Rising construction and labor costs combined with moderating prices are squeezing developer profits and in some cases stopping projects from being built altogether. The [Icon Las Vegas [REJ]](http://www.realestatejournal.com/propertyreport/newsandtrends/20060116-corkery.html?rejcontent=mail), has been the latest casualty.
In the article [High Costs Cool Vegas Condo Boom [Forbes.com]](http://www.forbes.com/newsletter/2006/01/13/vegas-condo-slatin-in_ps_0113soapbox_inl.html), “Related Las Vegas, canceled groundbreaking and announced plans to return deposits to hundreds of investors in two residential high-rise towers just off the Strip. Related’s reasoning: Construction costs have rocketed since it presold the units, eliminating its profit.” This is a significant event for investors since [Related has a reputation for completing their projects [Miami Herald].](http://www.miami.com/mld/miamiherald/business/13588389.htm)
Buyers are getting their deposits returned for their purchases within these two 48 story [500 unit towers [Las Vegas Review-Journal]](http://www.reviewjournal.com/lvrj_home/2006/Jan-07-Sat-2006/business/5248008.html) that would have been completed in 2008 but are upset because they won’t be able to flip for a profit. The concern in markets like Las Vegas and Miami is that speculators are fueling the demand, not future occupants. Supposedly the first tower was [fully reserved within 48 hours after opening the sales office [Las Vegas Review-Journal].](http://www.reviewjournal.com/lvrj_home/2005/Apr-02-Sat-2005/business/1017868.html)
There are more than 100 condo developments in the pipeline in Las Vegas.
Concern with smaller developers
Rising materials and labor costs would seem to be of special concern to first time developers, especially those that are building smaller 1-4 family properties. They generally do not have deep pockets and are banking on construction costs to move with inflation as well as the continued double digit growth in property values in order to realize a profit. However, with construction costs rising rapidly and housing price appreciation easing, there is not a lot of wiggle room to make a profit, icon or not.
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As a small developer in Chicago, I can confirm that this is going on. The cooling in prices was expected and I planned for it in my pro formas, but the rise in material and labor costs was not. Thus, on one project I have seen my contingency eaten away and now it’s cutting into my profit. When the deal closes, I’ll likely take the capital gains hit and wait unless an obsolutely unbeatable deal arrives, which I doubt. I’ll be okay, but if this wasn’t just a great deal to begin with (due to, of course, a good land price) I would be sweating bullets right now. I pity some of my competitors, who I know bought at greater land prices than I for the same market.