Las Vegas Housing to Reach $500 Per Square Foot
By Michael G. Hutchings
Five Hundred Dollars per square foot, plus. That is the direction we are moving in the Extreme Luxury Segment in Las Vegas (on average) in the not-too-distant future. And it is moving with more velocity than it did during the last “hyper-boom”.
Combine the momentum of Plutocratic Economics, meaning the fabulously rich becoming even richer through the excruciating process of a seven year-long recession and the validation of Las Vegas as a mature, established and potentially “first-tier” market. Not to mention, the added incentive to flee by the California – Proposition 30 Tax Refugees; as well as many other wealthy suitors looking for fun in the sun, as well as, low to “no” taxes with a superior quality of life than say…Well, most places; actually.
Add all of these factors together and there is the making of a fairly stout in-migration of quiet wealth into the valley. And, guess what; they don’t buy production boxes to live in, at least long-term they don’t.
Las Vegas is the natural first choice for this “one tenth of one percent”, and they are flocking here at rates like never before. I had a recent conversation with a very prominent, second-generation Asset Protection Attorney and he informed me, “unsolicited” of the fact that, “…their firm is receiving more phone calls from relocation clients with a net worth of over $10 million than at any other time over the past thirty years.”
That is a fairly strong indicator of in-migration of wealth into the valley. And they are often coming from markets that never gave Las Vegas a second thought prior to the last era of what I define as The Bellagio Boom, circa 2000.
Additionally, we have dozens of billionaires who either own here, do business here or frequent our market on a regular basis. Not a bad asset to boast for a market our size with a relatively meager GDP. But, that is just it…The super-wealthy are coming to Las Vegas primarily to spend, not necessarily to earn.
They do earn, and they do set-up shop because super-successful people cannot help but make money no matter where they go or what they are doing. But this latest Vegas-Phenomenon is unique in that this market is becoming a first-tier destination location. To a larger degree that takes the pressure off. All Las Vegas has to do to continue recruitment of the Super-Rich, is simply to be Vegas.
Based on the previous 6-month run-up of existing buildable single-family lots in Class “A” Master-Planned Communities, this from roughly 3rd Qtr. Of 2014 to almost a complete sell-out of any remaining “listed” inventory in the market by end of 1st Qtr. 2015; I would say by any indicator we are in a Mega-Luxury Lot Frenzy.
Now granted, we are not a large market by statistical analysis. Our whole market is under 1,000 buildable lots and we sell well under 500 Mega-Class Properties annually. Compare that to Silicon Valley that sells 5,000 homes over a million dollars per month, and you can see we are still in the seminal stages of becoming a market of Who’s Who on the Forbes 400.
But, we are well on our way to that status and if the current Post Recession indicators are any sign. Las Vegas could become the next Palm Beach or Palm Springs, only with Gambling, “real” Nightlife and much later shop hours and “last call” then “the other” and more physically hotter desert brethren to our West and South, meaning Phoenix/Scottsdale.
This last six month “push”, if you will; was a huge paradigm shift. Although, some of my more savvy clients/owners saw it coming and increased prices accordingly. To many it was simple supply & demand economics.
I was personally shocked to see such a formidable spike in both activity and closed sales, as I live it on the battlefield every day. And, it was the first real hyper-activity we have seen since the slow-down in 2007.
When Ascaya in Henderson came back on the market at starting prices around a million dollars per site. I personally thought they were out of their minds. It is a gorgeous project, and they seem to be doing everything right from a basic marketing perspective. I just thought it was too soon and would flood an already fragile luxury lot market with too much inventory.
It appears now, that I misjudged demand and the magnitude of where Las Vegas is going as a true luxury market. I knew we were “headed” in the right direction. I had no idea that the new wave was already here, on the ground and itching to write checks, today!
At this juncture the entire luxury lot market has been swept up into a vortex in a literal chase to see one million dollars as pretty much the standard for any unobstructed view lot in the valley.
That number was roughly about $1.250M+ at the peak of the market in 2005 – 2006. I thought it would take decades for the market to recover to that level. But, in fact; it already has been about a decade since the 2007 downturn if one really thinks about it. And, the entire Boom-Cycle in Hyper-Luxury was about 5 years, so it isn’t such an impossible feat to consider nearly ten years for re-establishment of these Luxury Watermark Prices.
We are a more established market now compared to 2003 for example, that sees many more wealthy Buyers from a far more vast array of feeder markets than Las Vegas did from 2001 to 2005.
Before the Bellagio Era even San Francisco would turn its nose up at Las Vegas as a legitimate tourist destination. Now, we have Buyers from every corner of the world. And, I just had an offer on a $700,000 Lot from my first Millennial, a 20-year-old Internet sensation named Ryan Higa, who has made his entire fortune seemingly making comedy videos on YouTube.
The world has indeed changed, and technology has won, especially when we see 20 year-olds looking to build what would be a $3.0M+ custom home from proceeds from his You Tube account. Las Vegas is a big beneficiary to the world of entrepreneurism and how it relates back to the technology sectors – Gaming Technology, Hospitality, Entertainment, Food & Beverage. Today all of these industries are driven by, you guessed it; technology. It is not just a software equation, it’s digital and much of the end use and subsequent results happen here. And, now the wealth “by-product” is staying and investing here, as opposed to carpet-bagging.
My last three Clients/Buyers have been the #1 Downloaded personality on Instagram who lives in a multi-million-dollar home in The Ridges, a Professional Poker Player and finally the You Tube sensation I previously mentioned. A multi-million-dollar Buyer that isn’t even old enough to legally drink. All of them, well under 40 years old. None of them go to an office and all of them live in Super-Luxury gated communities.
HIGHER LAND PRICES = HIGHER PRICED PRODUCT
This buying spree has in essence created the cost of acquiring a top tier custom lot at a minimum price of approximately $600,000. And, thus with a House Cost Analysis somewhere in the area of $300 per square foot and an average product size at 7,000 sq. ft., that equates to (“forces”) an average product somewhere in the neighborhood of $2.1M. It simply cannot be done properly for any less, period.
So, simple math (not Common Core) works out to a “House Cost” + “Lot Basis” equation of about $2.7M or $385 per square foot just to get in the game. That would be “if” the project could miraculously be delivered today.
However, these types of projects can’t deliver overnight, they take time to design and build and these prices will continue to rise by my most conservative estimations at 1% per month for the next 18 months. Thus, moving this market into the $460 per square foot range before too long. And this for “an average” custom home. Not, some of the breathtaking world-class products that are either underway or in planning stages at Masterplans around the valley like Ascaya, MacDonald Highlands, The Enclave and The Ridges.
I’m unfortunately anticipating another 20% bump in Land Prices in Prime Areas like MacDonald Highlands and The Ridges by the 2015 close-out. And a stabilization throughout 2016 as developers rush to deliver more inventory onto the market. There is very little individually owned, listed inventory and you can be rest-assured Sellers want to get every dollar out of their properties right now as it has been a long holding pattern for them with Taxes, LID’s, SID’s, HOA Fees & Penalties being paid all along the way.
So, that begs the question. How deep is this Mega-Luxury Market in Las Vegas? I believe it to be quite deep. We have a global market to draw from and we are just hitting our stride when it comes to expansion and product sophistication.
This is a city of 2 million+ inhabitants and there are really only four main places to live when it comes to hyper-luxury living and most of those are sub-par when compared to other MSA’s around the world. Therefore, our Demand outweighs our Supply by a wide margin.
Another reason the custom market will continue to sell is because we are still somewhat underpriced by comparison to other major resort markets. And, again our weather, tax advantages and lower building & labor costs help, not to mention the Las Vegas Strip which is the most effective “human being” delivery model of any major tourist market on the planet.
Our proximity to Southern California continues to help us land everyone from Wealthy Celebrities to Technology Tycoons.
The bad news is you have already missed the “Fire Sale” of buying land in Las Vegas. If you didn’t have cash, or you “did” have cash and didn’t get in the game. I’ve got news for you… It’s over for another 25-year cycle…And, unless you are college age you will most likely never see the negative effects of what happened during the last down cycle. If you are a student of economics, you will understand that those kinds of extremes only happen on a generational level. Not with every recessionary retraction.
In other words, Las Vegas will experience more down-cycles. Cyclical behavior is entirely normal for any market or industry. But, I doubt any of us will live to see another disaster like mid-2007 through 2012.
However, it was actually quite an uneventful land grab in retrospect. We saw below wholesale, almost free pockets of land “off and on” for close to two years. However, it was nothing as exciting as “for example” the BLM Auction at the height of the peak cycle. This last go ‘round was just a quiet little one-off series of purchases from astutely confident investors.
The good news is the next 18 months will be a pretty safe time to buy for speculators and end–users in the finished lot arena. You may get zapped slightly come 2018 or 2019 but after one more revolution we will see per home site pricing level-off at about $650,000 to $700,000 a lot. As a whole, I don’t anticipate much more volatile movement for many quarters to come.
2017 will be the most interesting period to observe. This will be a post-election, geopolitical and socio-economic period of turmoil. With interest rates moving upward, gun-shy banks getting comfortable with $3.5M to $5.0M Design/Build purchases (read Demands for Institutional Product) by Private Clients. We should see a slow steady increase through 2016 and well into 2017, then a time for pause.
2017 is going give some major indication as to whether we see a peak and possible plateau and/or the next decline. Or, whether we see Vegas sky-rocket even beyond the last Boom Cycle that ran from 2000 to mid-2007 or seek a healthier solid plateau. In other words, will we launch into stratospheric levels like those seen in Los Angeles, New York, London, Sydney, Melbourne, etc.? Or, will the market simply stabilize and solidify. After, the last down-cycle I vote for “solid & stable”, myself.
THE RISING TIDE LIFTS ALL BOATS
If we see $500 per square foot regularly in premiere communities around the valley. Which I am confident we will. It will drive the re-sale markets to follow suit. This will create equity for Major Renovation of dated product, and we will then see the return of well over $200+ per square foot for production product and on into the $250 per square foot to $300+ per square foot on Semi-Custom Product, just like before.
Making about $150 to $160 per square foot the norm for the affordability factors relating to basic single-family housing across the valley.
This means “again” for an 1,800 +/- sq. foot Las Vegas, Red-Tiled, Vanilla Stucco House it will once again be close to $300,000 and you can be rest assured that about an 18% premium will apply to the average Las Vegas “newly built” production home, and that product will be close to $340,000 per delivered unit.
With interest rates assuredly up by then and a less than buoyant job market, affordability will become a serious problem for this market over the subsequent 24 to 36 months and beyond.
In simple layman’s terms. If you are in the market, it is time to buy!
The activity levels in extreme custom sort of marches to its own beat. But of course; it is an extrapolated process and it is a three-fold equation tied to Private Financing, Lot Prices & Construction Costs.
It moves so slowly, that it is often a safer animal with less volatility both in an expanding and deteriorating market. Some large-scale projects of 20,000 square feet or more. Which incidentally we have more of underway than at any other time in our history, simply transcend entire economic cycles they take so long to fund, design and build-out.
Custom appears to generally lag behind the median markets but when the extreme luxury begins to hit on all cylinders and deliver it can actually pull median housing up as normal prices pale in comparison to the Super-Luxury segment making it easier for the Semi-Custom and High-End Production projects to eke their prices up.
Since, financing is always available for the publicly traded production guys they have really bolstered the $1M to $1.5M price category around town over the last 18 months. Making it easier for the Custom Operators who deliver on a much larger scale both in terms of building sites & architecturally to move well into the high millions and up into the low $2M price point without much effort.
As I said, we already are seeing more 20,000 sq. foot product going up than ever before and we will now see the $3.5M well into the $5M+ pricing arena become more prevalent in Las Vegas than ever before.
The luxury condo market has also helped that price segment. The arrival of more sophisticated Buyer Groups and Architects has helped efforts, as well.
We saw Custom Homes selling and closing for over $1000 per square foot in 2008 and 2009 well after the recession set-in. So even $500 per square foot may be a timid prediction considering what is going on in this market at the moment.
But, if you are good at reading tea leaves, 2017 will be the year for reflection. Until then this market is in a Buy Mode with regard to the extreme high-end and will remain so for a solid 18 months.
Buy everything you can get your hands on for the next year and a half. You literally will not be able to make a mistake, rest assured.
Again, as we roll into 1st Qtr. Of 2017 that will be the time to take a breath and analyze. Not that I won’t be doing that every step along the way. But, by that time period it will be apropos to pause and reflect as to decide whether to double down or take your chips off the table and head for greener pastures.
And I state this opinion purely from a speculative standpoint. As an End User, again pretty tough to get hurt in the Las Vegas Market right now. And that is a far cry from the blood-letting of 2008 and beyond.
So, the odds are in our favor regardless of any quasi-science or statistical analysis by “for example” the Zillow’s of the world, who haven’t even been in business long enough to witness a complete housing cycle. The momentum or velocity as we like to call it in production building is growing. And that is hard to stop regardless of any live-time or short-sighted statistical analysis or incomplete logic by newcomers to the industry.
Michael G. Hutchings is a Licensed Real Estate Broker & General Contractor with over 30 years of experience and who is currently based in Las Vegas, Nevada.