Looking to the Skies: Developers Build Big & Tall

Residential tower construction has reached unprecedented levels in the Southwest. Dozens of condo projects are under construction,
with many more planned.

However, as construction costs and interest rates climb, developers
in Phoenix and Las Vegas are scrambling to get their projects out
of the ground first. Soonit may cost more to build the towers than
their sales value because of the rising costs of labor and materials.

One thing is clear: no one wants to be stuck on the losing end
of supply and demand.

Condo Boom Cools in Las Vegas,
Heats Up in Phoenix

 

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Several Las Vegas high-rise condominium projects were recently canceled by developers due to rising construction costs and slow sales.

"There are 60,000 condominium and 19,000 condo-hotel units currently proposed, planned or under construction in the Las Vegas Valley," said John Restrepo, principal of Restrepo Consulting Group, a Las Vegas real estate research firm. "But we anticipate that less than 25 percent of those units will actually be built in the next five years."

Meanwhile, in Phoenix the brakes aren't quite on yet, and the ratio of abandoned projects to those that have broken ground belies a much more favorable construction market, according to construction statistics from the Dodge Construction Network.

In Las Vegas, Related Las Vegas LLC called off its "Icon Las Vegas" project in January due to escalating construction costs. The $325 million, 514-unit development consisted of two, 48-story, glass-and-concrete towers with residences costing from $526 per sq. ft. to $1,360 per sq ft.

Designed by Arquitectonica, Miami, the 4.5-acre project was nearly sold out when Related pulled the plug. The company cited a six-month delay from a lawsuit filed by an adjacent project that complained of obstructed views and emergency vehicle easements. The case was later settled.

"During the time it took to resolve the lawsuit, construction prices had increased so drastically that we were unable to build Icon based on its original pricing," said Marty Burger, president of Related Las Vegas.

Diversified Real Estate Concepts similarly canceled its $600-million, 825-unit Aqua Blue condo-hotel off-Strip project in July due to building costs. The project, which included basketball star Michael Jordan as an investor, called for a Jordan-branded steakhouse, cafe and athletic center.

Other projects, meanwhile, are being flipped to capitalize on the area's escalating land values. Australian developer Victor Altomare sold the 0.68-acre parcel of his planned 21-story, 236-unit Liberty Tower condo project along the Strip in early January 2006 to Stratorise South LLC for $5.5 million. The site sold for 600 percent more than its original $900,000 price-tag in 2004, county records show.

"Only 13 of the valley's 107 planned projects have broken ground thus far, and just 10 have gone vertical," Restrepo said. "Experience, financing, location and branding are the key ingredients for a project's successful transformation from a Web site into a vertical reality."

Turnberry Associates, which is credited with launching the city's current condo craze, is moving forward with a $1.2 billion, 3,500-unit condo-hotel complex. It partnered with gaming giant MGM Mirage Inc. to build the four-tower Residences at MGM at the northeast end of the resort's property.

Donald Trump's celebrity status has helped propel his $500 million, 1,282-unit condo-hotel currently taking shape at Fashion Show Drive and Las Vegas Boulevard. The Hard Rock Hotel Casino is also pressing forward with its $1.4 billion, 1,420-unit complex which is expected to finish in 2008.

"It's not an infinite market and demand for this market type is going to cap-out," said Brian Gordon, principal of Applied Analysis, a Las Vegas-based economic research firm. "Projects with long sale periods run a far greater risk of higher than expected building costs, and are less likely to be built."

Phoenix saw $706 million in four-story or higher residential-related projects that have started since 2004, with $478 million in canceled or deferred construction according to Dodge. In Las Vegas, the value of canceled projects has escalated to the same level of current construction: $2.3 billion.

The factors leading to Phoenix's residential boom are varied. "The demand to go vertical is from people who are tired of long commutes, to professional buyers without kids, to buyers of second homes, to of course the investors -- all of these groups are driving the need," said Mike Bontrager, Southwest business unit president of The Weitz Company . "As these segments get thinner, it will shut things off."

Weitz recently started construction on three major downtown Phoenix residential projects, which are profiled later in this magazine.

"The streak will continue for this and next year, but I think we'll come to a point in time where things slow up a bit, "Bontrager said. "It's just like every other cyclical market segment we have."

Lofts, warehouse conversions, mixed-use developments and the metropolitan area's numerous urban centers expand the potential customer base.

"We are still working on a couple of high end condos such as Residences at 2211 Camelback," said Steve Bassett, principal with Phoenix-based design firm DFD CornoyerHedrick. "But we are also working on several projects of a totally different product type than we have been doing, at a lower price point."

However, even with this variety, the realities of a potentially oversaturated market cannot be avoided. "The real question is: how deep is this market," Bassett said. "The first two or three of our new projects have the best shot, but there might not be many more breaking ground after that."

 
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