If the Market is a Train, Land is the Caboose
This article from the Las Vegas Sun peaked my interest because the Vegas hotels are taking a beating right now and are dealing with rising vacancies while more deliveries are scheduled.
Vacant land on the Las Vegas Strip changed hands last week in the first such deal on the famed 4-mile corridor since the recession.
Surprised observers of the $25 million acquisition of 2.15 acres at Harmon Avenue and Las Vegas Boulevard by developer Brett Torino and two undisclosed partners had one key question: how to value Strip property in this — or any — economy?
When business was brisk in Las Vegas, developers and speculators fought over Strip parcels. Casino executives were quoted declaring the land beneath their casinos was worth $20 million per acre. Those estimates inched upward during the boom years, topping out at more than $30 million per acre.
First of all, it’s always tough to value land because the eventual product doesn’t get delivered until some time after the land trades hands. Land is usually accompanied by significant market risk. If you’re a developer buying land at the peak, you have no idea you are buying at the peak and instead you are being asked to price in the little risk that the run-up to the peak has seen. And yet, the likelihood is that the product won’t be delivered for a few years and who knows what the market will look like then.
Buying land in a down market is even more difficult. In Las Vegas it’s difficult to imagine a sane person beginning a new development in the near future. Here’s the pitch for developing on the strip:
It’s going to cost millions to buy the land, even more to develop it, and then we’re going to have the hot place on the strip until someone else comes along and develops something even better. And yet we’re going to have something that aside from brand will be identical to every single other place on the strip, so while our pirates might be more attractive for some people than a topless pool, really it will all be kind of the same. Oh yeah, and every other state in the U.S. has seen people flock to Vegas long enough and they’re going to loosen their own gambling rules enough to create competition that we don’t want in addition to the competition for the international tourists that Macau and other places are going to give us. Oh, but don’t worry, the tourism board is going to keep beating a dead horse with those “What happens in Vegas” commercials (no need to update that campaign).
In any case, the point of this post was not a rant on how screwed Vegas is. The point is that land is valued on a derivative basis. It’s only worth whatever the asset that can be built on it, less the costs of construction and less the risk involved. When Las Vegas vacancies start to look better and the development pipeline settles down a little, the land in the article will be a lot more attractive.
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