Friday, June 18, 2010 | 3 a.m.
Faced with more than 5,000 empty high-rise condominiums in Las Vegas and buyers staying on the sidelines in the weak economy, developers are turning to the rental market.
Luxury condo project Turnberry Towers is among those that started renting a portion of its units in 2010. Strip high-rise tower Allure and other developments such as Boca Raton have been leasing units since the recession cut into sales two years ago.
Heather Herrod, director of business development with RMI Management, whose rental division manages a portion of the units at such projects as Allure and Boca Raton, said several developers are considering time shares as well.
It’s about finding a way to generate revenue in a difficult time, she said.
“In this downturn in the economy, rather than sell units at bargain basement prices, they are renting them out to supplement the shortfalls in developers’ operating budgets,” Herrod said. “This allows them to hold onto the inventory until the market turns.”
Allure has sold 150 out of its 428 units and has rented 115, Herrod said. Boca Raton has rented fewer than 200 of its 378 units, of which it has sold 177, she said.
Some developers are watching one another, and they may end up following another’s lead, Herrod said.
“We estimate that out of RMI’s portfolio of eight major high-rises in Las Vegas, that an additional 660 units could conceivably be rented out by the developers,” Herrod said.
“They are going to have to do something with those to generate cash flow,” said SalesTraq President Larry Murphy, who reported that through the first four months of 2010, just 166 new high-rise condo sales closed in Las Vegas, even with CityCenter as part of the mix.
One Las Vegas is a project that recently turned to renting units in its two towers that have 359 units. Fewer than 75 of those units’ sales have closed, Murphy said.
Starwood Property Trust took over One Las Vegas as part of its acquisition of the real estate loan portfolio of failed bank Corus Bankshares.
In a recent article in The New York Times, Starwood’s founder Barry Sternlicht said he though One Las Vegas would be converted to rentals.
Streamline Tower, another property obtained by Starwood through Corus, might follow suit, according to real estate analysts. Streamline has closed on 25 of its 275 units.
Las Vegas housing analyst Steve Bottfeld said he sees the rental trend continuing because if developers can’t make money selling units, they have to do something to generate revenue to pay for construction loans. Many might be lease options for the renters to purchase the units, Bottfeld said.
The same principle is being applied at condo hotel projects such as Vdara, where MGM Mirage is putting in its hotel-room pool units it is unable to sell in a market with more than 2,500 condo hotel units available, Bottfeld said.
Turnberry has sold about 80 of its 318 units at its west tower that opened in 2008 and in January decided to rent a small portion of the tower, said Scott Singler, director of marketing.
It has leased out 27 units and has five more left in its portfolio, he said. With an average lease price of $1.50 per square foot and the average size of 1,300 square feet, the condos are being leased at just under $2,000 a month on average, he said.
It’s a way to get bodies into the building and market it by word-of-mouth from tenants to increase purchases, Singler said.
That has helped boost sales to the point that prices have even risen to about $350 per square foot, up from about $300 a square foot, he said. When the tower opened in 2008, the units sold for $500 to $600 a square foot, he said.
Singler said it is difficult to add more units to the rental pool because they are shells waiting for the buyers to finish them out. Renting them requires they be completed, he said.
Some analysts have projected it could take more than a decade or longer to gobble up the excess supply of condos. The market has been hobbled by buyers’ unwillingness or inability to spend money but also by the difficulty to obtain financing.
“The problem is so big, it is like the oil spill,” Bottfeld said. “They have tried 14 different solutions, and they got it partially under control. This is one of 14 solutions they are trying. It is not going to be the final cure, but it is one more step in the right direction.”
One condominium tower that isn’t putting any of its units in a rental pool is the north Panorama Tower, said Marc Ehrlich, president of Panorama North Marketing.
Only 60 of the 372 units have been sold. It was foreclosed upon by its construction lender, Istar Financial in November 2008, but Ehrlich said interest is picking up with 25 sales so far this year. It recently announced it has teamed up with CalCon Mutual Mortgages Corp. to help buyers obtaining financing — something that has been difficult since the credit crunch hit two years ago.
Ehrlich said selling units and having the developer rent them at the same time creates too much confusion for potential buyers. Going the rental route can create problems if 50 percent or more are leased because Fannie Mae or Freddie Mac won’ buy the mortgages, Ehrlich said.
Bottfeld said there is interest in renting the high rises from those under 45 who are more than likely single or in a relationship and don’t have any children. They may be working nearby and want to minimize their travel distance, he said.