Vegas Condo Developers' Win Streak Ends

August 03, 2006 - You might have thought irrational exuberance went away when reality hit the dot-coms early this decade. But it found its way to Las Vegas and went to work on the fledgling high-rise luxury condo market.

Spurred by Las Vegas' pro-business climate, a national real estate investment furor and low interest rates, developers the world over showed up in Sin City in early 2004. They proposed to build 90,000 luxury high-rise condo units in a market that had a mere 2,000.

Celebrities threw the dice, too. Actor George Clooney agreed to invest with Related Las Vegas and Centra Properties in the proposed $3 billion Las Ramblas casino, hotel and condo project near the Las Vegas Strip. Ivana Trump joined Australian developer Victor Altomare's plan for a 73-story condo tower called The Ivana on the Strip's south end. (The plan was to dwarf ex-hubby Donald's 64-story Trump International Hotel & Tower Las Vegas up the road.)

"We had a lot of irrational exuberance in the market in 2004 and 2005," said Richard Lee, a spokesman with First American Title Co. of Nevada. "But now we're recovering from it."

Indeed, midway through 2005, developers started rolling snake eyes. The culprit: construction costs.

Costs soared 30% to 50% from the time developers started selling units to the time they were ready to shop for construction loans. That put the squeeze on returns, typically targeted at 20% or more.

So asking prices climbed. The average price of a new condo on the highly desirable Strip has pushed past $800 a square foot from about $600 in just a couple of years, says Brian Gordon, a principal at Las Vegas-based Applied Analysis, an economic, information technology and finance research firm.

"The pricing dynamics in the market have changed so much in the last 12 months that a lot of these projects don't make financial sense," he said. Many developers have canceled projects, including Las Ramblas and The Ivana.

Of the nearly 90,000 units proposed, about 13,500 are under construction (including Trump International Hotel & Tower). An additional 16,300 are in pre-sales, according to Applied Analysis. More than 50,000 are in limbo.

"We probably won't see many of those moving forward in the near future," Gordon said.

Among the hangovers: Would-be condo buyers have sued developers, claiming breach of contract. Many real estate brokers will never see hundreds of thousands of dollars in commissions for signing up buyers in pre-sale periods. In two years, average land prices skyrocketed nearly 250% to more than $700,000 an acre in the Las Vegas valley, Applied Analysis says.