A Stern Glance

(Note: Vestin and Gordon Silver are Stern And Company clients)

Copyright © Las Vegas Review-Journal (By John G. Edwards)

Financial leaders agree: LV recovery will take time

A bankruptcy lawyer, head accountant and hard-money lender who spoke to a business group on Friday agreed that the Las Vegas recession will run long and cut deep.

Unemployment will reach 15 percent after the holidays, up from 13.9 percent now, predicted Mike Shustek, founder of Vestin Group, a hard money lender who makes loans secured by real estate.

Marginal hotel-casinos that are loaded with debt will be cannibalized, said William Wells, managing partner for RSM McGladery, an accounting firm.

In fact, one reason commercial foreclosures are not worse is that banks don’t want to take back collateral so they are continuing to negotiate with borrowers, said Greg Garman, managing partner for the law firm Gordon Silver.

The three executives spoke to about 75 attendees at the CEO-CFO Group at McCormick & Schmick’s on Flamingo.

Garman estimated lenders provided $3 trillion to $4 trillion [NOTE: Mr. Garman said "billion," not "trillion"] worth of debt to Southern Nevada borrowers over the last few years.

He said the Fontainebleau Las Vegas is an example of the problem hitting Southern Nevada now.

“You can’t refinance it and can’t sell it,” Garman said of the bankrupt property which is now stalled and unfinished.

So far, $2 billion has been spent building the $3 billion Strip casino property, but it would take another $1.5 billion to complete it, he said. Then, it would only generate $100 million in yearly cash flow, he said.

Penn National Gaming is offering “less than $300 million” to buy it, according to news reports, but that wouldn’t even cover the $400 million owed contractors and subcontractors with mechanics liens on the property.

As bad times continue, Garman predicted a flood of lawsuits among business partners and against lenders. Debtors will “swing for the fences, because you don’t have a lot of options,” he said.

“You are not going to see new construction in commercial (properties),” Shustek said.

Vestin’s most recent loan was $18 million to a company that bought a performing pool of $40 million in loans from the Federal Deposit Insurance Corp., he said.

In the residential sector, Shustek predicted little new construction until the inventory of foreclosed properties is sold, because these homes are going for less than the cost of building a new home.

Developers have cut the price of high-rise condominiums by 30 percent to 40 percent, Shustek said.

While many low-end homes have gone through foreclosure, “you are going to see the big-end (homes) start to get it,” Shustek said.

Wells expects a W-shaped recovery for housing, with prices climbing and then falling again.

“Where is the job growth going to be coming from?” the accounting executive asked.

The government will make a housing recovery even harder when it is forced to raise interest rates to fight inflation, Wells added.

“It’s not going to be the fantastic numbers we had 2003 and 2006,” Wells said. He said a slower economic pace will become the new normal.

Businesses are changing their strategies. “Just growing for growth’s sake is not the way to go. People are learning how to run their businesses with fewer people,” he said.
 
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http://www.lvrj.com/business/financial-leaders-agree-lv-recovery-will-take-time-65892347.html

In Business Las Vegas: Experts say economy crushing Las Vegas real estate market

By Brian Wargo In Business reporter

The group, composed of a lender, a bankruptcy attorney and a consultant, said the Las Vegas recovery will lag not only the nation but competing markets such as Phoenix.

Michael Shustek, CEO of Vestin Group, a real estate lender and asset manager, said many residential foreclosures have been limited to low-end homes, but a wave of foreclosures at the higher end of the market is coming.

Those homeowners are having difficulty getting refinanced, and prospective buyers are limited in getting higher-limit loans, he said.

“You are going to have a lot of large homes hit the foreclosure market,” said Shustek, who participated in the CEO-CFO Group’s Nevada Economic Summit on Oct. 23 at McCormick & Schmick’s. “The people who owned the big home probably owned the dry cleaners. And what happens is people lose their jobs, and they don’t need as much dry cleaning. It’s a food chain that goes all the way to the very top.”

The key to predicting the real estate market is what’s happening in the economy and in gaming and construction – two industries that were hit hard, said Gregory Garman, an attorney with the law firm Gordon Silver. Las Vegas isn’t Detroit, but it’s in a tough spot when it comes to absorbing real estate, he said.

“We have high unemployment and two industries that are not anywhere close to the verge of recovery and a stagnant if not shrinking population base,” Garman said. “When you look at those things weighing against us, it is going to (take awhile) until some of this (housing) inventory gets absorbed.”

The poor economy and number of used homes on the market will weigh on new-home sales. The large gap in prices between existing homes and new homes makes it even tougher, panelists said.

Loans for condominiums are difficult to obtain, Shustek said. In some cases lenders are requiring buyers put down 30 percent to 40 percent.

“Look at how many condo towers you are seeing empty,” Shustek said. “I did the lending on Towers 1 and 2 at Panorama. We sold out. Tower 3 has 15 closed units in that whole tower. It is frightening out there.”

Wells said that homebuilders can’t compete with existing homes selling for $70 a square foot and that the lack of job growth will hinder that recovery going forward.

The experts predicted that even the addition of 12,000 jobs at CityCenter, slated to open in December, by itself won’t fuel enough additional economic growth or create enough jobs to offset the tens of thousands of jobs Southern Nevada has recently lost.

“We have 180,000 unemployed in the state,” said William Wells, managing director of RSM McGladrey, a business consulting and accounting firm. “That is the part I am concerned about. Where is (job growth) going to be to put more rooftops out there and fill some of these homes.”

Wells predicts the housing market will suffer through what he calls the “W” effect with prices going up, down and back up again. The concern is what happens with the Federal Reserve and need to raise interest rates to keep inflation under control. That will keep a lot of buyers from the market, he said.

“I think the other thing we have to put in perspective is when is the residential market back. How do you define ‘back’?” Wells said. “Back to what, because it is not going to achieve the unreachable numbers we had in 2003 to 2006. I think people are coming to the realization that there is a new baseline. That was something that was unsustainable, and going forward you will have to manage your life a little differently.”

Concern about commercial RE

Like the residential market, Shustek said he is just as concerned about commercial real estate with high vacancy rates. That problem has yet to hit, but it is coming and new projects are grinding to a halt, he said.

“You are going to see it slowing down here until we build industry or create jobs,” Shustek said.

Wells said commercial real estate lags residential, but it could have more of an effect on Las Vegas in the long term. It could be two to four years before the commercial market turns around, he said.

Garman said it has mostly been land that has been foreclosed on by lenders, but suggested that will change soon. Many highly leveraged property owners will simply give buildings back to lenders, he said.

“It doesn’t look rosy,” Garman said. “Unfortunately, it has really yet to start. This is the wave that faces us.”

The economic woes won’t help the construction industry rebound.

Garman, who represents clients with mechanic’s liens against the foundering Fontainebleau, said he doesn’t expect anything “built for a substantial period of time … I am not sure the economic model justifies the type of dollars at which the current product is going up.”

Some of the panelists suggested Las Vegas’ jobless rate will hit 15 percent from its current level of 13.9 percent. Companies are running with fewer workers, and a lot of those jobs are gone and never coming back, Wells said.

Las Vegas will be one of the last cities in the country to rebound, even after Phoenix, the panelists said. Garman said Phoenix is helped because its economy is more diversified.

Wells said his firm has clients that develop in Las Vegas and Phoenix, and suggested the commercial real estate market may be in worse shape in Phoenix, which was more overbuilt than Las Vegas’. Southern Nevada, however, has been harder hit in the housing market, he said.

“We have to create jobs and be more diversified,” Shustek said on what Las Vegas can learn from the recession. “We depend on construction and gaming, and the only way to make this city and state thrive is to be diversified.”

Wells said the state needs to broaden its tax base to deal with a $2.5 billion budget deficit. The lesson to be learned in Las Vegas is the level that it enjoyed from 2003 to 2006 was unsustainable. People were overleveraged and thought the bubble would never burst, and now they must get used to what the term “normal” means, he said.

“I think people are starting to realize that those days were nice, but they aren’t here anymore,” he said. “There is always a little bit of greed factor for everything. We are paying a price for that right now.”

(NOTE: Gordon Silver and Vestin are Stern And Company clients)