WESTERN SNAPSHOT, DECEMBER 2006

Las Vegas Multifamily Market

With developers, investors and lenders reacting to shifts in market perceptions and realities, there has been a pronounced change in attitudes relating to multifamily housing during the past 12 months. Las Vegas is one market that has evolved in response to market conditions but is struggling to find a sustainable equilibrium.

Las Vegas has never been as identifiable as it is today, with creative marketing campaigns driving interest in the tourism industry and national media reports about ups and then downs in the residential market having stakeholders moving in different directions. The segregation of the multifamily market is the clearest example of this dichotomy. From a consumer perspective, the lower-end segment of the multifamily market is facing serious supply constraints, while the ultra-exclusive luxury condominium market is feeling the pains of a hyper-supplied condition. It is rare to find this level of imbalance where such strong supply and demand indicators are present.

Of course, pricing is the x-factor, and one concept remains a staple in the Las Vegas residential market: density drives value. The traditional suburban market has homebuilders developing creative products to increase density and generate higher returns, while condominium developers within the resort corridor have found it necessary to increase tower heights in an effort to make projects financially feasible. This concept, along with shifts in consumer demand, have both ends of the spectrum reacting.

The Rental Market

Supply within the apartment sector remains relatively tight given a flood of apartment-to-condominium conversions in the past 2 years and a near standstill in the new apartment construction. Pricing levels in the for-sale market have generally held their ground after remarkable gains during the past 24 months, particularly at the lower end of the market. Not surprisingly, this has put additional upward pressure on rental rates.

While the for-sale residential market continues to report median prices that are on par with the prior year, segments of the market, particularly at the higher end, are experiencing a softening condition. For-sale inventory levels remain a concern with the number of new home communities nearing all-time highs and the number of resale units on the market well above 20,000 — another all-time high. With relatively stable demand based on the number of newcomers and escalating supply levels, pricing will be the balancing factor. While the full extent of any shift is uncertain, the lower end of the spectrum, particularly rental product, tends to be impacted to a lesser degree.

By third quarter 2006, the apartment market in Southern Nevada reported continued demand and limited availability. Average asking rents climbed to $861 per unit per month or $0.96 per square foot, representing a 5.6 percent increase over the prior year and up more than 12 percent from 2 years ago. Occupancies continue to remain near optimal levels at 95.8 percent, which has become commonplace throughout the past couple of years.

The overall health of the economy in Southern Nevada persists, but recent indicators suggest a slowdown in the pace of consumer expansion and spending. From a tourism standpoint, development activity and visitor spending volumes are running at a record-setting pace, which fuels the economic engine. Supporting the current amount of investment activity are the 50,000-plus incremental annual employees and the 70,000-plus new residents demanding goods and services. Clearly a very substantial portion of these predominately service employees will demand attainable rental housing.

Softness in the for-sale residential sector in recent months has heightened concern overall, particularly regarding pricing stability. Can record inventory levels in the new and resale home markets allow pricing levels to hold? While a difficult question to answer, market fundamentals appear conducive to a soft landing. We expect residential product at the lower end of the spectrum to be impacted to a lesser degree should conditions change. With the for-rent sector well positioned, limited new inventory is expected to call for continued strength in average rents and occupancy levels.

The Luxury Condo Market

On the other end of the spectrum are the thousands of potential for-sale, luxury condominium units that carry price tags averaging in excess of $700,000 for units averaging a modest 1,000 square feet. Valley-wide potential inventory levels continue to escalate at a rapid clip. Total inventory of more than 95,000 units in approximately 140 projects include approximately 2,400 existing units, with another 13,500 units under construction. Competitive units currently pre-selling account for only 12.2 percent of the market (11,700 units), while speculative plans exist for 58,400 more units. To date, an estimated 2,600 units are suspended in the sales process, and another 7,210 have officially been cancelled.

How can the market be expected to absorb this level of inventory? Simply put, it can’t. We estimate that another 10,000 units may commence construction activity in the next 5 years. While the depth of the market over the long run appears fairly strong, the likelihood that 2007 will repeat the feverish sales volume reported in 2005 is limited.

Compared to other resort-residential markets, Las Vegas maintains a relatively low share of condominiums to total housing. The latest available data suggests Las Vegas’ share of condominiums to total housing is less than 15 percent, while more mature markets maintain significantly more higher-density living (e.g., West Palm Beach, Florida is approaching 30 percent). This condition will change as Las Vegas aligns with other resort-residential markets over the course of the next 5 to 10 years, but this relatively new high-rise living concept won’t take shape overnight.

Not unlike any real estate market, location, branding and experience are keys to success. Projects announced by major operators and development companies are likely to enter the market with greater success. However, this is far from a guarantee. Less demand, higher construction costs and higher costs of capital are making all projects more challenging. Proximity to the Las Vegas Strip is important, as are viewscapes and amenities, particularly with regard to higher-priced projects. Units meeting these criteria have proven successful, while those without are unlikely to move beyond the concept stage.

The nearly 3,000 units slated to begin sales in 2007 at MGM MIRAGE’s CityCenter should be well received by the market compared to the challenges several projects face today. That having been said, a portion of the current pullback by buyers may be the result of a wait-and-see attitude as the CityCenter metro-resort will change market dynamics. Expect the luxury market to find a new equilibrium as the majority of proposed projects will face demand and financing challenges, with the first wave of resale units adding another layer of complexity.

Brian Gordon is a principal with Applied Analysis, a business advisory firm in Las Vegas.

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