Las Vegas Real Estate as an Investment – Place Your Bets

With property values continuing to decline all around the world, one has to ask the question as to which market is the most likely to become an attractive investment destination first. Personally, I think we have some considerable distance to fall still, but that gives the property investor time to give serious consideration as to their next investment. Anyone considering buying property in the USA as an investment should seriously look at Las Vegas with an eye on the future.

Las Vegas was one of the most boom-fueled markets in the United States and has been particularly hard hit by the global downturn. Here, we take a look at the underlying fundamentals in an effort to predict when Las Vegas will be worth investing in again.

Current state of the real estate market in Las Vegas

Office space. The office vacancy rate is at the highest level in years - around 20% vacant and still climbing. Class A office space is vacant at an even higher rate - 28% and also climbing. Nearly 700,000 sq ft of office space was completed in the first quarter of 2009, and there is still 600,000 sq ft under construction. 8.1 million square feet is vacant.

Retail space. Retail space is lagging behind office, but only just. Availability has increased by 1.7 million sq ft over the last year to 51.3 million sq ft, and 221,000 sq ft of space emptied out in the first quarter of 2009. 800,000 sq ft was added to the inventory and there was 1.7 million sq ft under construction - much of which has now stopped. Vacancies are now around 12% and likely to continue climbing, especially of a few more big box retailers like Circuit City go under. Malls are emptying out faster than they filled up and 42% of the spaces available are over 10,000 sq ft and not financially viable to turn into smaller spaces in the current market.

Commercial foreclosures. Everyone expects a tidal flood of commercial foreclosures over the next two years - much of this empty commercial space is highly leveraged and it is only a matter of time before the commercial foreclosures begin to outweigh the residential. The Las Vegas Sun puts 25% of LV commercial real estate currently in trouble, second only to New York,  with $8.525 billion of loans and property in trouble, and is ahead of the far larger Los Angeles market at $5.02 billion. LV Sun report.

Residential market. Nevada is one of the most hit by the foreclosures spreading across the USA. Las Vegas in particular has several years worth of inventory to clear and some properties are selling for pennies on the dollar. There is actually a good argument that much of Las Vegas' residential development land has zero value. It is hard to estimate how long it will take to clear these foreclosures as most of the new build properties have been reduced in an effort to compete with them. Prices are already down to around 2003 levels and new home sales are at an all time low. Supply and demand is alive and well in Las Vegas - the simple fact is there is massive over supply of property for sale in Las Vegas,  combine this with a drastic drop in demand and you have a recipe for disaster. Even moratoriums by Fannie Mae and Freddie Mac have failed to slow the foreclosure rates. Which brings us to the underlying fundamental in Las Vegas.

Gambling. Las Vegas is a vacation destination - pure and simple. The amount of local demand is not anywhere near enough to create a strong housing market with the current level of inventory. Take away the visitors and you take away the market. And the gambling industry is not looking good at the moment.

According to the Associated Press, Casino stocks fell drastically this week as investors dumped shares across all industries after a six-week rally while gambling investors continued wondering how casino companies would manage debt and large projects.

JPMorgan upgraded Las Vegas Sands Corp. from neutral to overweight on Monday, as shares in the Las Vegas-based company controlled by billionaire Sheldon Adelson fell 40 cents, or 8 percent, to $4.63 in afternoon trading.

"Our upgrade is not without meaningful risks, which include but are not limited to ... (Las Vegas) getting meaningfully worse from here and uncertain capacity additions do in fact open and cannibalize its (Las Vegas) assets," Greff wrote.

MGM Mirage Inc. shares dropped $2, or 20.3 percent, to close at $5.02 amid rampant rumors and unconfirmed reports about the company and its largest project, the $8.7 billion CityCenter complex on the Las Vegas Strip.

Las Vegas Sands Corp. shares dropped 39 cents, or 7.8 percent, to close at $4.64. Wynn Resorts Ltd. shares fell $2.32, or 7.1 percent, to close at $30.44.

Meanwhile, the Dow fell 289.6 points, or 3.6%, to close at 7841.73, while the S&P 500 fell 37.21 points, or 4.3 percent, to close at 832.39.

MGM Mirage, majority owned by billionaire investor Kirk Kerkorian, on Friday covered its share of the $70 million construction payment for the project. Dubai World's $35 million share was the second payment covered by MGM Mirage while the 50-50 partners hammer out a deal to assure the project is completed.

Dubai World expressed worries about MGM Mirage when it sued the Fortune 500 company last month and said the casino company's statements about its financial health put CityCenter at risk.

Dubai World also alleged that MGM Mirage has mismanaged CityCenter, though MGM Mirage officials have said that Dubai World has been involved in CityCenter's progress since the partnership started in August 2007.

Dubai World said it was particularly concerned about comments in MGM Mirage's annual report warning that it could default on its debt and be forced to seek bankruptcy court protection.

Dubai World manages investments for Dubai, which announced in February it would issue $20 billion in bonds as Dubai's economy is in free fall, amid a deepening global economic crisis. Abu Dhabi immediately purchased $10 billion - the rest remain unsold.

It is not just the big boys that are in trouble either. Trump entertainment filed chapter 11 recently (again) and it looks as though Hooters, Lady Luck and the Greek Islands will be following suit.

Visitor numbers. Visitor volume was down 8% in February from the same month one year ago, with convention attendance down nearly 35%. The Las Vegas Convention and Visitors Authority said 2.9 million visitors came to Las Vegas in February, compared with 3.1 million visitors in February 2008.

The numbers show that about 1,700 conventions and meetings were held in the month, 15.7% fewer than the same month one year ago.visitor volume is down 10% for the first two months of 2009 compared with January and February of 2008, with convention attendance down nearly 29%. The average hotel room price is down 21.5% to nearly $102 per night this year.

Conclusions. Until such times as the gambling industry perks up, Las Vegas real estate will continue to devalue. The time to buy property as an investment in Las Vegas is when the casinos start showing some solid results - preferably 6 months before. There will be a killing to be made somewhen between now and the upturn in the economy the governments are betting your bottom dollar on. Place your bets !