NEW YORK -- Olympia & York's mounting troubles are threatening what looked like the beginning of a recovery in the city's property market.

Last week it became increasingly likely that nonbank creditors would foreclose on some of Olympia's buildings in New York and be forced to unload them at fire-sale prices.

That would mean further real estate losses for banks, whether or not they have lent money to the Toronto developer, which filed for bankruptcy two weeks ago.

Real estate experts thought a turning point was reached in the New York market earlier this year, when Citicorp negotiated the sale of a Times Square office building at 43 cents on the dollar. While the price was low, at least a price level had been reached to attract a buyer.

A Damper on New Lending

Many of the buildings compete with bank-owned properties. But threatened quick sales by bondholders, foreign banks, and insurance companies might send overall prices back down again, causing further write-downs by U.S. banks. And new loans would once again become unthinkable.

"The few lenders that were starting to open the door and do loans are going to think twice about it now," said Mark S. Edelstein, a partner in Milbank, Tweed, Hadley & McCloy, a law firm with an active real estate restructuring division.

The U.S. real estate of Olympia & York Developments Inc. was not covered by the bankruptcy filing. But, struggling to maintain control over newer projects, the company is likely to hand over to creditors the huge office building at 55 Water Street and several other New York towers with low occupancies, experts said.

Olympia recently told bond-holders of the 55 Water Street building that it is unwilling to pump new money into the site. Instead, Olympia is expected to pick and choose among its 14 New York City buildings.

The firm will fight to keep well-leased properties, attorneys said, letting lenders worry about coming up with the $100 a foot or so it costs to upgrade the older space for tenants.

Although U.S. banks are not exposed in any major way to Olympia's projects in New York, fire sales by the bondholders, foreign banks, and life insurance companies that do hold such loans would drive down the price banks can recover from their own foreclosed real estate in the same neighborhoods.

Moreover, signs are mounting that Olympia's crisis already has pushed capital away from starved U.S. real estate markets, undercutting other bank real estate loans.

Foreign Bank Stops Lending

One Japanese bank virtually shut down its U.S. credit operation after assessing its exposure to Olympia, a bank official acknowledged. He asked that the bank's name not be published.

And investors have started to establish reserves against losses on bonds backed by Olympia properties, further reducing the amount of capital available for new investment.

In New York "the combination of the Macy's and Alexander's bankruptcies and the O&Y situation has had the effect of prolonging the reluctance of lenders to extend credit," Mr. Edelstein said.

The impact will be greatest in New York, where Olympia controls more than 8% of the space in the major office districts in midtown and lower Manhattan.

Other Cities Affected

But the troubled developer also owns large buildings in Los Angeles, Chicago, Boston, and Dallas, as well as Hartford, Conn.; Portland, Ore.; Springfield, Mass.; and Orlando, according to documents filed in bankruptcy court.

To be sure, some experts think Olympia's problems have already been discounted by the real estate markets across the country. But Mr. Edelstein said the Olympia fallout will significantly depress valuations as banks assess the collateral on hundreds of billions of dollars of real estate loans that mature in the next two years.

The world's largest office developer, Olympia has run into trouble at every turn since early April, when it announced it would attempt to restructure some $12 billion of debt.

A bank group financing the Canary Wharf project - a long-range development of 13.4 million square feet in 32 office buildings east of London - has refused to grant the long-term financing Olympia said it needs to complete the first phases of the project.

Instead, the once mighty developer has been forced to beg almost weekly for its allowance of working capital, while skeptical bankers mull over the developer's proposal to exchange equity for forbearance on loan maturities.

Meanwhile, negotiations with lenders on Canadian properties also failed, forcing the developer to seek protection in Toronto bankruptcy court.

Ironically, the direct exposure of U.S. banks to Olympia appears to be focused on properties outside the country. Moreover, the two biggest lenders, Citicorp and Chemical Banking Corp., indicated they have already reserved against their loans, meaning the direct impact of Olympia on earnings may already have been absorbed.

Last week, attention shifted to New York, where Olympia controls about 23 million square feet of space - much of it in competition for tenants with bank-owned property.

In the downtown financial district alone, four Olympia properties - at 60 Broad Street, 125 Broadway, 2 Broadway, and 55 Water Street - account for 2.2 million square feet, or nearly 10% of the vacant space in the district.

An Interim Benefit

In the short term, Olympia's predicament could actually help other buildings. To the extent that uncertainty about Olympia's ability to manage and improve space takes its buildings out of the running for tenants, "it tightens the market," said Robert J. Alexander, managing director of Edward S. Gordon Co., a real estate broker.

"Every broker's got his hands on the tenant roster" of Olympia's buildings, said Marty B. Levine, senior vice president of Koeppel Tener Riquardi Inc., a leasing and appraisal firm.

But in the long run, Mr. Alexander said, "you'll see that product coming back on the market and keeping economic pressure on values."

Some argued that Olympia's fall from grace is not going to make the market any worse than it already was. Indeed, they say, the situation represents the bottoming of the market.

"It appears that the filing in Canada is not necessarily going to cause a domino effect of filings here," said James M. Peck, a bankruptcy specialist with Schulte Roth & Zabel.

"It seems to me that O&Y is in the too-big-to-fail category and that the same philosophy that kept Donald Trump out of bankruptcy should keep O&Y out of bankruptcy in the U.S.," said an attorney who declined to be identified.

Keeping the Trophies

Other experts, however, predicted Olympia would let some of its older properties fall into the hands of bondholders and insurance companies that hold the loans, while fighting to retain control of such well-leased trophy properties as the World Financial Center and 1 Liberty Plaza, on which Sanwa Bank holds a $300 million mortgage.

That scenario quickly began to play out at a meeting of bondholders who hold a nonrecourse mortgage on Olympia's 3.6-million-square-foot building at 55 Water Street.

That 1977 building is about 23% vacant today, but the vacancy rate could skyrocket to 40% in the next five years.

At least one bondholder, a unit of Capital Re Corp., set a reserve on its holding, resulting in a $1.5 million charge to the parent, after Olympia told the group of 50 or so investors that the building's income would be insufficient to meet expenses after 1993.

Mr. Peck said lenders and borrowers alike would try to negotiate settlements out of bankruptcy court, because of the costs and administrative delay of being in bankruptcy and the potential loss of tenants to properties perceived as more stable.

"There is nothing about bankruptcy per se that causes a deterioration in value," he said. "But the process is notorious. You operate in a fishbowl."

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