Back in the heady days of the real estate boom, property prices in New York City soared along with those in the rest of the U.S. When the subprime mortgage crisis hit and prices collapsed, the city’s market held out longer than others — for two reasons. First, it is a major financial center with strong demand; and second, the weak dollar made it possible for international buyers and investors to find deals at discounts as high as 40%. Where will the New York market be in 2009? Where are the most attractive deals to be found in emerging markets? In a podcast recorded at the Knowledge at Wharton Real Estate Forum on Emerging Markets on December 2, Donald Trump, Jr., executive vice president of development and acquisitions at the Trump Organization, speaks about those questions and more. He also discusses how he views his unique contribution to expanding the Trump brand overseas, building on the foundation laid by his famous father. 

An edited transcript of the conversation follows.

Knowledge @Wharton:  Our guest is Donald Trump Jr., executive vice president of development and acquisitions for The Trump Organization. Donald, thank you so much for joining us today.

Trump:  A pleasure to be here.

Knowledge at Wharton:  The question on everyone’s mind these days is the world financial crisis and the impact on the real estate market. How is real estate doing in New York and some of the other markets where you are active?

Trump: Real estate in New York is an interesting thing because New York is always known as perhaps the place for real estate. It’s really synonymous with New York. But what we’ve seen over the last few months is that the real estate market in New York has really taken a turn with the rest of the world, meaning real estate prices in the U.S., Europe, emerging markets, everywhere, have really gone up without any rationale for the past few years. New York didn’t actually experience the first part of the down slope when everything turned around, when people realized that they didn’t know what they were buying. It all of a sudden didn’t make sense to buy it at two cap, etc. etc. New York was held up for a couple reasons, first, as still a financial epicenter of the world … There was all this talk of decoupling. And now we realize that when the U.S. goes down, we’re still taking the rest of the world with us. So maybe that’s good, bad, indifferent, whatever. But New York was held up for that.

And [second], it was also held up primarily because the dollar had just been underperforming incredibly. You had such a low dollar relative to the pound, relative to the euro, relative to so many other currencies, that there was this huge influx of emerging market buyers, of European buyers, that were basically buying at a 40% discount. So when you saw prices in New York start to drop was when that changed. And all of a sudden, the euro’s not so strong, and the pound wasn’t so strong because everyone said, “Well, you know what? Maybe New York’s at an all time peak.” But peak is relative. If you’re buying at a 40% discount off of peak, you say, “Okay, I can do that.” For a lot of people, it was the emerging market, the association of just owning a place in New York. “I’ve made money owning a company, I’ve done very well for myself over the past two years, I really want something in New York.”

That was working until just recently, when we’ve seen the slide. And again, prices have held fairly stable. But what we’ve seen is a downturn in velocity. So we know what’s coming next.

Knowledge at Wharton:  What are some of the other markets where you’re active, what’s the situation there?

Trump: Well, I think very much the same, other than those markets that really started going much earlier. In the U.S., we’re in Chicago. Chicago hit a wall two years ago. Chicago should have been the talisman for what’s to come across the market in the U.S. Obviously Las Vegas, South Florida, Southern California — there are other markets that are troubled. There are other places that were actually continuing to do well — amazingly enough, in Toronto and Canada. And again, a lot of these projects, we really haven’t been very long in terms of our own equity in many of these projects for the past few years. So most of the things that we have were actually jobs that started  [in] 2003, 2004, started delivering and are substantially complete.

So we don’t have a lot of the issues that a lot of other development companies have, where, all of a sudden, your financing is based on X valuation, your real valuation is 50% of X, so you have problems. Across the world … you have seen major slowdowns in the Middle East, whether because the pricing of the dollar has gone done, or because some of the investments they made just didn’t turn out to be so good. Things are becoming a lot tighter over there. But things are becoming tighter everywhere. It’s really been a global downturn.

Knowledge at Wharton:  Are you finding any good opportunities in emerging markets?

Trump:  Not yet. We’ve been looking at the emerging markets heavily for the past few years. I think with a father such as my own, probably the best place that I could have ever made any kind of [impact] is by getting outside of New York. New York’s his market, and he hates to travel, therefore and ergo, if I want to do stuff, it’s going to be outside. So I really do probably spend 70% of my time on the road traveling. My passport reads like a phone book. Since May, I have probably hit 17 or 18 countries outside the U.S.

In [looking at] those markets, I think there are many opportunities. There are a lot of things that are being underserved. For us, we’re primarily a high end company. We deal only in the five star type product, whether that’s resorts, hotels, condominium residences. So that’s going to change, perhaps, our timeframe a little bit. But certainly the emerging world continues to be incredibly underserved in the high end. I will use Dubai as an example, because I said, “This is how we’re going to do well when we eventually get to build over there.” You go there, you see the highest end of the product, you say, “This is class C New York rental, if that.” And it’s the best of the best in that given market. So as people’s tastes start to mature, as that wealth starts coming back into those markets, those people truly appreciate the difference between sub-par real estate and prime real estate. They are starting to recognize those things.

Part of that’s an education process. They just don’t know. Part of that’s also really working with local labor to train them to be able to build to an aesthetic finish that’s acceptable, say, in the U.S., for five star finishes. That just is unheard of there. I mean a floor could be humped, it could be sloped, it could be level. But because you call it five star, it all of a sudden is. Great marketing, lack of product to follow it.

So there are many opportunities in those markets, certainly as [prices] come back down to rational levels. When I was looking at performance, I say, “Okay, well if I could sell to high end here and I’m buying my land at here … If I have to build a building, what’s left?” There’s nothing there. So I think as we’ve seen kind of a re-centering on a price per square foot basis of land, as we’ve seen commodities prices come back into check and to normal levels, certainly as we’ve seen oil and gas come back in as a driver of all of those commodities, I see those opportunities and those margins starting to create themselves again. It’s going to be a matter of time. I think someone asked me just now at the conference, “What’s the next big bubble?” And I said, “It’s probably the distressed markets.” Getting in on distressed real estate, too early — that’s going to be the next problem.

Part of that is it’s a bubble by default, in that there’s nothing else — no one else is going long anything, so there’s nothing else to actually have to be a bubble. But that’s probably it. It’s really going to be a factor of timing it, getting in on or near the bottom. But frankly, I’d rather miss the bottom and get it on the upslope than to say, “Okay well, we’re probably near bottom. It’ll probably drop a little bit in the next couple months,” and all of a sudden, two years later, you’re saying, “Well, we never really dropped much lower, but we’ve maintained a kind of low plateau for two years.” That’s a situation I want to avoid. So I’d rather take my time and be very selective about how we enter these markets.

Knowledge @Wharton:  Help me understand how you evaluate market opportunities. So you go into these 18 markets. How do you go about deciding which opportunities are worthwhile and which ones are not?

Trump: What we do perhaps differently, and certainly what I do and have learned from my father that’s different than most of the real estate companies, is I’m actually looking at the real estate and what I can envision there to be the real estate. I think one of the big problems that we’ve seen in the real estate bubble over the past few years is that people have purely been looking at a matrix on a spreadsheet and saying, “Okay, well, this looks great,” without taking into account the demographics, which side of the street you’re on, which zip code you’re in. And people say, “Well, what do you think of the New York market?” And I say, “New York? What do you mean New York market?” I break it down by zip code, and then in that zip code, I’ll break it down into cross streets.

If you go down Fifth Avenue, if you look on the east side of the street versus the west side of the street, there’s a substantial difference in retail rent. Is that because of the sun lines? Is that because the retail things are broken up because there’s more commercial spaces that don’t have retail? For whatever reasons, you can’t just say, “Fifth Avenue.” I mean east or west? A 75% difference in rent can mean a lot to a tenant, but it could also mean a lot to the traffic flowing. So you have to look into the variables in much more detail. I don’t know that I have a fixed formula when I go into these markets to look at a piece of real estate. I go in, I look at the real estate. Sometimes it screams out, “This is so obvious, it’s so underserved, it’s such a great location.” And sometimes it takes an outsider’s perspective to realize that.

Because if you live in a market, you pass it 30 times, you say, “Oh, it’s always been bad.” Well, because it’s always been bad doesn’t mean it can’t be the next great.

Knowledge at Wharton:  What keeps you up at night?

Trump:  My job.  I think just trying to figure out where those next deals are going to be … trying to continually figure out a way to properly manage the growth of our company. Because I think there are going to be incredible opportunities. Beyond just those opportunities, though, there’s an opportunity cost associated with every one of those opportunities. And so perhaps what drives me crazy at night is I don’t necessarily think we’re at the bottom yet, although I do think there are probably good deals to be made today. I don’t want to just say, “Well, I don’t think generally we’re not at the bottom yet.” You can always find that one-off deal that’s incredible, just like you can often find a one-off deal that’s an amazing steal in a high market because the stars just aligned right that day. So I think a lot of what keeps me up is really trying to figure out a way to value one deal relative to another, or relative to a deal I haven’t yet seen but I probably have a feeling there’s going to be a lot of in time. And with unlimited capital, it’s great. While we have quite a bit, you’re never unlimited in this world, relative to where valuations have gone these days. So it’s really that — playing those opportunity costs and trying to figure out which is going to be the right deal to have chosen in time.

Knowledge at Wharton:  One last question. Your dad has, of course, built a very successful reputation and a tremendous brand for The Trump Organization. What would you like your unique contribution to the brand to be over time?

Trump: It’s an interesting question, because it is very difficult to get out from under the umbrella that he’s created. And over 30 years he has really created an incredible foundation to allow me to grow into different things. But I think, again, as I started off the conversation, he’s a New York guy. He doesn’t like to travel.

And so I think a lot of what I’ve been able to do has been expand that brand, take that foundation that he’s created and be able to really turn it into a brand that’s not only recognized globally, but a brand that actually has a global presence and is everywhere — whether that’s condominium developments, expanding … our hotel management side, and a lot of the things that we’ve been doing over the last few years. I don’t really look at it as, “Oh, I have to figure out a way.” It’s just a natural expansion. And whether he takes credit for it, or I get credit for it, it makes no difference to me, so long as the bottom line is good.

Knowledge at Wharton: Donald, thank you so much for joining us today.

Trump: Thank you very much. It’s great to be here.