Spiraling costs plague Las Vegas developers

Wednesday, November 01, 2006
By Peter Sanders and Christina Binkley, The Wall Street Journal

Casino giant Harrah's Entertainment Inc. has spent nearly $1 billion over the past year buying up land on and around the Las Vegas Strip for an ambitious redevelopment of the gambling mecca's tourist corridor. But the company hasn't revealed exactly what it plans to do with the 350 acres it has amassed.

One reason for the silence: mounting concerns about rising construction costs and a shortage of steel, concrete, window glass and other materials. And now that Harrah's is the target of a $15.5 billion buyout offer from two private-equity firms, it's even less clear how much of the giant plan will get the go-ahead.

MGM Mirage, Wynn Resorts Ltd. and Boyd Gaming Corp. have their own massive redevelopment projects in the works, plans that, if completed, promise to remake other parts of the Vegas Strip over the next decade. The companies are vying to build self-contained empires with so many lodging, shopping and eating options that guests won't be tempted to venture outside. But rising materials and construction costs are in almost every case either driving up the price tag substantially or prompting the developers to hedge their bets and scale back.

Perhaps the biggest, MGM Mirage's Project CityCenter, is steaming ahead. It now has an approved budget of $7 billion, up from the roughly $5 billion the company mentioned when it announced the project two years ago. Company officials now say full costs hadn't been calculated back then, and there have been a multitude of design changes: Condos were added, and open-air spaces were enclosed to protect tourists from heat.

But other projects may be reined in. Even before the current buyout offer, Harrah's investors were spooked by the potential price tag, which helped drive the company's stock price down precipitously in recent months. Now, Harrah's potential new owners -- the private-equity firms Apollo Management LP and Texas Pacific Group -- may not be eager to execute all of Harrah's plans, according to people familiar with the situation. These people say potential owners are likely to take a hard look at any major development project in Las Vegas if their bid is accepted.

In an earnings conference call with analysts last week, Harrah's Chief Executive Gary Loveman declined to comment on the buyout offer but said the company was moving ahead with its plans and expected to announce details in two to three months. He also struck note of caution: "The spiraling cost of construction ... in Las Vegas and everywhere else (has) made the consideration of these kinds of large projects much more difficult than in the past," he said.

Harrah's planned development is a response to competition from not just from MGM Mirage, but also from Boyd Gaming's proposed $4 billion Echelon Place, located farther up the Strip. There also is an Epcot-like plan that the mogul Steve Wynn is hatching for his Wynn Las Vegas casino.

Recent glitches are fallout from a global construction boom. Huge developments under way in China, the Middle East, Europe and the U.S. have created shortages and led to skyrocketing prices for steel, concrete and -- the latest casualty -- glass for skyscraper windows. Few big construction firms are available for new jobs.

Some contractors working in Las Vegas have placed staff members in China, where they work directly with factories to lock up supplies. "China went out and bought 50 percent of the world's scrap steel and ore 18 months ago," says Tony Marnell, chief executive of Marnell Correo, which built many of the most famous Las Vegas casinos, including the Bellagio and the Wynn. "We've had a man in China for two years making contracts to buy things direct."

An unintended consequence could be a sharp slowdown in hotel-room growth in Las Vegas. For the past five years, supply growth, measured by rooms, has been about 4 percent a year, says Bill Lerner, casino analyst for Deutsche Bank. With potential construction delays over the next two years, that rate could drop to an average of 1.8 percent a year over the next five -- a reversal of the scenario Wall Street feared, as new projects crowded the market.

Indeed, Station Casinos Inc., a local casino operator, recently opened its $900 million-plus Red Rock Resort far from the Strip, and a planned condominium tower for the site has been scrapped. In September, the company said the budget for its next suburban Vegas resort had increased by $150 million to $600 million. Glenn Christenson, Station's chief financial officer, attributed $30 million of the increase to higher construction costs. A company spokeswoman said Mr. Christensen was unavailable to comment.

MGM Mirage officials say the worst is over, in terms of rising costs for their massive project, which is set to open in November 2009, next door to the company's Bellagio casino, featuring multiple hotels, condominiums and retail space. It features a large shopping mall, called "SoBella," situated just south of Bellagio; a condo-hotel next to Bellagio, called "Vdara"; and two stand-alone condo towers, dubbed "Veer Towers." Plans also call for a branded Mandarin Oriental luxury hotel and a separate boutique hotel, the "Harmon."

Because of the project's scale, MGM Mirage has built its own concrete plant at the site; at the height of construction in mid-2008, it expects to have 7,000 workers swarming the site. By early next year, 20 cranes will be in use there. The company says it has locked in prices for items like steel, elevator shafts and is shopping globally for items like copper piping.

MGM Mirage executives say the worst is over in terms of their cost increases. "Raw material costs are going down, not up, now," says Jim Murren, president and chief financial officer at MGM Mirage. "We saw a huge spike in 2004 and 2005 but it started slowing near the end of 2005 and costs have been flat, to down, all year."

Meanwhile, construction on Encore, Mr. Wynn's new hotel and casino tower, is under way, and a second resort on the site of Las Vegas Sands Corp.'s Venetian casino -- the 3,000-room Palazzo -- is scheduled to open next year. At the south end of the Strip, the 34-acre Tropicana Hotel & Casino site is set to undergo a change in coming months when closely held Columbia Sussex Corp. completes its acquisition of Tropicana parent Aztar Corp. Details of that project haven't emerged, but Columbia officials have said they hope to add a number of large name-brand hotels to the site while keeping parts of the old Tropicana resort intact.

Pre-Sale Reservations are Set to Begin at MGM Project CityCenter -- Registration Underway

MGM Mirage Reveals Four New High Rise Condo Venues that will raise the bar in the new Architectural Renaissance that is underway on Las Vegas Boulevard.

Las Vegas, NV (PRWeb) November 1, 2006 -- VIP Brokers will meet in mid November at the Bellagio to begin the launch process Las Vegas' most exciting preconstruction project on the Strip, MGM CityCenter. MGM has unveiled plans for residences at the $7 billion Project CityCenter, being built in the heart of the Las Vegas strip between the Bellagio and the Monte Carlo Hotel, that will take Las Vegas new a new level in architectural design. CityCenter is the nation's most expensive private construction project and its largest collaboration of name-brand architects The 66-acre site will include four condominium developments encompassing five high-rise towers. Units in the development have a price range from $500,000 to $8 million.

Construction on Project CityCenter is underway. The development's most prominent feature, a 60-story, 4,000-room hotel-casino designed by Pelli Clarke Pelli, is beginning to take shape. The main casino-hotel will sit behind the Veer leaning condo towers without the typical Strip front location or dramatic entry facades that are the norm for Vegas hotels. And the CityCenter hotel tower will be shaped as an elongated S, not the usual Y shape, for a very dramatic architectural effect.

CityCenter will also include retail, entertainment, restaurants and other amenities in an urban village setting. An elliptical people mover has been designed to help visitors navigate between the four corners of Harmon Avenue and Las Vegas Boulevard which is destined to be one of the busiest intersections in the world.

The residential choices will include Veer, a condominium-only project, two condominium developments that will be built on top of boutique hotels, and VDara, a free-standing condo-hotel. The Veer leaning towers will house 810 loft-style condominiums, soaring 36 stories above Las Vegas Boulevard and prominently serving as the gateway to MGM CityCenter. The towers are the creation of German-born architect Helmut Jahn, known for sleek, ultramodern exteriors and unusual shapes.

Las Vegas architect Joel Bergman, who helped design the Mirage, Treasure Island and Paris Las Vegas, among other local resorts, said the towers will make other cutting-edge designs "look tame." The cutting edge leaning design will challenge engineers but benefit residents because their views will be less obstructed than would be in a conventional high rise. While appearing to be smooth glass from a distance, the building's skin will feature horizontal metal blades that will shade floor-to-ceiling windows from Las Vegas' summer heat. The illuminated blades will slowly change colors. Construction on Veer is set to begin in November and expected to be complete by 2010.

VDara, is a 1,543-unit condominium-hotel with units ranging from 500 square feet to 1,850 square feet. VDara will be built between Bellagio and the CityCenter hotel-casino. Fifty stories of elegant design, will offer fully furnished and fully appointed condo-hotel suites.

The Mandarin Oriental Hotel will have approximately 227 condominium units above the 400-room hotel tower, with the 4,100-square-foot penthouses coming with the highest price tag in Project CityCenter at $8 million. The Mandarin Oriental Hotel at CityCenter will include 400 hotel suites as well as more than 200 condominium ultra-luxurious residence units designed to appeal to an international jet set buyer profile. These units atop the Mandarin promise to be some of Las Vegas' most prime "trophy properties".

A second boutique hotel, The Harmon, will be operated by MGM Mirage. It will have 228 condominiums above its 400 hotel rooms. Developed by the Light Group, known for Panorama Towers and Spa Lofts, these units will appeal to the young, hip, and trendy buyers.

As the leading high rise condo sales team in Las Vegas, June & Lauren Stark of Ezra International Realty, have been chosen VIP real estate brokers to be part of the mid-November reservation pre-sale of MGM City Center. The Stark Team was instrumental in the very successful sell-out of TRUMP Towers Las Vegas, with June being featured on the TRUMP Towers promotional DVD and Lauren on HGTV giving a Trump Condo-Hotel Model Tour . As the #1 sales team in the Cosmopolitan Resort, being built across Harmon Avenue from Project City Center, the team has a solid track record of representing buyers in the first phases of preconstruction sales. Sky Las Vegas luxury condominiums on the strip, just honored the Stark Team as the # 1 sales agents by giving the team a new Saab convertible.