The credit crunch, slowdown in appreciation and rising defaults that have plagued the single-family home sector in Las Vegas are looming as problems in the luxury condominium market, analysts said.
The high-rise and mid-rise condo markets continue to weaken as demand has softened and supply continues to increase - a problem that will worsen as more and more projects come on line in the next year, analysts said. Given the current pace of sales in the resale market, several years of inventory remain.
Those who already closed on their condos with the intention of flipping them aren't finding the buyers they expected. The rental pool for the high-end units is shallow, and the rent owners can charge is limited.
That could lead to defaults in the high-rise market.
Las Vegas is also facing problems that are emerging in other markets and are a byproduct of the speculative boom of 2004 and 2005. Buyers who signed contracts two to three years ago may not be able to close when those projects are completed. In some cases, they may not be able to get financing from lenders and in other cases buyers may walk away, given the market slowdown and higher interest rates they may have to pay.
"We are hearing the potential that some of the units aren't going to close," said John Restrepo, principal of Restrepo Consulting Group that tracks the condominium market. "Some people are walking away because of the credit markets or because what they agreed to pay is not what they thought it would be worth today."
In some cases, buyers put down 10 percent or more and will lose their deposit if they walk away, Restrepo said. In other cases, lenders are turning them down and depending how their contract was written, they may lose their deposits or a portion of it.
"I think the high rises are in for a difficult time due to the mortgage crisis," said local housing analyst Dennis Smith.
Las Vegas is in a good position long term given its growth and its status as America's playground, but it is facing short-term challenges because the condo market was overbuilt and the credit crunch has made the market's prospects worse, said Hessam Nadji, managing director of research of Marcus & Millichap Real Estate Investment Services.
Concerns about foreclosures can't be ignored, but he said investors and second homebuyers in the Las Vegas condo market are in stronger financial positions than in other markets.
But he said that doesn't mean there won't be problems.
Condo developers will be getting some of those units back and if they don't have deep-enough pockets to be patient, will have to discount the units or rent them out, Nadji said.
In other cases, they may help buyers buy down interest rates in order to close the sale, he said.
There are 5,849 luxury condominium units in Las Vegas and another 14,149 units under construction, according to Applied Analysis, a local research firm.
By the end of the second quarter, 718 resale luxury units were on the market, which was down from the first quarter, Applied Analysis reported. Some 37 percent were high rise, 21 percent were mid-rise and 42 percent were condo-hotels.
"I think a lot of folks bought intending to sell. They never thought to live in it or buy it to rent," Restrepo said.
"I hear from condo owners every single day. They bought it to flip it and they can't sell it," added Eric Smith, owner of Colorado-based Corporate Housing By Owner, which works with condo owners who lease their units for short-term corporate housing.
Smith said more condo owners would be able to withstand the oversupply but their associations require a minimum of three-month leases or longer or the associations limit leases to one per year, restrictions that hamper owners' ability to lease their units for shorter terms.
The problems affecting existing and under-construction condo units also apply to condos that have yet to be built.
Some 6,091 condo units are being marketed but construction has yet to begin. Some 19,100 have been canceled or had their sales suspended and more than 58,000 units remain on the table for construction, Applied Analysis reported.
Slowing demand and escalating construction costs are expected to put a further damper on new luxury condominium projects unless they are mixed-use ones built by the resort industry.
At MGM Mirage's Project CityCenter, for example, 1,200 of the 2,400 condominium and condo hotel units are under contract since sales started earlier this year, and MGM Mirage Chairman Terry Lanni said recently that Dubai World's pending partnership will help the company sell even more units, at even higher prices.
Steve Bottfeld, executive vice president of Marketing Solutions, said the condo market has been affected by a climate of fear that has kept people on the sidelines, he said.
"The high-rise market is undergoing a significant sales problem right now and, more important, a resales problem," Bottfeld said.
The condo-hotel market, which Applied Analysis said represents nearly 46 percent of the market under construction or being marketed, is under pressure, analysts said.
Many owners of condo-hotel units at the Residences at MGM Grand and Platinum don't have positive cash flow, and that has deterred interest in that market, Bottfeld said. And when prices of some condo hotels are running $1,500 a square foot, that softens demand, he said.
Buyers of condos who bought in the early stages in 2003 and 2004 are $150,000 to $200,000 ahead, but those who bought in 2005 and 2006 find themselves in a difficult position, he said. With a median household income of $53,000, there are only so many people who can pay $2,000 to $3,000 a month in rent to help cover the mortgage.
Bruce Hiatt, co-owner/broker of Luxury Realty Group, said he expected a window of about 12 months in which there would be an oversupply of condos, calling it the "perfect storm."
With that in mind, Hiatt has launched a program geared toward sellers who are going into foreclosure or can't carry their mortgage and buyers who may have to walk away from their deposits because they can't close.
Hiatt said 2008 will be a tough year with the future south Strip and downtown faring worse than the resort corridor, but he said buyers who are patient and can wait three to five years are in good shape.
Given the rising land and construction costs, developers can't build condos for less than $1,800 a square foot, Hiatt said. There are many people who bought between $400 and $900 a square foot and stand to benefit.
Although Las Vegas's condo market growth is limited by the lack of water views, it remains attractive over the long term as a second-home market, Restrepo said. But it won't match what was seen during the boom when investors helped drive the market, he said.
"I think the depth of the high-rise market has been overstated," Restrepo said. "I think what you are going to see over the next couple of years is that the wave of excitement and irrational exuberance is over. There will be more realistic demand."
Among the findings reported by Restrepo Consulting:
• Existing and under-construction, high-rise condos have a median price-per-square-foot of nearly $599, compared to a median price per square foot of $443 for existing and under construction mid-rise projects reported by Hanley Wood Market Intelligence.
• In the second quarter, there were 2,689 existing and 5,805 under-construction and actively selling condo-hotel units in the resort corridor. Those units had a median price-per-square-foot of $1,038.
• As of June 30 on the resale market, there were 227 luxury high-rise units, excluding condo-hotels, with a median price-per-square-foot of $499. In addition there were 221 condo hotel units with a median price of $832 per square foot. On the average, luxury high-rise condos stayed on the market for 114 days while condo-hotel units stayed on the market for 125 days.
• About 20 percent of the existing, actively selling and canceled projects are located in suburban areas where there is increased interest for development because of high development costs along the Strip.
• Of the 227 resale units on the market, 56 units were at the fourth tower at Turnberry Place (24 percent of its inventory); 33 were at the first tower at Panorama Towers (10 percent of its inventory).
• Of the 221 condo-hotel units on the resale market, 168 were at The Residences at MGM Grand, which is nearly 15 percent of that project's inventory and 53 were at Platinum Resort, which accounts for nearly 21 percent of its inventory.
• Overall, four high-rise projects, Panorama Tower I, Platinum, Turnberry Place Tower 4 and The Residences at MGM Grand accounted for 69 percent of all high-rise resales.
Among findings of Applied Analysis:
• Those units listed on the Multiple Listing Service during the second quarter had an average asking price of $830,4000 or $624 per square foot.
• During the second quarter, units that sold averaged $814,000 or $507 per square foot. High-rise, non-condo hotel averaged $545 per square foot; mid-rise residence averaged $287 per square foot.
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