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October 15, 1993 - Image 34

Resource type:
The Detroit Jewish News, 1993-10-15

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111111he combination of a
construction and real
estate slump both in
metro Detroit and
across the nation has
hurt the economic re-
covery, slowed the
crew on of new jobs and sapped
the wealth of developers to such
an extent that some find them-
selves building rich, yet "cash
Many still are building prop-
erties with the help of investors
— or other people's money. But
these days, the building busi-
ness may leave little cash in the
pockets of developers, especial-
ly if properties are not fully
leased and rent money is spent
on hefty maintenance costs.
The downturns are signifi-
cant given that every other eco-
nomic recovery over the last 20
years has been helped signifi-
cantly by an upturn in com-
mercial and office construction.
The last recession, combined
with the over-building of com-
mercial and office space in the
1980s, has pushed the real es-
tate industry into its worst de-
pression since the 1930s.
While most experts don't ex-
pect the real estate and con-
struction markets to recover
anytime soon, the current
downturn has created signifi-
cant problems for developers,
especially those who find them-
selves shoveling money into
buildings that are not leased to
"The first thing that hurt de-
velopers were changes in the
(1986) tax laws that served to
dry up cash flow and to remove
the ability to write off real es-

tate losses (on tax forms)," said
Michael Horowitz, president of
the Selective Group, a real es-
tate development firm in Farm-
ington Hills.
"The financial industry also
pulled back from lending to any-
one with a hand out. Develop-
ers today can't attract capital
from banks and they have a dif-
ficult time arranging financing.
The savings-and-loan crisis also
strained the industry, especial-
ly as many of the (office) build-
ings owned by S&Ls in the
south are now up for sale at be-
low-market prices."
As the cash flow of develop-
ers for current or future projects
has shriveled, the number of
construction jobs in the United
States has dropped from 5.1
million in 1988 to 4.5 million
last year, according to the Bu-
reau of Labor
Statistics. In ad-
dition, experts
project it will
take 10 to 13
years to absorb
the glut of va-
cant office
space across
the country.
Because of
the construc-
tion industry's
ripple effect on related indus-
tries, other professions have
suffered as well. Among those
industries are architecture,
building supply and manufac-
turers of nails, cement and fur-
niture. Another side effect to the
slump has been a drop-off in
contributions to the Allied Jew-
ish Campaign on behalf of area
developers (see related story).

The real estate business once considered the
best way to make money is at its lowest point
since the Great Depression.

"We've been holding our own
since 1990 in the office market,
which is actually getting a lit-
tle better, but obviously no one
is starting any new buildings,"
said Bob Katzman, vice presi-
dent of the Burton Katzman
Development Co. in Bingham
"Our family has been in the
business for 80 years, so we've
learned a few things over the
years," Mr. Katzman said. "One
of the things we didn't do in the
`80s was leverage ourselves to
the hilt. Any time there's a re-
cession, there's always a shake-
out. It's always been the
survival of
the fittest."
One of
the secrets
to the devel-
firm's suc-
cess has
been diversi-
fication, said
Mr. Katz-
man. The
company has holdings in in-
dustrial, office, residential and
retail. Mr. Katzman said the
firm also was studying a pub-
lic stock offering, but he de-
clined to provide further
Perhaps reflective of the sod-
den mood of developers, many
declined to be interviewed or did

not return phone calls.
"What we find is that devel-
opers must be rather creative
to keep their holdings from
falling apart, or if they're in dire
straights, from going bankrupt,"
said Pat O'Keefe, a partner with
Conway, MacKenzie & Dun-
leavy, a turn-around manage-
ment firm in Birmingham that
specializes in real estate. "I
know developers who have sold
off holdings to service debts on
other properties."

"Our family has
been in the
business for 80
years, so we've
learned a few
things over the

Bob Katzman

Another way developers can
raise cash, said turn-around
specialist James V. McTevia,
president of James V. McTevia
& Associates, Inc. in Eastpoint,
is to take a real estate firm pub-
He cited the recent offering
of Taubman Centers, Inc. in
Bloomfield Hills. The develop-
er of Twelve Oaks Mall in Novi,

Fairlane Mall in Dearborn,
Lakeside Mall in Sterling
Heights and Briarwood Mall in
Ann Arbor and 15 other such
projects across the country sold
26.8 million shares of stock last
The offering raised $300 mil-
lion which billionaire Alfred
Taubman's business used to re-
structure as a public real estate
investment trust and to pay off
existing debt.
"The best way for us to grow
was to become a public compa-
ny. This has been under explo-
ration by us for the last five to
seven years," said Chris Ten-
nyson, senior vice president of
corporate affairs for Taubman
Other big developers who
have sold or have filed in recent
months to sell a stake in real es-
tate empires to the public in-
clude Edward J. DeBartolo of
the DeBartolo Realty Corp. in
San Francisco, Martin Bucks-
baum of General Growth Prop-
erties Inc. in New York and
Melvin Simon of Simon Prop-
erty Group Inc. in Indianapolis.
Mr. McTevia said such offer-
ings will become more popular
in coming years as the sale of
stock raises much needed cash,
allows developers to maintain
control of their properties and
provides a means for debtors to
clear their slate with lenders.

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