The Housing Chronicles Blog: The credit crunch hits Las Vegas condo-hotel mega-project

Thursday, January 17, 2008

The credit crunch hits Las Vegas condo-hotel mega-project

The fact the lenders are pulling back from anything related to real estate has recently hit a big project in Las Vegas called The Cosmpolitan because the developer isn't able to refinance his original short-term loan. From today's Wall Street Journal:

Yesterday, Ian Bruce Eichner, the developer of a twin-tower casino resort in the heart of Las Vegas, defaulted on a $760 million loan from Deutsche Bank AG after he failed to get refinancing. The default on the loan supporting the $3 billion Cosmopolitan Resort Casino is a signal of trouble for Mr. Eichner, who gained notice during an earlier real-estate downturn in the early 1990s when he lost several projects in New York City.

But this is just the latest example of a much larger credit crunch:

Owners and developers of some of the country's choicest properties are having trouble refinancing shorter-term loans they received during the boom days.

Recent casualties include Centro Properties Group of Australia, one of the largest owners of shopping centers in the U.S. Its stock has sunk because it can't refinance $3.4 billion in short-term debt. Also, New York developer Harry Macklowe, who bought a group of Manhattan office buildings last year at the top of the market, is struggling to repay some $7 billion in debt that comes due in February. Mr. Macklowe just put his prized General Motors Building in midtown Manhattan on the block...

...few investors want securities backed by loans to commercial real-estate owners. Moody's Investors Service warned last week that the corporate default rate for the construction and building industry could reach 12% this year and predicted a 6% default rate in the hotel, gaming and leisure industries.

Condo hotels, which were the rage in Las Vegas and have since spread to markets such as San Diego, L.A. and even Palm Springs, are starting to lose favor because investors haven't seen the promised returns:

The Cosmopolitan includes 2,184 "condo hotel" units, which are condominiums that typically get rented out as hotel rooms. During the housing boom, speculators in cities such as Las Vegas, Miami and San Diego snapped up these units because they promised to rise in value while also producing rental income.

Lately investors have soured on condo hotels. In Las Vegas, a group of buyers are suing a development partnership behind the Signature condo-hotel project, claiming room rates aren't as high as promised. A spokesman for MGM Mirage, now the operator of the project, denied that promises were made about the rates.

Condo hotels are notoriously difficult to analyze because any market study must look at seemingly unrelated industries, a largely new and untested product type and make some broad-based assumptions to come up with conclusions and recommendations for prices and estimated absorption.

About 18 months ago I met with a developer interested in the opportunity for a condo-hotel in downtown Los Angeles; at the time I suggested that a smaller and faster-redeveloping Hollywood might be a better bet since he was representing a brand that had done extremely well in the hotel industry that was now focusing on condos. It will be interesting to see how the condo-hotel project -- The Residences at Ritz-Carlton at L.A. Live -- performs.

After all, what were the comps?

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