Vegas Condos Go Cold

Developers are suddenly scaling back their bets on the town's once sizzling luxury real estate market
By SONJA STEPTOE/LOS ANGELES

Posted Wednesday, Jan. 25, 2006
Now that several high rollers in the Las Vegas condo-hotel game, with properties linked to the likes of Michael Jordan and Ivana Trump, are either folding or selling their holdings, a growing number of players are losing their taste for big bets on high-rise residential real estate development.

Over the past two years, as high-rise fever spread across town, prices for the luxury apartments ballooned, fetching as much as $500 to $1,000 a square foot—or up to $1.5 million for a one-bedroom— at the peak. Buyers, mostly interested in flipping them for quick profits, eagerly anted up five-figure down payments, while developers planned more than 70 luxury towers holding a total of about 43,000 units on or near the Strip and downtown. But the intense competition for the city's limited supply of contractors sent construction costs skyrocketing 30% last year, just as lending policies tightened, interest rates climbed and sales started to slow.

Currently, just 18 projects are under way, and nervous developers have called off three high-profile projects over the past seven months. A number of others, including one backed by a group including George Clooney, are being either revised or postponed. Experts now forecast that only a quarter to half of the six dozen originally proposed projects will ever be built. Brian Gordon, a principal at Applied Analysis, a real estate research firm, says the developers with experience building luxury high-rises, whose properties are located on or near the Strip and carry a strong and recognizable brand name— such as Donald Trump, Hard Rock and MGM Grand— are the ones playing winning hands in Vegas now.

Back east, the luxury condo markets that have had similarly explosive growth in Miami and New York, where high-end apartments can command from $2,000 to $4,000 a square foot, haven’t slumped yet. Still, experts say the abrupt reversal of fortune in the desert, where the mainstream residential real estate and hotel markets are still quite healthy, shows just how quickly the odds can change in even the most affluent markets if runaway speculation and overzealous development take hold. “It’s another case of irrational exuberance,” says John Restrepo, head of a Las Vegas real estate and economic consulting firm. “There is a market for high-rise condo hotels here; but it’s not as deep as people thought it was. The days of the two guys from the East Coast or Canada coming into town and promoting a condo development with a website and a dream are over.”

Home market expected to suffer as investors pull out

By Steve Brown

THE DALLAS MORNING NEWS
ORLANDO, Fla. — An investor pullout from the housing sector this year could spell trouble for many U.S. markets.
High-priced-home markets and condominiums will be the hardest hit by an anticipated slowdown in investment activity, the country's top housing analysts said Wednesday.
"We expect housing activity to drop about 8 percent this year — it's primarily because of the investors' slowing purchases," said David Berson, chief economist with the Fannie Mae mortgage company.
Berson and other housing economists were in Orlando this week for the National Association of Home Builders' annual conference and exposition.
All the economists are predicting a dip in home sales in 2006, caused mostly by a decline in investment activity.
"We can't find a period when the investor share of home sales has been higher than in the last year," Berson said. "In the fourth quarter, it looked like investors were starting to step back."
That's bad news for such cities as Las Vegas, Phoenix, Orlando, Miami and San Diego, where investors account for more than 25 percent of the home purchases. Nationwide, investor and second-home purchases total at least 20 percent of the market.
In the Tucson area, experts such as University of Arizona economist Marshall Vest say many investors already have pulled out, but demand for housing remains strong due to population growth.
Investors also account for a big chunk of condominium sales in cities nationwide.
"I've been suggesting that we be careful not to oversupply the condominium market," said Dave Seiders, chief economist for the National Association of Home Builders.
"Once the investor activity declines, we may be looking at some pretty soft conditions there."
In both the condo and single-family-home sectors, the fear is that investors will choose to sell properties or decide not to go through with purchases they've signed up for, the analysts say. That could lead to oversupply and dropping prices.
"That's the big downside risk to the housing market this year," Seiders said.
The National Association of Home Builders is betting that home starts will drop by about 6 percent this year. Home mortgage rates also are expected to increase, to an average of 6.6 percent.