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October 23, 2014

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REAL ESTATE:

CityCenter condo prices not bending to market

MGM Mirage isn’t budging, though some buyers may walk away

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Steve Marcus

A sales executive talks about Veer towers during a January 2006 media open house. So far, 432 condo and condo-hotel units have sold at Veer. The average price per unit at Veer, Mandarin Oriental and Vdara towers is $1,250 per square foot, four to six times as much as other luxury units have sold for in Las Vegas recently.

CityCenter

Eco-friendly resorts: Construction continues on the CityCenter on the Strip between Monte Carlo and Bellagio. Aria and Vdara were given the second-highest certification by the U.S. Green Building Council. Launch slideshow »

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Buyers of CityCenter condos are urging the project’s managing partner, MGM Mirage, to lower prices on the units by 30 percent to 50 percent to better reflect the valley’s sagging condo market.

MGM Mirage is balking at the idea — at least for now.

Some buyers — many of them prominent and wealthy MGM Mirage customers who signed purchase contracts more than two years ago, during the real estate boom — are bracing for an uncomfortable confrontation with the company late this year, when the units are scheduled to close escrow.

MGM Mirage spokesman Alan Feldman said the company is aware of the changes in the condo market, but it’s too early to predict where the market will be at the end of the year. It would be foolhardy for the company to guess where prices will fall months before the units close escrow, he said.

“None of us could have predicted how the market changed throughout 2008,” Feldman said.

“We’re all going to have to take a breath and wait until the end of the year to have these discussions,” he said. “Anything else is just speculation.”

Condos in the super-luxury Mandarin Oriental resort — the first residential building at CityCenter to go on sale — were nearly sold out within weeks of opening reservations for “friends and family” and before the company opened its CityCenter sales center to the public in January 2007. Tourism was soaring in Las Vegas and the Strip’s biggest building boom — led by CityCenter — was in full swing.

Subsequent condo sales for CityCenter’s Veer and Vdara towers weren’t as brisk, a reflection of the slowing economy.

Buyers have so far signed purchase contracts for CityCenter condos worth an average of $1 million per unit.

Some buyers say they are most frustrated by MGM Mirage’s unwillingness to discuss potential price reductions.

Among them is Steve Mack, a retired Las Vegas pawnbroker who pocketed $90 million from the 2004 sale of his multistate SuperPawn chain.

“They indicated to us about six months ago that they would have a better picture of how this would be resolved. But they aren’t saying anything other than ‘we’ll get back to you,’ ” said Mack, who forked over a 20 percent deposit on a $3 million condo at Mandarin Oriental. “I think they need to work with the people like us who’ve committed to this project in a way that’s fair for both parties.”

Mack says buyers are unlikely to close on their units unless they sell for at least 30 percent off the prices specified in their contracts. Others may walk away from their nonrefundable deposits if units sell for more than half their initial purchase prices, he said.

“We gave them that deposit money with no interest with an implied guarantee that values would not go down,” he said.

Besides depressed demand, financing is also a problem, with banks reluctant to make jumbo loans for second homes.

Some buyers have requested switching from larger condos to smaller, less expensive units they can pay cash for, avoiding the need for a mortgage that may not be forthcoming, Mack said.

CityCenter is a unique development that will command a premium price over any Las Vegas project, in any economy, Feldman said.

“The combination of amenities ... is unique to CityCenter,” he said. “This is one of those cases where we think two and two adds up to 10.”

Unlike many other Las Vegas developments, which financed construction based on a certain number of signed sales contracts, the financing for CityCenter doesn’t require that any units be sold. Still, developers and their banks were counting on more than $2 billion in condo sales to improve CityCenter’s profit potential.

A recent deal to guarantee financing for CityCenter requires MGM Mirage to raise at least $243 million from the sale of condos to avoid responsibility for costs above the project’s $8.5 billion budget. That’s less than what MGM Mirage would receive if the company retained buyers’ deposits and no units closed escrow. (The deposits aren’t refundable unless the company doesn’t deliver the condos, and CityCenter sales contracts give MGM Mirage until the end of 2010 to open the condos.)

High-rise condo broker Bruce Hiatt, owner of Luxury Realty Group in Las Vegas, said MGM Mirage should consider lowering the price of CityCenter condos in order to ensure that units close escrow. Vdara, a condo-hotel tower, has a more difficult challenge given that financing for units priced before the recession has dried up with the units’ investment potential. Hiatt said he is advising clients to obtain independent appraisals to compare against those offered by the developers’ appraisers.

There’s little dispute that CityCenter units will sell at a premium, Hiatt said. The challenge for appraisers will be determining how much to discount the units given that foreclosed condos are priced 70 percent below pre-recession levels, he said. It’s not yet clear what that discount will or should be, he added.

Buyers, many of them from foreign countries, are pouncing on luxury condo foreclosures at prices below the cost to construct the units, which is at least $300 per square foot in Las Vegas, Hiatt said. Sale prices are typically half their purchase prices of three years ago but have recently attracted multiple bids — a sign, Hiatt said, that the market may have hit bottom.

Few units are still available at such fire sale prices, Hiatt said: Of 28 foreclosed condo units on or near the Strip resort corridor, about half are under contract to be sold and about a third of 79 available for short sales are under contract.

Given that developers are unlikely to build condos for many years, demand is likely to overtake supply after buyers realize how few Strip condos survived the recession, Hiatt said. But that turnaround might not happen for another year after CityCenter is open for business — which would mean bad timing for MGM Mirage if it begins closing these units this fall, he said.

So far, CityCenter has sold about 55 percent of its roughly 2,400 condo and condo-hotel units, including 206 units at Mandarin Oriental, 432 at Veer and 698 at Vdara, at an average price of $1,250 per square foot. This compares with recent sale prices of $200 to $300 per square foot for luxury units in Las Vegas. During the boom, condos in premium buildings and locations sold for more than $2,000 per square foot.

Mack said he expects to pay more for his CityCenter condo than prices paid for similarly sized luxury condos in Las Vegas but not more than prices in other high-end markets, which have also experienced declines.

“I think they would have to admit that these are worth less than what they sold them for because there isn’t any real estate in the world that hasn’t seen a discount,” he said. “I’d have to think that CityCenter doesn’t sit on a different planet.”

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