Scottsdale's Luxury Resorts in Foreclosure? No!

http://www.azcentral.com/php-bin/clicktrack/email.php/8624274

That's the link to a story my friend Danny sent me, regarding the W Hotel in Scottsdale. While I think that this specific project was one of the good ones (and the building itself was quite well executed), it is illustrative of the problems we created in the past several years.

How much higher could the market possibly go? That's the question that many developers forgot to ask themselves, along with the whole question of underwriting based on assets with declining values, such as speculative real estate holdings.

Scottsdale and Paradise Valley were adding luxury and upscale hotels (or new renovations) like crazy, while at the same time nearby cities like Tempe and Phoenix were beginning to do the same. Part of what made Scottsdale so attractive in the recent past was its exclusive claim to luxury. But that benefit was obviously eroding as the competition for that segment was growing, as was supply, and the demand grew at a slightly slower rate.

Overall, this would appear safe to most investors until the real estate bubble is taken into account. The entire Phoenix market is disproportionately dependent on real estate, and especially all that new "wealth" in Scottsdale. To the developer in this environment, it's a double-edged sword: upward pressure on land costs and development costs, followed by a burst bubble at the end of the day; which impacts the ability to sell condos, prove net worth (on other real estate assets), and generate the expected cash flows on the hotel and restaurant(s).

This story will likely play out many more times in the near future, and in generally similar cases. And in the end, the winners will be those who either buy buildings like this one, at a huge discount, or those who build similarly strategic projects at a substantial discount. We all know who the losers will be--those who stayed speculative too long (who deserve no sympathy) and those who had solid projects that fell victim to a bad market, like this one. I just hope that the Triyar group will survive to move forward on some of their other great local projects when the market returns, and the rest of the development community learned how to better use debt in their businesses.