Wow- how bad does it have to be for this to happen? A major casino project on the Strip facing foreclosure:
[Hat tip to JW and to M!]
The developer of the $3 billion Cosmopolitan Resort & Casino says its lender, Deutsche Bank, filed a notice of foreclosure on the property for a construction loan of $760 million that just matured. Developer and owner Ian Bruce Eichner says in a statement that his company is working with Deutsche Bank and Merrill Lynch to find new investors. Eichner tells The Associated Press in the statement that, "This action by our lender comes as no surprise." He blames challenges in the real estate and capital markets for difficulty in raising capital for the project, which is now under construction.
This project is located right between the new City Center and the Ballagio- as good a location as one can get on the Strip. Their website describes this project:
The financial difficulties of the Cosmopolitan brings up some interesting questions- What will this mean for the City Center project, as well as others on the Strip? What does this mean for existing casinos?
Whatever the answer, it is likely that rounding up a new batch of investors won’t be easy. The credit crunch has made all kinds of financing more difficult to obtain, and projects like this require require a lot of financing, with a long lag time before any revenue is generated.
As the recession deepens, it is clear that housing is not the only thing that is "doomed."
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That cant happen in Vegas!We all know Vegas is bullet-proof,or is it.Reality sure is a mean mother.
This isn’t a Vegas problem, it’s a commercial paper problem. Noone’s interested in making those kind of loans anymore, not to anyone.
But the casinos are doomed anyway in what’s coming. It’s just that this isn’t proof of it – that’ll come in about a year.
Netdance-
Although a number of projects have been cancelled, there remain a number of large projects still on the books for Vegas. I can’t help but think that the commercial paper problem is a big problem for LV.
Existing casinos are another matter. While the claim is that people will gamble no matter what, I suspect that in a recession, people will gamble less, stay at cheaper places, and stay closer to home. I agree they are more likely to see more trouble a year from now.
I was shocked when I read about it this morning. I saw the excavation this past summer.
This whole thing is going to affect everyone in a lot of ways.
Dan
I have to agree with netdance and twist, casinos are going to see pretty big drops in revenue in the next year. Well, unless they take credit cards
There’s a bigger picture here, though. Assuming most people don’t walk away from their house, we’re going to have a large portion of the population living with uncomfortably large mortgage payments. Also, I think it’s obvious that the way we issue credit will be very different when this is over. Getting yourself into massive debt will (and should) be much more difficult. Finally, I imagine that people will live a lower debt, higher savings lifestyle in the future. The extent of this across the entire population is debatable, but it will happen to some degree.
In summary, people on average will have less disposable income, less access to credit, and less inclination to spend. Don’t forget to add housing prices that won’t rebound for a decade (since foreclosures will remain high for years as owners slowly give up hope and/or are forced to relocate), which leaves people underwater and feeling vulnerable.
Given this scenario, I see very dark clouds hanging over anything having to do with entertainment, and they’ll be around for a LONG time. It’s also not too early to think about a (stock) market bottom and where to look for bargains. It’ll take a lot of convincing to get me to invest in anything that people don’t absolutely need.
MGM is building City Center next door and has stated they do not want a half built project next to theirs. They will probably buy Cosmo, finish it and complete the assemblage all the way to the Bellagio. At times like these, the big boys take charge and increasingly dominate the market. Rather than see through buildings there will be consolidation. Not so terrible…
Jan-
I continue to believe that the City Center is going to do bad things to the Strip when it finally comes online. It will add way too much supply to a saturated market.
If they really wanted to help the market, they would buy the Cosmo and bulldoze it.
I think you have to separate Vegas casinos which are corporate and own their facilities vs. this new breed of condo-hotels which are being built by independent developers. Condo-hotels are worthless investments for buyers. The monthly fees are enormous and even if your room is rented out, you are guaranteed to lose money because mgmt takes such a large cut. You cannot leave any personal property in the room so it is truly just like a hotel room. The only buyers who possibly will make money on these will be the MGM buyers that got in very early, did not hold long enough to lose much monthly cash flow, and flipped to a 2nd buyer. Every other one of these projects is doomed.
There’s a lot to consider here and a lot of unknowns. While, historically speaking, entertainment has always been stalwart, even in times of extreme downturns, I’m not so sure that will be so this time.
Vegas is already hurting on a number of fronts all of which have been detailed here and elsewhere. Add to this things such as the CES convention, one of Vegas’ largest gatherings, saw an attendance decrease this year. Now this happened for a number of reasons having little to do with the economy and some reason directly related to slowing retail sales. Nonetheless, it’s a datapoint worth mentioning.
The casino companies have tons of cash. They can, most likely, hold out longer than other sectors of the local economy (and Vegas had better that is the case). That said, Vegas isn’t the same place it was even a short decade ago. It’s much more expensive overall. Those cheap weekday rates have disappeared and the pool of people those served (the Californians driving or flying in a few days fun) is shrinking faster than Larry Yun’s credibility.
I have to wonder who bought all those CityCenter units already sold? Individuals intending to occupy them or investors and companies? And no matter who did buy them, what does the current state of the Vegas economy and real estate market tell us about the unsold units? And those sold units, do those investors hope to resell them in the “hot Vegas market” they were undoubtedly told about when they made their purchase? Will many of these units just come back on the market adding even more inventory to the already bloated corpse that Vegas is becoming?
And looking forward a few years, Vegas is hardly an example of sustainable land usage. They have all the problems of Southern California greatly magnified. The city could be facing one of most historic water shortages any city has ever faced. What happens to those thousands of luxury homes when water is ridiculously expensive and your supply of water is strictly rationed?
Vegas is going to be an interesting case study over the next few years and when I say “interesting” I mean I’m glad that I’m not part of that study because it could be a very unpleasant one.
Twist, most of the towers in cosmo and city center are condo-hotels. That means that the units are allready bought and paid for. The owner lets the hotel rent out the unit when vacant, and shares in the revenue. A perfect situation for a down market, as the casino gets the capacity for conventions etc, without having to carry the costs of the units.
INterestingly enough, casino revenues are on the rise, for the 5th straight year.
http://www.lvrj.com/business/13890927.html
The thing that happened in vegas is a lot of fresh faced people came in and started projects. Many of whom had no idea what they were doing (ivanka trump). the bad ones went away, and the more established ones kept coming. See Spanish View towers, and you see what happens when unexperience people jump into the highrise game. The stakes are much higher.
Plus, The condos being sold at city center and cosmopolitan aren’t for the average joe. At starting prices of $500k and up, they are being bought by a different type of person. Especially considering that many of the condos being sold cannot be occupied as full time residences (due to purchase agreements preving occupancy for more than 2-3 weeks).
We looked at buying early on at City Center. They wanted 25% down (about $150k on smallest unit) with additional amounts needed every few months until completion. These conditions made it impractical for flipping. So I don’t believe there will be a huge bunch of inventory for resale.
Walking through the high end casinos like Wynn, I find myself in the minority of English language speakers. With the dollar weaker than it has been in years compared to most of the world’s currencies, Vegas becomes a huge international draw. So as US citizens find they can no longer afford Vegas, much of the revenue they would have brought in will be replaced by international visitors. So while the casino industry may slow down a bit and room rates come down a bit, I believe the industry will do just fine.
Housing, on the other hand, could continue to stink for quite a while. My personal observation is that the rate that home prices are decreasing is accelerating. And we still have something like 25 months of inventory. I had read a quote from a housing analyst who declared in early 2006 that we would have a housing shortage in Las Vegas by 2007. I just read where, once again, he is declaring that we will have a housing shortage by 2009. Someday he will be right. ; )
I bought a couple of units at Cosmo. Part of me is praying all goes well and the thing gets built. Part of me wants it to go under tomorrow so I can get my deposits back. I could use the money to buy some unbelievable deals in Summerlin and NLV that I can rent out!
Cosmo Still Under Construction Deustche Bank came to an agreement with Perini, and the construction at Cosmo will move forward while the financing is sorted out. Banks have many terms that can trigger default, and many developers (and businesses in general) are technically in default on loans at some point even if they are doing fine financially. It’s not comparable to a residential owner defaulting on a mortgage.
This project will be completed and will do well- perhaps just not under the original ownership structure.
The housing doom we all suspected would happen when Twist started this blog has indeed happened. The question of the day now is how far down will it go and how long will it last?
Now I find myself mostly on this board for a new purpose, what will be the impact to the economy in general?
It has started to hit Las Vegas, noticed in the R-J yesterday that gaming revenues were down last month by 4% in the state and 3% on the Strip.
Not all bad for the consumer at least. We will start to see more deals on food, lodging, and entertainment. Then eventually the economics will gravitate back to equilibrium and life will go on. Fortunately we don’t have a bunch of politicans running the Strip.
City Center will be built out and finished. Will be interesting to see how fast it gets filled and the impact to several other new projects in the works. I heard the other day that the number two Trump tower may be on hold.