Jones Lang LaSalle

> PLACE LV 01 12 06
AN ICONIC STUMBLE?
Peter Slatin and Stephane Fitch

Late last week, Related Las Vegas cancelled groundbreaking and announced plans to return deposits to hundreds of investors in Icon Las Vegas, two residential high rise condos it planned to build just off the Strip. Related's reasoning: construction costs have rocketed since it pre-sold the units, eliminating its profit.

"Construction costs in Las Vegas have gone through the roof," says Jorge Perez, who co-owns Related Las Vegas with long-time partner Stephen Ross of New York. "I think many developers around the country are having difficulties starting some projects."

The Jerde Partnership
Related may have pulled back, but develoepr Bruce Langson is moving ahead with his 1,000-unit Las Vegas Central condo project.

This is the second time Related has scrapped plans to build big in Vegas. In the fall, the company abandoned a $5 billion plan to build high-rise condos, a medical building, a performing arts center and a new city hall building on 61 acres of railyards near the city's downtown. Perez says he grew increasingly concerned at the unchecked rise in construction costs there as well. (The city was also dragging its feet on its commitment to the deal, he says.)

Not that Perez is giving up on Vegas. He's optimistic that Related third large-scale venture, a $3 billion hotel and condo complex called Las Ramblas, will go forward. That project, which Related is pursuing with venture partners that include film star George Clooney, includes 11 towers with a luxury hotel and condo, bungalows, spa and health club, dining, shopping, bars and a casino. Perez in negotiating with a luxury hotel chain to join the venture.

The Icon project was delayed for five months by a lawsuit, but construction costs rose significantly during that time.

It could be the first domino of many to fall in the desert city. Literally thousands of condo units in more than 100 projects are in various stages of planning, permitting, development and sales as builders race to meet demand that many observers say is fueled not by potential residents but rather by speculators. When a well-regarded, superbly funded national player like Related makes a misstep that has buyers fuming, investors may think even harder about placing their money into buildings built by those with less experience and lesser credentials.

Though Related's buyers will be made whole (including interest), some who'd paid up to $80,000 to reserve condos in the luxury project, called Icon, are fuming. Many thought they were sitting on windfall profits from flipping their units, since the price of condos near the Strip has been rising rapidly over the past year.

Could Icon be the first domino of many to fall in the desert city? If Perez is right, and other developers have to abandon projects, there may be more disappointed investors soon. Thousands of condo units in some 130 projects are in various stages of planning, permitting, development and sales as builders race to meet demand there.

A lot depends on how far along a given project is in the development process. Richard Lee, director of public relations in Las Vegas for First American Title, notes that a full 90% of the 3,000 high-rise (15 stories or more) condo units already in construction have been sold, at prices between $500 and $1,000 a square foot. And that doesn't include a burbling sales market for condo-hotel units, such as the Residences at MGM-Grand. As for those still on the drawing boards or not even that far along, however, Lee expects there will be a significant shakeout.

The problem, many observers say, is that the demand is fueled not by potential residents but rather by a wave of speculators. But the pace of construction has collided with a steep runup in the cost of steel and concrete as well as a shortage of qualified construction workers. Add in the misstep by a well-regarded, superbly funded national player like Related, and investors could get spooked, especially at the prospect of placing their money on developers with less experience and lesser credentials?

Many other developers also projected costs (and profits) and took bids from condo-buyers when construction prices were at least 30% lower than today. As construction delays mount, the cost runup has wiped away margins, and the plethora of projects has brought inexperienced developers into the market while highlighting a shortage of contractors with the knowhow to build high-rise luxury residences.

Of course, one developer's ceiling is another's foundation. Developer Bruce Langson, a longtime local builder, has no plans to shelve construction of his 1,000-unit Las Vegas Central condominium project – but happily admits "we got lucky when the FAA made us change the project last spring." The regulatory agency forced Langson to trim the two-building project's height from 52 to 40 stories, cutting construction costs in the process. Nonetheless, the says, "a byproduct of that is we've not gone to open our sales office until the increase in construction costs has fully manifested itself" and can be factored into pricing.

Such singular circumstances may mean good fortune for Langson, but he predicts that Icon's troubles will show up in other projects as well. "It's going to help reorganize the market somewhat," he says. Along with making buyers do tougher due diligence, he says it will "force the issue on every project or purported project. The majority will fall by the wayside now." One reason: once the city provides approval for a zoning change that is needed for development, the builder has a year to demonstrate "significant progress" – which does not include deposits on presales, but instead entails construction related movement, or "going forward with the whole package," Langson says. And he adds that the 12-month window is starting to close for some projects due to a convergence of higher than expected construction costs and a limited pool of qualified contractors.

Citing the sales figures for condos already in development, Richard Lee believes that the investor market will remain strong. But Langson notes that buyers will become more cautious. "In the next six months, we're going to see a lot more names fall by the wayside," predicts Langson. As for Icon's orphaned investors, he says, As for Icon's disappointed buyers, he declares, "I'm glad those buyers are back in the marketplace."