September 28, 2012 7:17 pm

Betting the house

Can the Las Vegas property market bounce back after the 2008 financial crash?
Las Vegas sign©Montage by Rikke Holst/Reuters

There is something spooky about walking through the cavernous halls of an empty Las Vegas casino hotel. The Sahara, a former Rat Pack hang-out at the north end of the city’s fabled Strip, once hosted performances by Frank Sinatra, Judy Garland and Shirley Bassey. The Beatles stayed at the hotel, one of a handful built before 1960 that are still standing. The rest have been demolished to make way for a new generation of vast gaming palaces. The Sahara has avoided that fate but its doors have been closed since last year after the property’s owner, the Los Angeles-based SBE group, concluded it was “not economically viable”.

The slot machines and gaming tables are gone, the carpets have been ripped up, the floor sticky underfoot, and, without air conditioning, the dank, unlit interior of the building is stifling in the desert heat. The casino seems to capture the decline of a city devastated by the 2008 financial crisis.

But appearances can be deceptive and SBE, which operates restaurants, hotels and nightclubs, and its partner, Stockbridge Capital, a private equity firm, have secured $300m in financing to redevelop the Sahara with the aim of reopening it in 2014. Before the 2008 crash, any company seeking to redevelop an older casino hotel would have knocked it down and built a new one in its place. Now a new frugality has taken hold in a city where excess used to be the norm: SBE and Stockbridge will overhaul the Sahara while retaining its original structure. It will then be rebranded as an SLS property (SBE already operates the SLS Hotel in Beverly Hills).

©Corbis

The Sahara, which is undergoing a $765m redevelopment

There is a lot riding on the Sahara redevelopment, with SBE the first company to start a project of this magnitude since the 2008 crash. “We wanted to come in early [in the economic recovery] because construction costs are significantly cheaper than they were,” says Rob Oseland, president and chief operating officer of SLS Las Vegas, shortly before we walk through the empty casino. “As the market returns, real estate values and development projects will come back. It’s been rewarding to be the first ones out because Las Vegas has gone through so much doom and gloom that any sign of growth is celebrated.”

©Alamy

The Sahara's interior

Before the crash, Vegas stood as a shining example of the power of the leisure economy. For much of the decade leading up to 2008, it was the fastest growing city in the US: people from all over the country moved there to work in its gigantic casino resorts and tourists from all over the world flocked there for hedonistic splurges. Cheap credit fuelled a local housing boom and residents, old and new, splashed the cash, refinancing mortgages to buy second and even third homes. Everyone was invited to the party.

The crash bought an abrupt end to all that, with the Brookings Institution calling Las Vegas “ground zero of the world economic crisis”. Tourism slumped and house prices tumbled harder and faster than elsewhere in the US – falling by as much as 65 per cent from the market peak in 2006, according to research firm Applied Analysis. Several multibillion-dollar casino projects were suspended, such as the Echelon and Fontainebleau developments, and as construction stalled, so did the job market. Nevada now leads the US in joblessness.

There is little chance of a quick return to the boom times but house prices have inched higher over the past few months, although local estate agents say this may be due to scant inventory rather than a meaningful increase in demand. “We still have somewhere between 45,000 and 55,000 properties in some form of default,” says Kolleen Kelley, president of the Greater Las Vegas Association of Realtors. Demand for property continues to be weak despite an improvement in the city’s economic prospects. “Gaming revenues are up and tourism numbers are up,” says Kelley. “Builders are building again but the really large projects haven’t come back on line.”

There is no casino hotel development in Vegas bigger than City­Center, which opened at the end of 2009 with a price tag of $9bn. Most of the funds were supplied by a consortium of banks while a big investment from Dubai World, the Dubai government holding group, kept the project alive when costs spiralled. The complex, the largest private construction project in the US, is in the heart of Vegas and consists of three hotels – including the Mandarin Oriental – a vast casino and arena, condominiums, convention space and a Daniel Libeskind-designed mall. CityCenter was created to usher in a more sophisticated era in Las Vegas, with public art installations and outdoor spaces to explore but, when costs soared, it flirted with collapse before finally opening amid the financial crisis.

The thousands of additional hotel rooms that CityCenter brought into the Las Vegas market caused considerable anguish among rival operators struggling to adjust to falling demand. However, the complex has quickly become part of the local landscape, although the residential component has been hastily redrawn since City­Center opened its doors. The City­Center Harmon tower, designed by Norman Foster, was supposed to have 49 floors, but with market demand collapsing the tower never opened and is scheduled for demolition.

©Getty

CityCenter, the $9bn complex that opened in 2009

CityCenter was an expensive bet on condominium buyers or second-home seekers embracing urban living in the heart of Vegas but the slumping real estate market stopped that from happening. The main residential component in the complex is now in the twin Veer towers, which lean away from each other, and the Mandarin Oriental. Prices have been slashed twice to stimulate demand. The cheapest units in Veer have been cut to $315,000 from $500,000, with the most expensive penthouse unit in the Mandarin Oriental going for $6m.

“CityCenter was conceived in the best of times and ultimately was delivered in the worst of times,” says Tony Dennis, executive vice-president of CityCenter’s residential division. “But this project was built for multiple generations ... there’s a hundred-year horizon here so while we are subject to the vagaries of the short-term market, this is a long-term vision.”

Of the nearly 900 condominiums for sale in the Veer and Mandarin Oriental, CityCenter, which is owned by MGM Resorts, about 300 have been sold. CityCenter is targeting buyers in California, Canada and China with its new cut-price condominiums. “The underlying quality of the real estate, the construction, the services that are available, that will stand the test of time,” says Dennis. “It’s a tremendous opportunity when you compare it with other markets. A Mandarin Oriental residence in London would cost $10,000 a sq ft. We are at $800 a sq ft.”

Property buyers taking advantage of the sharply reduced prices in Vegas at CityCenter and across the broader residential market will find a city that is re-examining how it attracts tourists and residents. For years, demand was so strong that every time a new casino resort opened with thousands of rooms there would be people to fill it. But casino operators have become more circumspect and, as the Sahara redevelopment shows, small and affordable is now the norm, rather than big at any cost, with debt, The Sahara redevelopment will cost $765m, much less than multibillion-dollar new-build projects such as CityCenter, the Bellagio or the Wynn Las Vegas that have sprung up in Las Vegas over the past 20 years. Instead of adding thousands of new rooms, SBE is focusing on quality rather than quantity. “I think this is the next chapter,” says Rob Oseland as we finish our tour of the Sahara, closing the doors of the dark and empty casino behind us. It is not necessarily in the Las Vegas tradition but it might just offer a way forward for the future.

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