Thursday, March 20, 2008

Las Vegas Real Estate Developments Running Into Problems

Las Vegas real estate has certainly seen better days. It was announced last week that two of the strip’s major developments—The Cosmopolitan and The Plaza—are now faced with some problems.

The Cosmopolitan is a mixed-use building located by the MGM Mirage’s CityCenter complex. The project was originally budgeted to cost in the range of $2 billion, but rising construction costs put the project closer to $4 billion to complete and Deutsche Bank is now foreclosing on the development. The developer, Bruce Eichner, has been attempting to save the project, but the problems in the credit market have made it rough going. 83 percent of the units have already been sold, according to The Wall Street Journal, and each buyer made at least a 20 percent non-refundable down payment to secure their unit. The development will probably be completed eventually, but how long it will take remains unknown.

The Plaza is a huge project scheduled to open in 2012 on the north end of the Strip, on the site of the former New Frontier. The development was projected to cost around $6 billion. It would offer 4,100 hotel rooms, 2,600 condominium units and the Strip's largest casino at 175,900 square feet. Because of the problems in the Las Vegas real estate market, The Plaza’s developers have decided to put the entire project on hold and construction on the project has been suspended altogether.

The good news for investors in all of this is that, with the various project delays and stoppages, the pipeline of nearly 45,000 new rooms which were scheduled for completion by 2012 will be drastically reduced. With that many rooms coming available at once, the market would have been flooded and rates would have plummeted. We might now see a more gradual increase in the number of units available and less market volatility as a result.

Investing in Las Vegas real estate—be it residential, commercial or otherwise—is certainly a gamble at this time. The market is still unstable and prices will likely continue to fall. However, Las Vegas remains one of the most popular destinations in the world for visitors, and investors with a long-term focus are generally safe investing in such a market. In the short term, I would probably advise against investing in Las Vegas real estate, but investors should watch the market and be ready to jump in when things start to improve.

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