And It starts in the Vegas Market....
Some Developers Scrap
Luxury Condos in Las Vegas
By Michael Corkery and Alex Frangos
-- Christine Haughney contributed to this article.
From The Wall Street Journal Online
The Icon Las Vegas was supposed to be a classic luxury condominium building, featuring valet parking, a pool with cabanas and views of the Vegas Strip. Reggie Jackson, the Hall of Fame slugger, bought a three-bedroom unit listed for $800,000.
But last week the project, which would have included two towers with 48 stories each, was scrapped before construction could begin. The developers, a joint venture of East Coast real-estate tycoons Stephen M. Ross and Jorge Perez, are returning deposits to about 350 buyers.
The Icon isn't the only Las Vegas luxury high-rise encountering trouble. The fates of five condo projects are uncertain and three have been canceled in the past year, according to Applied Analysis, a Las Vegas real-estate research firm.
Meanwhile, some of the splashiest projects with celebrity status, like a condo tower named after Ivana Trump and a development backed by actor George Clooney, are being sold and revamped, respectively.
After two years of glitzy marketing, developers and real-estate brokers are discovering that Sin City's luxury condo market isn't as easy to navigate as they expected. Demand isn't as strong as some developers thought and construction costs have quickly outpaced their plans.
"Developers came in and completely overestimated the demand," says Irwin Molasky, whose Molasky Group of Cos. built one of the first high-rise luxury condo developments in Las Vegas, called Park Towers, which opened about four years ago. For now, he has no plans to build more luxury condos because he says there's too little demand and too much proposed supply.
"This is not New York. This is not Miami. We are still in the desert," Mr. Molasky says. "There isn't enough wealth [in Las Vegas] for these prices. To pay $1 million for a place in New York is not a big deal. Here it is a big deal."
The broader Las Vegas housing market remains strong, however. The area is growing rapidly, as more than 5,000 to 6,000 people per month relocate to the city in search of jobs in the region's booming economy. But many new residents are buying modest single-family homes and condos, many of which have been converted from apartments -- at median sales prices of about $175,000, according to Hanley Wood Market Intelligence, a real-estate research firm in Costa Mesa, Calif.
Yet prices for luxury condos could drop in the Las Vegas market by as much as 15% in the next 12 to 18 months, predicts Hessam Nadji, a managing director at Marcus & Millichap, a real-estate research firm based in Encino, Calif. "You are going to see a short-term correction and some softening," Mr. Nadji says. "I don't think the wheels are going to come off and there's going to be a crash."
Real-estate developers blame increased construction and labor costs and a more difficult lending environment for sinking their luxury condo projects. Condo developers say construction costs are higher in Las Vegas than in other U.S. cities because they are competing with casino developers with lots of cash who are willing to pay higher prices to get their developments done quickly.
There are more than 17 condo projects under construction and about 76 on the drawing board in Las Vegas, according to Applied Analysis. If all were completed, they would add 51,000 luxury condo units to this city of about 780,400 households. Developers and researchers say many units that haven't been started will never actually be built. A portion of those proposed units are condo-hotels, which are rented out as hotel rooms but owned by individuals.
Icon Las Vegas ran into problems when the builder of a neighboring condo project filed a lawsuit last year, complaining about Icon's height and location. Construction was delayed by six months. A judge dismissed the suit, but during that time, building prices went up so much that cash from presales wouldn't cover the cost to erect the first tower.
Related Las Vegas, Icon's developer, will return the 10% deposits to about 350 buyers. The first tower was mostly sold and the second one had contracts for about half of the units, according to a person familiar with the project. Mr. Jackson couldn't be reached to comment. Related Las Vegas is a joint venture of Related Cos., New York, owned by Mr. Ross, and Related Group of Florida, Miami, owned by Mr. Perez. The two companies are separately owned and operated, but maintain minority interests in each other. Both have decades of experience in high-rise developments but are new to Las Vegas.
The slacking demand for luxury condos is affecting Related's other major Vegas project, Las Ramblas, which boasts Mr. Clooney as a co-developer. The project was conceived as 11 skyscrapers filled mostly with condos and a small amount of hotel and casino space. Martin S. Burger, president of Related Las Vegas, says Related hopes to announce a deal with a hotel operator that would expand the hotel and casino and trim the number of condos. Mr. Clooney said through a spokesman that he remains "100% behind the project."
The problems in the luxury condo market, priced at $500,000 and up, may also reflect the whipsaw affect of speculators who put down payments for condos before they're built and hope to flip them at a profit later. These speculators artificially inflated demand and now are fleeing. Researchers at Marcus & Millichap estimate that as many as 70% of the buyers of condos in Las Vegas have been speculators or people seeking second homes.
Developers of high-end condos often sell units before construction begins, in part because banks won't provide financing until a large percentage of the units are reserved. In many cases, buyers can obtain a nonbinding purchase contract by putting down just 10% of the sale price. But as home-price appreciation has started to slow, some speculators are canceling their purchases, upending the market.
Last year, about 4,500 condos and townhouses, priced at $500,000 and above, were sold in the preconstruction and construction markets -- a fourfold increase over 2004, according to Hanley Wood. It's unclear how many will make it to final sales. "It's tough to gauge demand for the condo product when you have people committing in a nonbinding way to multiple projects," says Brian Gordon, a principal of Applied Analysis.
Luxury condo builders who broke ground early enough have been lucky. Bruce Weiner, president of Florida-based Turnberry Associates, built one of the developments where sales have actually closed. In 2005, the company sold 85 units in Turnberry Place for an average price of $1.6 million, according to Applied Analysis. In 2004, 218 units were sold for an average price of $928,581. In all, Turnberry has sold about 546 of the 777 units.
"I think the luxury market is there. I just don't think there is enough there to do it all in a year or two. There is enough demand for 2,500 units every year," Mr. Weiner says.
Luxury condos also face competition from condo-hotels. John Restrepo of Las Vegas-based Restrepo Consulting Group LLC, says there are 25 planned condo-hotel projects, which include 19,000 units. Of those, three projects are under construction, with 1,400 units. Researchers say the condo-hotels have the advantage of being developed and operated by major, brand-name companies.
Some developers tried to use celebrities to give their condos an edge. That strategy has had mixed results. Ivana Las Vegas -- a proposed condo tower named after Ms. Trump, an ex-wife of real-estate mogul Donald Trump -- is up for sale. The developer, Victor Altomare, says he could possibly make more money selling the project than by building the condos himself. Mr. Altomare says regardless of the new owner, the project will continue in its current design and that Ms. Trump still will get a condo of her own, with a view. Ms. Trump couldn't be reached to comment.
The market was rattled last spring when a Florida developer, Del American, went back to people who had reserved condos in its high-rise development and told them it was raising the price of the units to pay for increased construction costs. One buyer reserved a condo for $585,000 -- and the developer raised the price to about $1 million but offered the buyer a discount, according to the lawyer for some of the buyers, Richard Donahoo. Some of the buyers are suing the developer. Del American says prices increased on average by 35%. Mr. Donahoo says the price increases were higher.
Del American Chairman and CEO, Christopher DelGuidice, says his agreements with buyers were nonbinding and he had the right to cancel at any point. He says the company is offering to return the deposits to buyers, with interest, or a discount on the newly priced units.
Mr. DelGuidice says his construction costs nearly doubled from the time he marketed the units in the fall of 2003 to when he got the final construction bid last spring. Still, that project is under way and he plans a second project in the city, called Vegas 888, with perks like a members-only nightclub. Prices range from $750,000 to $10 million.
"As the dust settles over the next six months, we feel the projects left standing will be very successful," he says. "Based on marketing and the location we have, we will be one of the ones standing."
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And It starts in the Vegas Market....
Somethings ya just can't change.
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