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Half a Harmon

July 8, 2010 By

The Harmon Hotel is part of MGM International Resort’s CityCenter development. Designed by British architect Norman Foster this oval, blue glass tower has a prominent position on the front of Strip, but unfortunately the project has failed despite it’s prime location and high quality design team. The Harmon Hotel construction issue is one of the major blights on the Strip.

The Harmon is one of six high rise towers on CityCenter’s 67 acre plot and it was originally planned to be a 47 storey mixed-use tower. It was going to have 207 residences at the top, and a 400 room hotel. Then it was discovered that the reinforced steel bars used in the concrete (the rebar) had been incorrectly installed. The project was subsequently shrunk to 26 stories in height, with the residences wiped out – whether this was an economic decision, or related to the construction is a matter being debated by teams of attorneys.

General contractor Perini Building was tasked with making the Harmon a reality, but the company is now tied up in litigation with MGM. The affair was investigated by the Nevada State Contractors Board and the Clark County Building Department. It seems that Converse Consultants, the Harmon’s inspection firm, provided inaccurate data in their daily reports. As a result the firm was suspended from bidding on new work in Southern Nevada for six months and Perini Building’s subcontractor Pacific Coast Steel was fined $14,105, although it did not admit any fault in the rebar mistake. The mistake likely had its origins in the fact that the rebar was moved without first checking with the structural engineer.

The legal battle between MGM and Perini over the Harmon Hotel construction issue has a number of aspects to it. Perini is suing its subcontractor Pacific Coast Steel for defects relating to the beams, the general contractor has also pointed the finger at MGM by claiming the structural drawings were late and riddled with errors. MGM claims that the Harmon was halved in size because of the construction defects, but Perini counters that it was a decision made because of the downturn in the market for luxury condos.

Today, the Harmon remains unfinished and on hold, and $490 million of payments are being withheld by MGM International Resort. Perini has filed a master mechanic’s lien, and the attorneys are the only ones making money out of this deal at this time.

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Jim’s Rocking On

April 22, 2010 By

On Wednesday 21st of April 2010 developer Jim Rhodes was granted permission to apply for higher-density housing that is permitted by zoning for his proposed development on the former James Hardy Gypsum mine. The Clark County Commissioners voted 4-3 in favor of allowing Rhodes Red Rock company to apply for major projects that are at least 700 acres in size.

The original plan filed in 2003 was to build 5,500 houses on 2,400 acres. It was in this same year that the state introduced restrictions on the land that Rhode’s had bought, and he went on to sue the state and the county for making the changes. In 2009 a federal judge struck down the restrictions made by the county. The Clark County Commissioners feared that if they did not allow Rhodes to apply for housing then he may win a court battle and then be free to build or sell the land in smaller parcels.

At the heart of Rhode’s argument is that the state specifically singled out is land in their 2003 changes and thus violated equal protection rights. Wednesday’s ruling was a step forward for Jim Rhodes, but it won’t be seen as a positive move by most of the residents of Blue Diamond.

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Foreclosure Outlook

April 15, 2010 By

The exact level of Las Vegas foreclosures coming onto the market is unknown, but there are indications from analysts that they may depress pricing levels further:

  • Trulia.com in December 2009: “the market is still on the decline…A lot of cuts are at the top of the market. It would not surprise me to see double-digit declines, unfortunately, in Las Vegas over the next 12 to 18 months. Until unemployment levels off and starts to get better, we expect foreclosures to continue to play a big role in the 2010 housing market.”
  • SalesTraq in December 2009: “Hundreds if not thousands of Las Vegas homeowners haven’t made a mortgage payment in more than a year and still haven’t received a foreclosure notice…that’s how backed up it is. The banks are overwhelmed…If two out of three homeowners in Las Vegas are upside down, it’s a matter of time. If the economy doesn’t improve, a lot of people are going to take a walk and they’re not showing up on the radar right now.”

1 in every 102 housing units received a foreclosure filing in February 2010, and 1 in 89 in Clark County, most of which are in Las Vegas.

February 2010 Foreclosure Map

Source: Realty Trac

In addition to the uncertainty surrounding the shadow inventory, 76% of Las Vegans are currently upside down on their mortgages. If the economy does not improve, or worsens, there could be a further wave of foreclosures. On a more positive note, the recent dip in the number of foreclosures that are coming to market indicates that there may be price appreciation once the shadow inventory is worked through. The time horizon and rate of such capital growth is far from certain.

Las Vegas Foreclosure Activity

Source: Realty Trac

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Inventory Remains in the Shadows

April 15, 2010 By

Current Stock of Properties

Source: Greater Las Vegas Association of Realtors

The story that the statistics above do not tell is that the banks have a significant shadow inventory and they are rolling properties out at a controlled pace to avoid further price depreciation. One example is Bank of America, which is planning to unload approximately 6,000 foreclosed properties to the Nevada real estate market in 2010, with most of these in Las Vegas. Estimates on how much shadow inventory is out there varies, with First American CoreLogic estimating there to be 1.7 million properties nationwide, and Amherst Securities estimating 7 million. Wherever you come out at within this range it is fair to assume that Las Vegas has a disproportionately large percentage of the nation’s shadow inventory. John Burns Real Estate Consulting Inc. estimates that Las Vegas has a shadow inventory that is equivalent to 18 months of sales.

There is strong investor demand for the shadow inventory as it comes online so if it is dripped into the market we do not expect it to depress prices further. The threats to this would be if interest rates increased from moderate rates, or unemployment increases further. Despite the shadow inventory you can see from the below that new listings are controlled. If banks were to change their artificial supply this would be a further threat to pricing.

Of the 20,262 Single Family Homes listed for sale in February 2012, 7,974 have no contingent or pending offers, and 4,087 are new listings. There were 2,390 units sold in February at a total dollar value of $402.4 million. Of these sold units, 46.6% sold in under 30 days, 18.7% in under 60 days, 12.3% in under 90 days, 6.9% in under 120 days, and 15.5% in over 121 days. The total value of homes sold is 6.3% down on January 2010, and 4.5% down on February 2009. The average price of units sold is 2.2% up on January 2010, and 8.6% down on February 2009.

New Listings

Source: Greater Las Vegas Association of Realtors

Of the 5,495 Condo/Townhouse Units listed for sale in February 2012, 2,255 have no contingent or pending offers, and 1,166 are new listings. There were 685 units sold in February at a total dollar value of $58.7 million. Of these sold units, 54.6% sold in under 30 days, 18.2% in under 60 days, 9.8% in under 90 days, 7.9% in under 120 days, and 9.5% in over 121 days. The total value of condos sold is 3.9% down on January 2010, but up 40.3% on February 2009. The average price of units sold is 7.7% down on January 2010, and 9.5% down on February 2009.

The market for condos is picking up relative to single family homes, and the February statistics follow a trend, with the total dollar value for condo sales in January 2010 35.4% above those in January 2009.

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Economy Of Nevada

April 14, 2010 By

Whether the US economy can successfully skirt the hazards of a double dip recession, inflation, a currency crisis and rising interest rates, will have a direct impact on the direction of the economy of Nevada since it is driven by the discretionary spending of the American consumer.

After four straight quarters of decline US GDP growth moved into positive territory in the third quarter of 2009. Although GDP grew at an annual rate of 2.2 percent in the quarter, much of this is attributable to government spending linked to the federal fiscal stimulus package. The US economy expanded again in the 4th quarter, growing at a robust annual rate of 5.7 percent, and this was not only stimulus-related as there was growth in the manufacturing sector. Despite these positives unemployment sits at 9.7 percent, which is a 2.1 percent increase from one year ago.

Whether or not these signs of life in the American economy are sustainable, one thing that we can say for certain is that they are not enough to sustain Nevada as it continues to lag the US recovery. The current Nevada unemployment rate is 12.8 percent, a significant increase from the 11.8 percent of November 2009. Visitors, the lifeblood of the economy, have increased a mere 0.7 percent in the past year. Furthermore, the end of the construction-fueled boom has seen massive unemployment in the construction sector, and it is hard to imagine it will return to its former size in the near future. The State budget deficit was $887 million in March, as a result of taxable sales being down by 6.6 percent over the year and gaming revenue down 3.2 percent over the same period.

If one were to look for a positive angle it could be said that just as Las Vegas’s reliance on construction and tourism saw it suffer a disproportionate impact from the US recession, it is a leveraged play on the US recovery. That thinking hasn’t been born out yet, and perhaps that is a sign that the nationwide recovery is not deep and sustainable. Another reason that the national recovery is not having a knock on effect is that Las Vegas’s rapid growth led to structural imbalances in the real estate sector that will take some time to correct.

The double-digit drops in gaming revenue and taxable sales in Southern Nevada in 2009 were a direct result of the national decline in discretionary income that had been partially allocated to travel. Taxable sales in Southern Nevada have fallen from a high of $3.49 billion in December 2007 to a current value of $2.66 billion.

One of the best insights into the Las Vegas economy is the Southern Nevada Index of Leading Indicators, which is composed of 10 economic series, based on criteria used to build the National Index of Leading Indicators. The series and their respective weights are:

  • Residential building units permitted 0.7
  • Residential building valuation 0.9
  • Commercial building permits 1.0
  • Commercial building valuation 1.4
  • Taxable sales 1.0
  • Air passengers enplaned and deplaned 1.0
  • Sales of gasoline (gallons) 1.2
  • Gross gaming revenues 1.4
  • Visitor volume 1.1
  • Conventions held attendance 0.5

The Southern Nevada Index of Leading Indicators offers a picture of expected economic expansion over the coming four to six months, and Las Vegas continues to diverge from the national economy. Although the statistics are for the economy of Nevada as a whole, it is Las Vegas which is the engine of this economy.

economy-of-nevada

Source: Center for Business and Economic Research University of Nevada, Las Vegas

Further reading:
http://www.lvre.com/las-vegas-real-estate/

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There is a shortage of homes for sale in Las Vegas

April 14, 2010 By

Looking at homes for sale in Las Vegas you will see that volumes are on a par with those seen in 2004-2006. In addition to this trend of increased closings there has been a reduction in the time spent on the market for housing units sold. The affordability of housing relative to the last few years is bringing people back into the market. And one interesting fact that is often overlooked is that there is actually a shortage of non-distressed product.

Source: SalesTraq

Of the buyers in today’s market around half are investors, many of whom are cash buyers. In February it is estimated that 52% of all transactions were cash deals. This puts individual purchasers trying to get a foot on the property ladder at a distinct disadvantage as sellers prefer cash buyers rather than those that have to qualify for financing. Furthermore the market is saturated with Las Vegas short sales which generally take months of negotiations to close as the banks are overwhelmed with inventory and under-staffed.

In today’s market one product that is not common is non-distressed real estate: i.e that is not bank-owned, is in a good state of repair, is ready for occupancy, and can be readily financed by Conventional, FHA or VA loans. The graph below shows the limited supply of non-distressed real estate relative to the market.

las-vegas-home-closings

Source: SalesTraq

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Cosmopolitan Condo Class Action

April 12, 2010 By

The Cosmopolitan of Las Vegas has not had a happy journey, and the class action suit that has been settled in April 2010 is just the latest sign that it may yet live up to the potential of its prime location. The plaintiffs in the Cosmopolitan Class Action had signed up to buy some of the development’s 1,495 condo-hotel units, but are now getting 62% of their deposits repaid in recognition of the project’s delays.

Watching closely are 150 buyers of City Center units who are not happy with the way their transactions have played out. It is said that MGM Mirage has offered 25% of deposits, which falls some way short of Cosmo, however, the issues are quite different for each development.

So far City Center sales have been slow with 31 of the 1,495 Vdara units sold (prices from $370K to $871K) and 24 of the 225 Mandarin Units ($1.05m to $7m).

Of course, the real reason that depositors are up in arms is that values have plummeted since they put their money down. Union Gaming Group estimates that recently built mid-rise and high-rise condos are down 58% from their market peak, with condo-hotels down 71%. Union Gaming’s report, ‘Las Vegas High-Rise Blues II: From bad to worse’ studied 26 residential towers in Las Vegas and noted:

  • There is a current inventory of nearly 8,700 units (pre CityCenter), which includes all relevant projects in the resort corridor, downtown, the south Strip and the suburbs.
  • Of the residential towers, 20 are condos (pure residential) while the remaining six are condo-hotel.
  • Of the current inventory the number of “available” units that need to clear the market is alarming. This does not include currently owned units that are actively listed on the MLS system or what we believe could be a large number of owners who would prefer to sell but simply won’t given current market dynamics.
  • Union Gaming assumed that all units in default will ultimately become available. Of the 4,819 condo units it looked at, 49% are available or soon-to-be available. This includes unsold inventory (38% still held by the developer), units in default (10%) and bank-owned (2%).
  • Of the 3,863 condo-hotel units, 44% are available: unsold (33%), in default (10%), bank-owned (1%).
  • On a combined basis, 36% are unsold, 10% are in default and 1% are bank-owned.
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Are Investors Good for the Las Vegas Residential Market?

April 12, 2010 By

Investors are blamed for fueling the boom that saw the median Las Vegas house price go from $164,000 in 2003 to $275,000 in 2005, so it is no wonder people are nervous that nearly 50% of houses in Las Vegas are currently being sold to investors. However, the current crop of investors seems smarter, and is buying to hold for rental income, rather than flipping to capture rapid capital appreciation.  So are investors good for the Las Vegas residential market?

There is certainly an over-supply of homes in Las Vegas and these investors are helping stabilize prices. They are also providing rental units for those that are no longer able to secure mortgages.

Investors are being criticized for blocking first time home owners from entering the market as they are often cash buyers and are thus given favorable treatments by the banks. It is difficult for a homeowner buying with financing to compete against cash-rich investors chasing REOs. Also, not all of these investors are long-term as 3.7% of houses sold in February had been sold less than six months prior i.e. they were flipped.

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The Interest Rate Threat

April 12, 2010 By

Will interest rates be the next big stick that clubs Las Vegas real estate? This week the rate for 30-year home loans jumped to an eight month high of 5.21% versus 4.87% a year ago. If Las Vegas interest rates continue to rise under the weight of America’s debt mountain (where else can they go?) then it will further reduce the purchasing power of potential homeowners, and be a threat to the financial health of those borrowing on variable rates.

Don’t forget that the government stimulus measures are not permanent, and if they are taken away in a high interest rate environment then the pain may only have been postponed, not avoided. Yes Las Vegans more pain. Look beyond the Las Vegas Valley to treasury yields and you will see that they have been climbing in recent week as demand declines.

Further reading:
http://www.lvre.com/las-vegas-real-estate/

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Cosmopolitan Vegas Takes Shape

April 12, 2010 By

News about the Cosmopolitan Vegas is starting to trickle out as its opening in December gets closer.

John Unwin is the CEO of Cosmopolitan of Las Vegas, and it seems that Deutsche Bank will remain the owner for the foreseeable future as it has not found any other buyers, or secured an operating agreement with any hoteliers. Whilst Unwin has experience as a Caesar’s Palace GM, one thing that will different this time around is that Cosmo is starting with no database of customers. This standing start may be partially offset by the fact the development is the only new Strip casino coming online in 2010, but excitement of the new wasn’t enough to make Planet Hollywood profitable so will it work here? Harrah’s acquired Planet Hollywood because of the value it can generate using its customer database – how long can the Cosmopolitan survive solo?

With its stunning terraced rooms overlooking the Bellagio fountains it is possible that the development will break the mold of multi-casino operator model. In addition to the views, another thing that makes these hotel rooms unique is the kitchenettes. They are more like condos than hotel rooms, as that is what they were originally built to be.

Cosmopolitan of Las Vegas is 8.7 acres of prime Strip property, and Unwin plans to hire 3,600 workers in 2010 to make it a success. The hotel may open with as few as 800 rooms initially, with these increasing as demand dictates (the development has 2,995 rooms in all).

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