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Las Vegas High-Rise – Good Deal or High Risk?

by Richard Warren on May 31, 2010 · 11 comments

  
Turnberry Towers Las Vegas condo development

At the height of the Las Vegas real estate bubble there were well over one hundred high-rise condominium projects in some stage of development.  Most of them never went beyond the planning stage.  When the bubble burst those developers that didn’t get past the drawing board seemed to be the lucky ones in that they hadn’t committed vast sums of money to build units that couldn’t be sold.

The projects that did actually get to the sales stage were often pricing their units at more than $1,000 per square foot.  My have things changed. The median price for resale units on the MLS is $259 per square foot.  While there are only a little more than 800 units available for resale, there are more than 5,500 completed units that have yet to be sold. Average closings per month?  Twenty-two! Many real estate professionals call a 3-6 month supply of homes to be a sign of a healthy market – what do you call a supply of more than twenty years?

Opportunity or White Elephant?

Plenty of units have been sold only to fall out of escrow.  Even though many projects have slashed prices and offered incentives, a number of buyers have walked away from their contracts.  Others aren’t able to close because the financing falls through.  Banks are reluctant to lend on these projects and several builders are now offering their own financing. 

These are not low-end units.  Most were designed to appeal to high-end buyers and offered many luxury amenities. It just seems to be a case of oversupply, far too many units were built based on the assumption that the market would expand forever.  Does the current glut constitute an opportunity for investors?

Deal or No Deal?

Turnberry Towers has slashed prices of their new units in half with prices now starting below $300,000. They are even offering seller financing at attractive rates with 15% down. But is it a good deal? One real estate agent I know has sold a number of MGM Signature condos to cash investors at prices that are a fraction of what they originally sold for.   The big question is how much are they really worth with such a significant available supply?  Maintenance fees on these units are another factor.  The MGM Signature fees range from about $350/month on a studio unit to well over $1,000 on larger units.

For those looking for a Las Vegas vacation home it may be the perfect time to buy.  For an investor it may be a different story altogether.  While I doubt that it will really take twenty years to absorb this inventory, it will certainly take a very long time.  The risk-reward equation would seem to point away from high-rise condos as an investment. However, the contrarian view says you should buy when no one else wants to.  If you do, good luck!

Risk comes from not knowing what you’re doing.Warren Buffett

Photo Credit: ml18

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{ 11 comments… read them below or add one }

Jeff Brown May 31, 2010 at 7:54 am

Hey Richard — I’ll admit an anti-Vegas bias right off the bat. If the new stuff sells for anything approaching $259/ft I’m wondering who the buyer is. A 2,000 square foot second home in Vegas for over $500,000?!! I think not. What’s your take on waiting until the lenders are the sellers?
.-= Jeff Brown´s last blog ..Real Estate – Wall Street – And Security =-.

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Richard Warren May 31, 2010 at 9:11 am

Jeff,

The dynamics of building a high-rise are so different than building a SFR. They also appeal to different buyers. So you can’t really compare the price per square foot between the two. Prices for single-family homes are often below $100/sq ft now but those homes are not steps away from the action of the strip. The high-rise appeals to the wealthy individual looking for a second home; typically they aren’t going to purchase a SFR that’s located thirty minutes away. It’s two totally different markets.

The cost to build the high-rise units is over $500/sq ft, with the mega-luxury ones even more than that. Builders are already pricing new units below their cost to get rid of them but the $259/sq ft is for REOs and re-sales, not new units. From an investment standpoint these things make no sense at current pricing in that they would never cash flow. These wouldn’t be vacation homes for your average Joe. To a wealthy buyer who simply wants a vacation home or even a primary residence in the heart of the action it may be the perfect time to buy.

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Jeff Brown May 31, 2010 at 9:16 am

Thanks for curing my ignorance on the subject — makes sense now. Are the folks you described buying them at an increased rate now?
.-= Jeff Brown´s last blog ..Real Estate – Wall Street – And Security =-.

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Richard Warren May 31, 2010 at 9:27 am

The SFR market is actually doing well (in comparison to the very recent past), available inventory is fairly low and prices have shown a very modest uptick.

Again the high-rise market is a different animal. Units are being sold but have not been closing. The Trump high-rise has only been able to close escrow about 25% of the time. The problem lies with the lenders at the moment, they are understandably skittish. That’s why builders with the ability to do so are offering in-house financing.

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Jeff Brown May 31, 2010 at 9:30 am

Makes total sense. I’m wondering if Trump is having nightmares about his past? :)
.-= Jeff Brown´s last blog ..Real Estate – Wall Street – And Security =-.

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Ryan Hinricher May 31, 2010 at 10:57 am

Richard, those units certainly look good. Unfortunately for Vegas it seems that condo poison has set in. There is an unlimited supply of land to build up there vs. a place like Miami Beach (nearly certain to shoot back up in value), New York, or Downtown Chicago. I’m sure it will take a significant amount of time to move that inventory.

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Richard Warren May 31, 2010 at 11:08 am

Need to correct you on one point. There is NOT an unlimited supply of land. There is almost no land available in high demand areas along the strip. The Las Vegas valley also has a limited supply of buildable land. The recession and excess supply has pretty much stopped building at the moment but if building g resumes at a reasonable pace sometime in the future finding suitable land will be difficult. However, it may be quite a while before that happens.

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Ryan Hinricher May 31, 2010 at 11:18 am

Richard….definitely makes sense. I was thinking of when I was there and there were many “off-strip” projects. I’m guessing these are on the lower end. How far out from the strip is the demand area for condos? Is it mostly all outsiders buying? Or are people taking up primary occupancy?

Interesting market there.

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Richard Warren May 31, 2010 at 11:27 am

It is an interesting market, really two markets. The projects located on or just off the strip area are mostly out of town buyers with a good number of them being international buyers. Very few primary occupants. There was anewspaper article several months back about how some of the completed buildings are like ghost towns during the week because there are so few primary residents.

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Jason Edge June 2, 2010 at 3:26 pm

It sounds like the the LV market is in a bit of a mess. I can’t believe that some developers expected to get $1000 per sq ft!

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Richard Warren June 2, 2010 at 4:19 pm

They didn’t expect to get $1,000 per sq ft – they were getting that. That was before the bubble burst. The tough thing for builders is that there is so much lead time to get one of these projects going that many of them were stuck holding the bag.

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