reassure the stockholders and note-holders in Henry Mandel Associates, Inc., who had assisted their chief somewhat in his undertakings. Believe it now or not, he announced plans for seven apartment houses, each of nineteen stories, to occupy Seventh Avenue corners between Nineteenth and Twenty-third streets. One of his 1930 ventures, the Parc Vendome on West 57th Street, actually went through; that excellent structure occupies 62,000 square feet which Otto H. Kahn, the music-loving banker, had assembled for the Metropolitan Opera House. Then, perceiving that Manhattan was cold to more apartment houses, Mandel envisioned a super-garden city. He became active in Long Island and Westchester, building a group of $30,000 houses in Sleepy Hollow. The public, he announced, would have an opportunity to participate in the profits to be derived from the building and sale of these modest villas so greatly needed.
Well, two years is a long, long time when the cards are running against you. In March, 1932, hardly more than two years after the super garden vision, Henry Mandel filed a voluntary petition in bankruptcy, liabilities being listed at $14,000,000, unencumbered assets at $380,000. On London Terrace, said to be the largest apartment house in the world and capable of housing 5,000 persons, he owed upwards of $5,500,-000. Jailed for nonpayment of alimony, his hardest creditor being his one-time wife, Mr. Mandel was able to prove in June, 1933, that his potential income was $60 a week, whereupon a kindly court reduced his conjugal dividend from $32,000 to $3,000 a year.
Thus the new rich in Manhattan realty took it on the chin. Other operators, scarcely less prominent than those cited, have dropped from sight for the time being. Nothing was heard for some time of Benjamin Winter, who rose from nothing to buy Vanderbilt land, or of Louis Adler, who in 1930 announced that he had assembled a whole block in the financial district, bounded by Wall, Pine, Pearl, and Water streets where he would erect a building 105 stories in height, topping all others. Mr. Adler declared the financial district of New York to be the safest investment in the world. Perhaps; but it was not safe enough for Wall Street to invest any money in at the moment, and the project lapsed, which was probably Mr. Adler's good luck. Mr. Winter is again active, having been favored with time by his creditors.
It will be observed that the depression has not dam-aged the old families who own Manhattan's golden earth. Some of them by virtue of their leases and mortgage interest, the latter frequently established by selling at high prices to the Mandels and Lefcourts, stand to acquire buildings which daring promoters erected with public money. And the promoters them-selves haven't suffered greatly. They began with little and now have little but experience; yet they can start anew, and plenty of them will rise again. The real losers are the little folks who put their funds into piecemeal mortgages in the hope of a steady return and are not powerful enough to protect their interests. Thousands of them will find it impossible to recoup their losses, which represent the earnings of working years saved to defray the old-age wait for death. Wall Street has been accused of shearing lambs, but these lambs, being mostly young, at last have a chance to kick up their heels before the shearing; the mortgage bondholders, by contrast, were old sheep who had seen their best days; nevertheless they were neatly sheared and may not live to grow new fleeces.
While every realty interest, with the exception of old and partially liquidated first mortgages on well-established properties, suffered during the past four years, the blow fell heaviest on the more optimistic newcomers in the field. The old school is still with us, its more colorful figures emerging still full of fight in spite of the wounds inevitable in such a sharp liquidation. Among them may be cited Joseph P. Day, the lean seer and happy auctioneer, who disposes with equal gusto of lots in Throgs Neck or whole factory layouts in Brooklyn or Bridgeport; Walter J. Salmon, who specializes on Forty-second Street frontage and race horses, and the irrepressible Fred F. French, who having pulled downtown population uptown now proposes to pull it downtown again by rebuilding certain areas on the lower East side. Mr. French insists that 400,000 persons, all nice folks, want to live in the lower East side. We hope none of them come from Tudor
City, the mammoth French development on 42nd Street. What gadabouts we are! But realtors make us so.
A long view of New York real estate history reduces liquidating slumps to the relative unimportance of short illnesses in the life of a normally hale man. The first assessed valuation of record was that of 1685—£75,694, approximately $190,000. Once the colonial leading strings were broken, assessments rose rapidly, doubling between 1790 and 1801, when the total stood at $20,703,000. Valuation stepped along up to $65,-000,000 in 1826, then increased the pace to reach $233,-000,000 in 1836, failing to $194,000,000 in 1838 as the result of the 1837 panic, which had an effect somewhat parallel to the recent liquidation. Low-water mark for that move was not reached until 1843, six years after the crash, when the assessed valuation stood at $164,000,000, a forty per cent liquidation in city book value, though no one can say how much this was due to landlord pressure to get taxes down and how much to downright loss of value. Debtors of 1837 had to take their medicine without benefit of the devaluated dollar, which was tossed as a life-saver to their successors in 1933. At any rate, it was not until 1852 that the valuation of 1836 was surpassed —a period of sixteen years. Then another steady in-crease set in. The Civil War brought a slight setback, all regained by the end of the war in 1865, when the assessed valuation was $427,000,000. By 1872, $742,-000,000 worth of real estate was on the assessors' books, all on Manhattan, which then comprised all of New York City.
Since the creation of Greater New York through the addition of five outlying boroughs in 1898, Manhattan's assessed valuation has grown from about $2,000,-000,000 to almost $10,000,000,000. In 1920 it was just short of $5,000,000,000, and in 1932 just short of $9,600,000,000. In addition to this taxable property, the island had the lion's share of more than $4,000,000,000 worth of property exempt from taxation in the Greater City. Of this exempt real estate the city owned nearly $3,500,000,000 worth, chiefly occupied by parks, wharves, schools, playgrounds, and public buildings; the Federal government nearly $200,-000,000; the churches and hospitals nearly $1,000,-000,000, and the State of New York a small amount.
Almost a hundred years ago, as we have seen, the panic of 1837 brought a drop in assessed valuation which continued for five years and was not entirely overcome for fifteen years. The same phenomenon recently began when the assessors for the Greater City reduced their book figures of real estate valuation from the all-time high of $17,349,573,444 to $16,062,394,-318. Manhattan, at the reduced valuation of $8,169,-778,172, is still worth more than the other four boroughs combined, although comprising only one-fourteenth of the city's land area. On the average, Manhattan is reckoned to be worth $300,000,000 a square mile for taxation purposes, while the rest of the city averages about 2,750,000 a square mile. If historical analogy can be trusted, the up movement would not be resumed on the city's books until 1950. But do not forget the devalued dollar and its probable effect on land values.
The assessment map of Manhattan is now at its spottiest as a result of the boom developments and slump liquidation. Even while the island was losing population, apartment house builders were equipping certain sites for the accommodation of many times more persons than had previously occupied it. For in-stance, before Mandel built London Terrace, which can house 5,000 persons, the old structures on the same land housed only 400. Similar developments went on in Tudor City, Washington Heights, West End Avenue, and many other places. The result was that old quarters became depopulated in part.
The entire lower East side, below Fourteenth Street and east of the Bowery, close to one-tenth of the total area of the island, is assessed (1934) at only $145,-000,000. Realtors appreciate that general recovery of values is unlikely until this distortion is corrected. So far these adepts in real estate have been able to think of only two ways of saving the situation. One is to expand the parks and playgrounds; the other is build new housing projects with cheap money, prefer-ably furnished by the state or federal government. No one suggests seriously that these broken and partially deserted areas revert to their former status as neighborhoods of individual homes; perhaps there would be no demand for such dwellings, because of cost of up-keep and service. Mr. Chanin, the great champion of skyscrapers in the days when skyscraping was profitable, probably was right when he said that New Yorkers would live in apartments the rest of their days and like it.
Since the Manhattan of the future will be under economic pressure toward compact living quarters and under social pressure toward park and recreation areas, it begins to look as if the island in the distant future, say three hundred years hence, may contain approximately 1,000 giant apartment houses, each accommodating an average of 4,000 persons, these houses separated by parked blocks. Four hundred London Terraces would accommodate the present population of Manhattan. On that basis the present population of the island might be doubled, which is unlikely in any event, and yet far better living conditions could be maintained than exist at present, with ample allowance for business and traffic. This will have to wait, how-ever, until New York has become completely tranquil and socialized, until its citizens have taken over control of the island for their own benefit, and have pursued intelligently and unremittingly a steady program of planned construction. Which is perhaps another way of saying, "Never"; but the beginnings of a trend in that direction are clearly to be seen in the public housing projects, once bitterly fought by the landed interests, but now actually under way and generally accepted.
The Regional Plan surveys, so admirably presented in many volumes, show how a city incredibly huge and glorious might be created, centering on Manhattan but commanding an area vastly greater that the present five boroughs. These noble visions may come to pass when all who read this book are dead, and when many of our present social habits and institutions have likewise perished on the rough road to ideal cooperation.