Howard Hughes Downtown Summerlin and Operating Update by Todd Sullivan, ValuyePlays

I promised more on this so here it is:

Let’s start with the basics: Downtown Summerlin will be approximately 1.6 million square feet and will consist of a 1.1 million square foot Fashion Center which is designed to have three anchor tenants, small-shop retail and restaurants. Additionally, the project will include an approximate 200,000 square foot office building and approximately 280,000 square feet of big box and junior anchor retail space adjacent to the Fashion Center Here is the location visually (before construction finished):

Howard Hughes Downtown Summerlin, Operating Update

Remember, currently only 1/4 of the site is being used for the above project (1.6M sqft) and the aerial view below shows the mass of residential development around it (the area to the left is residential still to be developed by Howard Hughes Corp (NYSE:HHC) who has entitlements for ~42,000 more homes). Here is a drone view of the project, towards the end of the video you can see the land just waiting to be built on.

The first thing one notices when you talk to people from Howard Hughes Corp (NYSE:HHC) about Downtown Summerlin is the satisfaction they have in what they built. It would have been easy to slap up yet another non-descript rectangular mall that would have garnered excitement for a bit. What they instead built was a destination. They built a place people will want to go to for high end shopping, dining and entertainment for years, not a place people grudgingly go to because they need something at the store. The best part is Howard Hughes Corp (NYSE:HHC) owns all the land surrounding the project so competition will be scarce. Further as the project is expanded and further built out, its draw will increase. It is the same thought process going into the S. Street Seaport in NYC

Now, currently Summerlin has 41,000 homes and ~100k residents and that is served by 2.1M sqft of retail. The retail that is currently there is nothing like Downtown Summerlin but rather the usual smaller strip malls/restaurants that dot most US communities. It is estimated ~$2B in annual retail sales leak from Summerlin to other parts of Nevada.  An ancillary effect of Downtown Summerlin is that the retail and office space make the remaining residential lots to be developed more valuable. The company put 1.6M sqft of retail/office space on 1/4 of the available acreage.  It doesn’t take a math genius to figure out they could add another 4.8M sqft to what is left. This of course assumes they avoid doing one VERY obvious thing….go vertical.

The current floorplan is two stories high retail and a seven story office building (a 124 unit luxury condo building is coming).  Think higher (and deeper for parking) going forward as the shops all open and the current office tower is filled.  More office towers that feed the retail will then need a hotel (they are currently building and will operate at 302 room Westin in The Woodlands). Another luxury condo tower would fit nicely to compliment the retail, office and $1M plus homes in the area. Let’s not assume even for a second that what sits there now for retail satiates the demand. Having seen the site it is perfectly set up for much much more retail development even to just enlarge to current project. The $40M NOI for ’15 will be a distant memory in short order.

The bottom line is the eventual sqft of the operating assets on the 400 acre site in my opinion will be will be much more than most folks now assume. Now, if we are going to take a billion dollars or so of retail sales off the strip, what is the Fashion Show Mall on the Vegas Strip going to do?  Given its convenient location to the highways on the strip and stores in it,  currently it is drawing the same shoppers from Summerlin that will now stay in Summerlin to shop rather than fight strip traffic. This is where things get interesting.  Check out the following map (fashion show in red next to Monopoly character):

Now that City Center is done (Aria, Mandarin and Cosmopolitan), the ONLY place left on the strip to go UP, is the Fashion Show Mall (red circle). There is room to go other places, but they are either off the strip or at the extreme ends of it. The Fashion Show is right across from the Bellagio/Pallazzo and the Wynn and next to Treasure Island/Mirage.   So, it makes perfect sense to redevelop the fashion show and add a hotel/casino right on top of it. If you’ve been there you know it is a simple 3 story facade shopping structure fronting a mall behind it.

If you want to go up, you just need to know who owns the air rights. Who owns the air rights above the Fashion Show? Howard Hughes Corp (NYSE:HHC) owns 80% of them.  So, if we follow the playbook they have been using, how would this go? Typically what Hughes has been doing (see below) in these projects (except for Downtown Summerlin, S. Street Seaport and a few other larger projects) is they contribute the land they own to a JV with the developer at a certain valuation and then take 50% of the project (office buildings etc). If we then used this here, in theory they would contribute,  air, at a valuation of “x” for their contribution to the JV (and prob a bit of cash in this case due to the size of the project).

Now, skeptics will scoff at this and question just how much air is really worth but when one considers that air will then be filled with a Vegas hotel/casino, I’d say in this case “air” has quite a bit of value.

So the next time someone says to you “money just doesn’t appear out of thin air you know….” ,well, tell them for shareholders of Howard Hughes, it really sorta does.

Back to Downtown:

Howard Hughes Press Release

From the Las Vegas Review Journal

The opening of Downtown Summerlin will dramatically change the commercial real estate market in Southern Nevada, five senior industry executives agree. But they differ on just how those changes will be felt in the valley’s submarkets. The five — Michael Newman, managing director of CBRE; Frank Gatski, president and CEO of Gatski Commercial; Paul Chaffee, partner, NAI Vegas; Jeff Mitchell of Virtus Commercial; and Scot Marker, senior vice president of Colliers International — each fielded questions in the Business Press’ “virtual round table” format. Their responses have been edited for space and clarity. Here’s what they had to say:

Q:How does Downtown Summerlin change the commercial real estate market? Newman: The opening of Downtown Summerlin sends a big signal both nationally and locally that the Las Vegas economy is recovering. It is the single largest development in the valley since Town Square opened in 2007, and it is one of the country’s three largest projects under active development. Downtown Summerlin will offer a new and unique destination for shoppers, diners and entertainment seekers

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