all in' in las vegas: maybe the house doesn't always win

8/14/2019 'All In' in Las Vegas: Maybe the House Doesn't Always Win

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36 MADISON MARQUETTE

MARKET WATCH

Las Vegas is battling the economic recession on twofronts a local housing market in disarray and thefirst-ever yearly decline in tourism. Both call into questionwhether widespread speculative development in Las Vegaswill ever be the jackpot it had been.

Steve Wynn, the legendary casino magnate, recentlyadmitted in a 60 Minutes interview that if he had knownthat the economy would have turned down so signifi-cantly, he would not have started his latest casino resort,Encore. Of course, he added that developments likeEncore take many years to come to fruition and the signsof economic distress were not evident when the projectwas being planned four years ago.

Not surprisingly, the hubris that characterized the overalleconomy in recent years was especially evident in Las

Vegas.

No single project embodies this mix of optimism andgambling spirit like MGM Mirages ambitious CityCen-ter. Conceived as the U.S. economy hit its peak, the 16million square foot development in the heart of Te

Strip, includes 5,000 rooms spanning three hotels, a casi-no, shopping mall, and 2,700 condominium units in twotowers. Development costs were a staggering $7.5 billion.Overruns and construction problems have pushed thatnumber to $8.6 billion. oday, disagreements between its

investors and financing challenges have stalled progress.Even though MGM recently paid contractors $70 millionto keep them on the job, the real possibility of an MGMMirage bankruptcy due to the $13 billion in debt it hasamassed puts completion in jeopardy.

Even considered large by Las Vegas standards, CityCenteris simply the latest in a long line of all in bets by de-velopers, who for more than three decades have gambledsuccessfully on the towns unprecedented and consistentgrowth. Based on that track record, it is easy to see whyrampant speculation enjoyed so little scrutiny by bankers,

developers, investors, and retailers.

Te accompanying map of the strip lays out some of therecent projects that have fueled the large-scale condomini-um development boom over the last few years.

By Walter Bialas

Maybe the

House Doesnt

Always Win

All In in

Las Vegas

CityCenterLas Vegas, Nevada

Continues on page 38 >


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37PLACES MAGAZINE

MARKET WATCH

THE RECENT LAS VEGAS STRIP CONDO BOOM

Sources: LasVegasCondoScene.com, Madison Marquette Market Research

LAS VEGAS

CONVENTION

CENTER

MCCARRAN

INTERNATIONAL

AIRPORT

RIVIERA

CIRCUS

CIRCUS

WYNN

THE VENETIAN

MGM GRAND

TROPICANA

LUXOR

PALMS

EXCALIBUR

NEW YORK

NEW YORK

MONTE CARLO

BELLAGIO

CITYCENTER

COSMOPOLITAN

TRUMP TOWERS

ST. REGIS RESIDENCES

ALLURE

TURNBERRY

TOWERS

TURNBERRY

PLACE

FOUNTAINEBLEAU

HARRAHS

FLAMINGO

HILTON

CAESARS

PALACE

PANORAMA

TOWERS

PALMS

PLACE

THE

MIRAGE

FASHION

SHOW MALL

PLANET

HOLLYWOOD

BALLYS

PARIS

LAS

VEGAS

BLVD

LAS

VEGAS

BLVD

TROPICANA AVE

FLAMINGO AVE

15

15

Because this period is a significant

barometer for Las Vegas future, these

projects may be key to the citys fate:

Allure Las VegasDeveloper: Fifield

Residential Units: 430

Completion Date: 2008

Trouble closing units has forced unusual

marketing strategies. Ran its first auction to

move units in mid-April.

Turnberry TowersDeveloper: Turnberry

Residential Units: 1,340

Completion Date: Tower 1 2007

Tower 2 2008

With the 2nd tower being delivered, resales in

Tower 1 are selling for $100,000 less than pre-

construction prices.

Turnberry PlaceDeveloper: Turnberry



Some owners walking away since views are

blocked by Fontainebleau.

Fontainebleau

Developer: TurnberryResidential Units: 1,000

Completion Date: Fall 2009

Rumored that developer may not be able to

make payments given current condo pricing.

Trump International TowerDeveloper: Trump



Sold out but has only closed on 23% of the

units. Second tower postponed.

St. Regis ResidencesDeveloper: Las Vegas SandsResidential Units: 400


Construction halted in November.

Palms PlaceDeveloper: Maloof



Only 60% of units sold through March. Units

resold a year after purchase at a 1012% loss.

CosmopolitanDeveloper: 3700 AssociatesResidential Units: 2,000

Completion Date: Late 2009

Project may become part of CityCenter.

CityCenterDeveloper: MGM Mirage

Residential Units: 2,800


Key investor dropped out. Potential bankruptcy

by developer.

Panorama TowersDeveloper: Hallier PropertiesResidential Units: 1,030

Completion Date: Tower 3 2009

Sales well below expectations.

15

51595

115

GREATER LAS VEGAS

AREAOF

DETAIL


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38 MADISON MARQUETTE

MARKET WATCH

Tourism A Steady Driver

Anecdotal stories abound that no one is gambling,tourism has tanked, and that hotels are giving awayrooms.

While grounded in some fact, these observations donot paint the complete picture. At least through theend of 2008, Las Vegas tourism remained strong. oput the situation into clearer perspective, 37.5 mil-

lion visitors came to Las Vegas in 2008. Although offits 2007 peak, Las Vegas remained one of the mostpopular tourist destinations in the world. Tese visi-tors were also still spending in the casinos as evidenced

by 2008 gross gaming revenues of $9.8 billion just$1.1 billion shy of the 2007 peak. For the majorityof 2008, hotel occupancy remained strong, under-scoring a market whose economic engine remainedwell-primed when many other parts of the countrywitnessed unprecedented decline. Te accompanyingcharts highlight these long term growth trends in tour-ism and gaming revenues.

Te first part of 2009 shows that there has beensome recent slippage in these year-end numbers. Asof February, total visitors are down 10% and gamingrevenues have declined 17%. Hotel occupancy alsodeclined to 81.5% versus 90.6% the pervious year.

Te problem today is that the regions unchecked

optimism has created a serious disconnect between LasVegas monolithic plans and the realities of a slowingeconomy. In the past, the city was continually re-invented through the development of these large-scaleprojects which spurred further tourist gains as visi-tors flocked to the area to see the new sights.

During these times, the worst that ever happened wasthat too many rooms and casinos were added. De-mand, however, always quickly grew to accommodatethe new rooms and Las Vegas life blood, gaming rev-enues, never really showed any decline. For example,

while national travel patterns dropped precipitouslyafter the terrorist attacks of 9/11 and the tech bust Las Vegas visitation, occupied room nights, andgaming revenues all grew.

This Time is Different A War on Two

Fronts

Te slowing visitor market Las Vegas principal eco-nomic engine is moving negative for essentially thefirst time in 40 years. Tis is happening at a time when8,700 hotel rooms came on-line in 2008, with another

18,000 rooms poised to be added by 2010.

In the past, the Las Vegas economy functioned rela-tively independently because its drivers tourism andgaming were unique and insulated from other partsof the macro economy. In some ways, it could havebeen called recession proof. Tis time, however, thefar-reaching effects of the housing bust have linked LasVegas to the broader economy significantly impact-ing its domestic and international customer base.

The Local Housing Bust

What led Las Vegas into the slowdown was the ex-treme speculation in housing not unlike the specu-lation on the gaming front. Las Vegas is, unfortunately,a case study for many of the most troubled marketsacross the U.S. As such, Las Vegas current economicdownturn is related not only to its own housing bust,but to the national and global repercussions.

It is important to remember that Las Vegas was oneof the first markets to show extreme weakness in the

housing market evident as early as 2006. In a nut-shell, speculators came into the market to make a fastbuck. Te home flipping strategy they employed droveprices up (in what had been a very affordable market).Teir investment activity also created housing demandthat was unreal and unsustainable.

Te National Association of Realtors (NAR) reportedthat the median home price in Las Vegas rose from$132,000 in 2000 to $321,000 by mid-year 2006.Tis equates to an annual appreciation rate of 15%.oday, NAR estimates that the median home price hasfallen to $183,000 an extraordinary decline of 43%from its peak.

What is, perhaps, even more dramatic is the level ofoverbuilding that took place. While a variety of meth-odologies exist to estimate home demand, we looked atthe relationship between residential permit activity andemployment growth. Quite simply new jobs createdemand for new homes.

In looking back, Las Vegas clearly shows a boom-bust

cycle in home construction since the 1980s. As inmany markets, home building periodically gets aheadof demand and then slows to fall back into balance.

For example, looking at the economic expansion of19932000, the region generated 214,500 buildingpermits and added 309,000 jobs. Tis translates into aratio of one new building permit for every 1.44 jobs.

In comparison, between 2000 and 2007 the region

issued 256,100 housing permits on a base of 266,000new jobs a ratio of almost one permit for every onejob. Tis recent one-to-one ratio was clearly not sup-ported by real housing demand, but rather by extensivespeculation from outside the market. Assuming the19932000 ratio of one permit for every 1.44 jobs isabout right for the market, Las Vegas was overbuilt be-tween 2000 and 2007 by as many as 100,000 homes.

Magnitude of the Distress

Realtyrac reports on home foreclosures nationally.Teir data shows that as of first quarter Las Vegasranked at the top of U.S. metro areas, with over35,000 foreclosure filings. Tis equates to almost4.5%, seven times higher than the U.S. average.

As could be expected, the top 10 zip codes with fore-closures in Las Vegas were in the expanding suburbs tothe northwest, southwest, and southeast parts of themetro area. (See accompanying map.) For example,the top ranked zip code (89108) is located in northLas Vegas and has had over 2,200 homes fall into

foreclosure since January 2008. Currently, the medianexisting home value is $132,000 down 32% in thelast year.

Retail has been especially hard hit by the downturn;particularly so in the greater Las Vegas area. Although

VEGAS TOURISM

5

10

15

20

25

30

35

40

1976

1972

1980

1984

1988

1992

1996

2000

2004

2008

0

2

4

6

8

10

12

1976

1972

1980

1984

1988

1992

1996

2000

2004

2008

As of first quarterLas Vegas rankedat the top of U.S.

metro areas,with over 35,000

foreclosure filings.

LAS VEGAS VISITORS(in millions)

GAMING REVENUES(in $ billions)

Sources: Las Vegas Convention and Visitors Authority,

Madison Marquette Market Research

> Continued from page 33

All In inLas Vegas


4/439PLACES MAGAZINE

MARKET WATCH

the pullback in consumer spending is to blame nation-ally the over-speculation in Las Vegas housing hasexacerbated the problem because retail tends to followthe rooftops. Many Las Vegas homes were purchasedby investors who hoped for a quick flip. As such, manywere never occupied or occupied only for a shortperiod as the investor moved on to other speculativeproperties or walked away from a losing bet.

In this way, the driver of retail demand new house-holds and their shopping needs became uncoupledfrom normal market dynamics.

roubled shopping centers can be diffi cult to identify.While percent leased or occupied is easy to track, it ismore diffi cult to uncover centers or retailers within a

center that are under-performing or have an unprofit-able rent to sales ratio.

Recognizing these issues, Madison Marquette analyzedCoStar data and found that Las Vegas is at the topof our list for potentially distressed retail assets, justbehind Phoenix. We have included our list of the mar-kets most likely to see distress on this page.

Our market review underscored that the principaldrivers that put Las Vegas in this position were thesudden increase in vacancy during 2008 when the

market moved from 4.7% at the end of 2007 to 7.6%by the end of last year. At the end of the first quarter,this rate increased to 9.3%. In addition, althoughLas Vegas experienced good net absorption during

the period, 7.8 million square feet of space had beendelivered or was under construction. Importantly, thiscontinued development was taking place in a marketwith weak demand fundamentals as evidenced by alow pre-lease rate in the space under construction.

At this time, a closer look at property-level data showsthat much of the disconnect has occurred in the small-er centers. Based on our review, there are 64 centersin the area (over 50,000 square feet) with occupanciesless than 80%. While some of these centers may stillbe in lease-up, the overall retrenchment of retailers,combined with the tough Las Vegas market suggeststhat many of these centers are now experiencing stress.

The Future

Many observers speculate that commercial propertydefaults will be the second shoe to drop in the reces-sion. In Las Vegas, the first shoe, the housing marketcollapse, was so acute it is easy to understand whyinvestors and developers there are extremely worried.

Earlier bets on Las Vegas continued growth havealways been rewarded. It remains to be seen whetheranother rescue will come or whether a slowdown ingrowth is inevitable because there is a limit to thedemand for the entertainment capital of the world.

Walter Bialas (walter.bialas@madisonmar-

quette.com) is VP, Research in our Washing-

ton, D.C. office. P

POTENTIALLY DISTRESSEDRETAIL MARKETS

Rank City Distress Index

1. Phoenix, AZ 171

2. Las Vegas, NV 145

3. Kansas City, MO 142

4. Atlanta, GA 140

5. Birmingham, AL 140

6. Indianapolis, IN 138

7. Memphis, TN 138

8. Detroit, MI 135

9. Sacramento, CA 134

10. Providence, RI 134

11. Houston, TX 128

12. Dayton, OH 127

13. Dallas/Ft Worth, TX 127

14. Chicago, IL 136

15. Inland Empire, CA 136

16. Tucson, AZ 125

17. Jacksonville, FL 121

18. West Michigan, MI 118

19. Broward County, FL 116

20. Columbus, OH 116

MOST DISTRESSED ZIP CODES

15

15

515

515

215

215

95

95

160

115

215

89131

Total Homes in Foreclosure. . . . . . . . . . .1,940

Households in Foreclosure . . . . . . . . . . . .13%

Avg. Price Decline Last 12 Months . . . -31%Average Foreclosure Price . . . . . . . $223,000

89129

Total Homes in Foreclosure. . . . . . . . . . . 1,810

Households in Foreclosure . . . . . . . . . . . 10%

Avg. Price Decline Last 12 Months . . .-32%

Average Foreclosure Price . . . . . . . $156,000

89108

Total Homes in Foreclosure. . . . . . . . . . .2,210


Avg. Price Decline Last 12 Months . . .-36%

Average Foreclosure Price . . . . . . . .$95,00 0

89148

Total Homes in Foreclosure. . . . . . . . . . 2,000


Avg. Price Decline Last 12 Months . . . -33%

Average Foreclosure Price . . . . . . . .$191,000

89178



Avg. Price Decline Last 12 Months . . . -36%


89110

Total Homes in Foreclosure. . . . . . . . . 2,160

Households in Foreclosure . . . . . . . . . . 14%

Avg. Price Decline Last 12 Months . -36%Average Foreclosure Price . . . . . . .$96,000

89121



Avg. Price Decline Last 12 Months . .-32%


89122

Total Homes in Foreclosure. . . . . . . . . .1,790


Avg. Price Decline Last 12 Months . .-37%

Average Foreclosure Price . . . . . . .$113,000

89123



Avg. Price Decline Last 12 Months . . -27%

Average Foreclosure Price . . . . . . $166,000

89183



Avg. Price Decline Last 12 Months . . -31%

Average Foreclosure Price . . . . . . $134,000

89108

89129

89131

HENDERSON

SUMMERLIN

NELLIS

AFB

NORTH

LAS VEGAS

AIRPORT

MCCARRAN

AIRPORT

89110

89121

89122

89123

89148

8917889183

LAS

VEGAS

STRIP

Sources: RealtyTrac, Madison Marquette Market Research

all in' in las vegas: maybe the house doesn't always win

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