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Las Vegas: The house always wins

<span style="font-style: italic;">City sees prices sag and suffers sharpest drop in building permits among U.S. metropolitan areas</span>

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Condo developers have been betting big on Las Vegas lately. And many have gambled and lost. Two years ago J. Terrence Lanni, CEO of MGM Mirage, raised eyebrows when he predicted that 80 percent of the condo projects then planned in Las Vegas would never be finished. At the time, 100 high-rise condo projects were announced or in development. A gold rush mentality swept the Strip as rookie developers vied for customers by throwing lavish parties.

Today, Lanni’s predictions have been nearly borne out. According to numbers issued by Applied Analysis, a local real estate research firm, the vast majority of the Las Vegas Valley’s “potential inventory” of 97,776 condo units exists only on paper.

Only 27 percent of the condo units planned since 2004 for Las Vegas are already built, under construction or pre-sold. That is, only about 4,200 were built. Today, 13,400 are under construction. About 9,500 more have been pre-sold. Strikingly, 14,000 have been outright canceled or suspended.

“I don’t know anyone who is sober who believed all those condos would come online,” said Applied Analysis principal Jeremy Aguero.

That some condos didn’t get built should come as no surprise. Yet so many development proposals failing to get off the ground is a red flag, all the more so because the near-total bust in high-rise condo building happened in one of the nation’s 10 fastest-growing cities. Market-watchers attribute Las Vegas’ ongoing condo-construction flop not to outside forces like a regional recession or subprime woes. Instead, the market has dwindled because of high construction and land costs and low-income residents with a love of sun-kissed single-family-home living.

Looking back, it’s tempting to say a kind of irrational exuberance overtook the market. Many projects won building permits from city hall with little more than an architectural rendering. And rather than build condos, some owners who had successfully petitioned city hall to rezone their properties for high-rises chose instead to flip their assets.

The case of the unbuilt Liberty Towers is part of this fad. After his property was rezoned 18 months ago, Victor Altomare didn’t build the condos in his rendering. Instead, he immediately resold his property at a 600 percent markup.

Some of Las Vegas’ woes can also be traced to the high cost threshold for developers. Land on Las Vegas Boulevard has gone from an average of $4 million an acre in 2004 to $34 million.

Building materials are also expensive. Demand in China has lead to scarcities in the U.S., and construction costs that have mushroomed by an average of 60 to 70 percent since 2002.

“If a builder did not plan very far ahead, they’re fully exposed,” said Bruce Hiatt, owner of the Las Vegas-based Luxury Realty Group.

These factors translate into steep break-even costs. Hiatt estimates developers would have to unload units for $1,800 to $2,500 a square foot — if not higher — for a Strip condo project to reach profitability. Few projects are selling at those prices. Among the elite group that is reportedly fetching those prices on the Strip are Las Vegas Sands’ Palazzo and Elad’s planned Plaza. Off the Strip, the only project that may be reaching that level is the Palms Place, brokers say.

The large supply of condos is leading developers to offer bargain prices. Applied Analysis’ survey of condos listed for resale at prime addresses like Turnberry or the Residences at MGM Grand found secondhand condos closing for as little as $537 per square foot. Brand-new condos may go for as much as five times that.

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Unlike in markets such as New York, investors make up a high percentage of Las Vegas condo buyers, which increases the market’s volatility. Las Vegas, with a median income of about $53,000, can’t rely on locals to buy many high-end condos.

Foreign buyers, however, are bolstering the market. Buyers from China, Taiwan and Russia have become more common.

Yet despite the knocks the city’s high-rise condo market has taken, pockets of profitability exist. Time-shares and luxury apartments in condos associated with mega-resorts are two products that are selling.

In a city that has grown up around gambling and casino-hotels, condo ventures have a built-in edge because they offer many of the flashy amenities that draw residents and visitors to the city. And while developers may miss not renting all those condo units during peak moments and weekends, condo sales are also a way for builders to help finance construction.

Hotel and casino companies have in some cases also successfully expanded into the condo time-share market. The Hilton Grand Vacation and the Marriott Grand Chateau both have sold units as time-share packages.

Need a room? 40,000 more to come

In Las Vegas, where the weather changes so little that a lot of folks have given up talking about it, a favorite alternate topic of conversation concerns the number of hotel rooms in the city. As each new mega-project is announced, locals wonder aloud whether or not the city is finally overbuilding this time. It’s a question that residents have chewed over since the 1940s, when mobsters from New York City dismissed local skeptics and opened the city’s first modern casino-resort.

So far, the answer to the question of overbuilding remains “No.” But with 151,000 hotel rooms already in the city and more on the way, sentiment on the question might begin to shift.

Over the next five years, 35,000 to 40,000 rooms will be added to the city’s stock, according to the Las Vegas Convention and Visitors Authority. Echelon Place, a new project that is going up on the site of the old Stardust, will have 5,000 rooms, making it the world’s largest hotel.

The hotel building boom in Vegas is driven by occupancy rates that have been hovering around 93 percent, according to the convention bureau, about 7 percent higher than in New York City, which has the second-highest occupancy rate in the country. The record year for hotel occupancy in Las Vegas was 1996, when the rate was 93.4 percent; the recent low occurred in 2002, when the rate was 88.6 percent. That decline, said Jeremy Aguero, principal of Applied Analysis, a Las Vegas real estate research firm, came on the heels of the Sept. 11 attacks and their aftermath.

Accompanying the high occupancy rates in Las Vegas is a rising take on the rooms themselves. For the first six months of 2007, the average cost per room is $139, up from an average of $120 in 2006.

Two developments are influencing the high room-occupancy rates. First, more and more large conventions are coming to Las Vegas, bringing more and more guests. In 2006 some 6.3 million conventioneers traveled to Las Vegas. In addition, aging baby boomers, as well as growing numbers of foreigners — particularly Chinese, Koreans and wealthy Russians — are also being enticed to the city. Altogether, 38.9 million tourists visited Las Vegas last year.

Thanks to the opening of the international market, said Aguero, “the well of demand has been much deeper than folks anticipated it would be.” Las Vegas, he said, is “no longer solely a gaming destination.” That means you might have better odds winning at blackjack than you will at finding a room there.

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