Amid art boom, dealers brace for a bust

"Hanging Heart" by Jeff Koons

Is the art boom over?

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(FORTUNE Small Business) -- If, like most entrepreneurs, you've been focused on the real estate recession and record-setting energy prices, you might not have noticed a big surprise in the art market: It's still partying like it's 1999.

At Sotheby's contemporary-art auction last fall, Jeff Koons's nine-foot-tall, 3,500-pound, vivid-pink stainless-steel sculpture "Hanging Heart" became the most expensive work by a living artist ever sold at auction, fetching $23.6 million. Two dozen artists saw their work achieve record-high prices that month as Sotheby's and Christie's booked sales of $1.7 billion, a 24% increase over the previous year's November sales. And in February a charity auction organized by rocker-activist Bono netted $42.6 million, comfortably ahead of Sotheby's $29 million estimate.

Every shattered record, though, recalls not only 1999 but the specter of 1989, when a cooling economy overwhelmed the hot contemporary-art market like a nuclear winter.

A-list artists such as Koons saw their prices plunge, but the hardest hit were small-business owners specializing in contemporary art. In New York City alone, more than 70 galleries folded.

Knowledgeable art dealers aren't waiting around to see if the crash will finally come in May, during the Sotheby's and Christie's International annual spring sales of postwar and contemporary art. Those entrepreneurs are turning to new markets and applying lessons learned in the last downturn to ensure that they're nimble enough to succeed in either a continued boom or a bust.

Seattle art dealer Greg Kucera, 51, recalls that after the 1989 crash he was stuck with a stack of recently coveted but suddenly unsellable prints by painter Donald Sultan. "The prices had gone up dramatically," Kucera says. "He published a lot in a short time - and then suddenly the market was not there to absorb it."

Burned by that experience, Kucera is now pickier about what he stocks, and won't deal in works by artists he thinks are overproducing. He specializes in lesser-known and regional artists, whose prices are more stable than those of top-tier names. Kucera also lists prices on his website, an almost sacrilegious move in the mystery-shrouded world of contemporary art. He's seen sales jump as a result.

New York City gallery Pace Wildenstein continues to represent elite names, but president Marc Glimcher, 44, manages volatility by boosting prices no more than 10% or so between shows - no matter how an artist fares at auction. It's a strategy that served him well in the last crash: When the market was rising, some collectors complained that Glimcher's prices were too cheap and devalued their investments. But when the cycle turned, Glimcher didn't have to mark down the work of a single artist, thus maintaining the prestige and perceived value of their work.

Glimcher is also broadening his customer base by focusing on the international market. In the late '80s high-end art buyers came from the U.S. and Japan; when those economies simultaneously tanked, the art market followed. Now China, the Middle East, and Russia also field wealthy collectors, all of whom are enjoying the effects of a weak U.S. dollar.

"Our growth in the art world is abroad," Glimcher says. "As the dollar slides, we are the exporters that benefit."

Art fairs are another new bright spot, because they bring in new clients and high-volume sales. New York City gallerist Josee Bienvenu, 36, shows at four fairs annually - London, Mexico City, Miami, and Basel, Switzerland - and sales have been so robust that she added more fairs to her 2008 calender. "Right now art fairs are Costco (COST, Fortune 500) for art," adds Chicago dealer Aldo Castillo, 51, who is also increasing his presence at the events.

Even as he expands overseas and at fairs, Glimcher is refocusing on his core business. In January he ended his relationship with the Bellagio Gallery of Fine Art in Las Vegas, a tiny exhibition space that Pace Wildenstein managed. Launched as an experiment, the venture became an unexpected money-spinner: Shows featuring works by Picasso and Monet drew 750,000 visitors a year at $12 a head, making the Bellagio Gallery the tenth-most-trafficked "museum" in the U.S. at its peak. But when Glimcher's five-year contract ended, he decided it was time to concentrate on his main stable of artists.

"Like everything in Las Vegas - and we knew this could be the case - it's got a very short life span," Glimcher says. "There's just a limit to how long people will pay attention. It was a very nice revenue stream while it lasted."

That's true of most revenue streams, of course. The trick is to know when to move on to the next one.