Good morning,
You know the saying: What happens in Vegas, stays in Vegas. One major real estate developer is hoping executives at some of the largest companies in the U.S. will literally choose to stay in Vegas but to conduct business, not to play the slots. And his journey has followed the constantly evolving real estate market in recent years.
Lorenzo Doumani comes from a family that ranks as Las Vegas royalty. They're the developers of the iconic El Morocco and La Concha Motels. A new piece by my colleague Shawn Tully details Doumani’s pursuit to build Majestic Las Vegas—a destination for Fortune 500 execs.
“Companies of all kinds want a big, permanent presence in Vegas, and this is a condo-style solution for them,” he told Tully. “The suites could serve as corporate headquarters, or as a venue where the NFL holds meetings for team owners, or as display space for clothing companies that spend many millions every year on displays during Las Vegas Fashion Week that they tear down after four or five days.”
And the vibe he’s seeking to summon is “the super-loose élan that ruled in the heyday of Frank, Dean, and Sammy,” Tully writes. A premium spot, of course, will only be available to companies with a champagne budget. “Expected price on the penthouse that would occupy the entire top floor and cover the square footage of a pro football field to the 50-yard line: $100 million, or $12 million for the 6,500-square-foot, four-to-a-floor versions below. We’re talking Manhattan prices,” Tully writes.
But the headwinds from COVID, high interest rates, construction costs, and inflation, have all been factors that have slowed down the development process.
“Before COVID struck, the project’s numbers looked excellent," Tully writes. "Doumani priced out the tower’s total construction costs at just over $600 million, including interest. He expected to raise around $450 million from preselling the Sky Suites, and finance the balance via a modest $150 million in borrowings. But after the outbreak delayed construction for 18 months, a second cyclone hit: a historic surge in construction costs. Doumani now puts his all-in expense at well over $900 million, representing a nearly 50% increase over three-and-a-half years, or 12% annually.”
“It’s the prices of concrete, steel, and labor, if you can find enough workers at all,” Doumani told Tully. “We’re also seeing long delays in getting materials, and interest costs have doubled since we assembled the original plan.”
Commercial real estate (CRE) has been a hot topic, especially following stress in the financial sector. The failure of SVB will most likely result in stricter lending standards on top of already tightened credit. But there’s a difference in opinion on how things will play out.
Morgan Stanley analysts have forecasted a “peak-to-trough CRE price decline of as much as 40%, worse than in the Great Financial Crisis,” Fortune reported. Meanwhile, Bank of America analysts suggested in a note that commercial real estate will hold steady, while echoing the office sector’s diminishing value.
Will corporations pony up for this property? You can read more about Doumani’s plans here.
Enjoy the long Memorial Day weekend. See you on Tuesday.
Sheryl Estrada
sheryl.estrada@fortune.com
