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Vegas Boom Runs Out Of Steam

Can Las Vegas keep believing that if it builds, visitors will come?

Sep 08, 2009

The Currans of Granada Hills have been taking family vacations on the Las Vegas Strip for years. They weren't about to pass it up just because Jeff Curran's business selling upscale cookware is down sharply.

But this summer it would be a smart Vegas vacation.

A year ago they plunked down $100 each for tickets to the Blue Man Group show at the Venetian. This year, the family of four -- Jeff, 59, his wife, Michele, 55, and their adult son and daughter -- took in the Mac King Comedy Magic Show at Harrah's with tickets discounted to $10 apiece.

Jeff used to spend up to $500 at the blackjack tables; his new limit was $150 -- on the penny and quarter slot machines.

"I've never seen the penny slots so crowded," Michele remarked in July as the family jaunt was drawing to a close.

The Strip's business model for the 21st century, which was to tap into an ever-expanding supply of free-spending visitors clamoring for first-class hotel rooms, four-star restaurant fare and high-priced shows, has been shattered by its worst recession in decades.

Vegas' ability to weather previous declines made it seem recession-proof. No longer. The carnage left by the economic downturn that began last year is unlike anything this town has seen.

Tourism is down for the second year in a row, and the people who come aren't spending with the abandon of the past. Last year Jeff Curran gave his son and daughter virtually free rein on the casino floor; this year their daily limit was $25 each.

In 2007, the peak year, 39.2 million people visited. Last year 37.5 million visitors came to town. Tourism officials say convention business is down about 27% from a year ago. If current trends continue, Vegas may barely break 35 million visits this year, the lowest level since 1999.

Even if the slump eases, its effect will be felt well into the future. The Strip -- the roughly four miles of Las Vegas Boulevard that churns out more than half the gambling revenue in Nevada -- is reassessing its habits of spending lavishly on new construction and of targeting the wealthiest or most spendthrift customers.

Room rates on the Strip are so steeply discounted that the top resorts will put you up today for the same price that downscale hotels charged two years ago.

At the Encore, which Vegas impresario Steve Wynn opened in December as an extension of his luxe Wynn resort, some customers were offered two-night stays this summer for $99. For some nights this fall, promotional rates as low as $90 are being offered at Bellagio, a premier Strip hotel where rooms customarily can reach $500 or more.

Some of the city's top gourmet restaurants have offered half portions for (not quite) half price during slow times of the day. Cirque du Soleil, the acrobatics juggernaut that dominates the Strip with six shows, has done something that veteran Vegas watchers find more mind-blowing than anything it presents onstage: It's knocking as much as 40% off ticket packages for two.

"Cirque never discounted for anyone," says Anthony Curtis, the publisher of Las Vegas Advisor, an insider's guide to deals.

Curtis says Strip resorts and restaurants are more willing than ever to place discount coupons in his guide. "This year I'm getting through doors where there used to not even be doors."

Financial toll

Casino executives say they see indications that the current decline has bottomed out, with hotel occupancy rates creeping back to 90%. But the intense discounting is cutting deeply into resort profits.

A sharp rebound like the one after the Sept. 11 attacks isn't considered likely.

"This is different because it's not a one-dimensional recession," said Rossi T. Ralenkotter, chief executive of the Las Vegas Convention and Visitors Authority.

The behind-the-scenes maneuvering at the Strip's most ambitious new development, MGM Mirage's CityCenter, may provide the best look at the financial fallout.

The enormous project, situated between MGM Mirage's Bellagio and Monte Carlo, is designed as a city within a city of curvilinear steel-and-glass towers.

In 2006, near the peak of the Strip's popularity, the company launched its condo sales campaign with special pricing for "friends and family" -- that is, MGM Mirage's employees and top customers.

Over the next year, MGM took 20% deposits on about half of the roughly 2,400 residential units in three condo buildings and a condo-hotel, some priced as high as $9 million.

Buyers say that the current Las Vegas market may not support appraisals of more than $400 per square foot on units originally sold at $1,000 per square foot. Under those conditions, buyers will be unable to secure mortgages at the full sales price.

"Some people are going to walk away," says Mark Connot, a Las Vegas attorney representing several buyers.

Under Nevada law, MGM can keep deposits up to 15% of a contract price, or more than $262 million of the $350 million in deposits the company says it accepted on 1,336 CityCenter condos as of midyear, with an additional 1,100 units on the market.

Until recently, buyers say, MGM held firm against even the idea of renegotiation. Now the company has shown signs of backpedaling from the original valuations.

MGM Mirage Chief Executive James J. Murren said the company knows appraisals have fallen sharply since the "white-hot" pre-recession period. But Murren, himself the buyer of two CityCenter units, added that he believed the market may have become "stabilized, though still difficult," and is poised for recovery. "We feel time is our friend," he says.

Stakes are high

For now, Las Vegas' challenges are formidable.

Corporate meetings and conventions -- a huge driver of the Strip's growth -- have taken on the aura of ostentatious wastefulness in a time of belt-tightening. It didn't help when President Obama pointed the finger at financial institutions that had scheduled high-profile junkets despite receiving federal bailout funds.

"He used Las Vegas as an example of profligate spending," casino mogul Steve Wynn complained at an investment conference in April. He was smarting from Wells Fargo & Co.'s cancellation of an employee-recognition event at his resorts, which he said cost his company $8 million in revenue.

Obama made amends, somewhat, by appearing in Las Vegas at a May fundraiser for Senate Majority Leader Harry Reid, a Nevada Democrat (and by staying overnight at Caesars Palace on the Strip).

But with convention bookings still slumping, the pain lingers.

Not only has the economic collapse been more extensive and severe than in the past, but the town has much more at stake. In 2001, Las Vegas had 125,000 hotel rooms to fill; at year-end 2008 the inventory was 141,000. An additional 16,000 have been scheduled to open in the next two years.

As a rule of thumb, an increase of 200,000 new visitors per year is required to fill every 1,000 new rooms -- meaning that 3.2 million new visitors would have to come to town to absorb the new construction.

Failure to reverse that trend would shatter one of the town's articles of faith: that new, glitzier properties always generate the tourism to fill them.

That axiom has held since Wynn opened the 3,000-room Mirage in 1989. Many then doubted his glossy property could make enough to pay off its heavy debt. Instead it was a roaring success. A wave of themed resorts followed.

There was Kirk Kerkorian's MGM Grand in 1993; Wynn's own Bellagio, rising from the rubble of the Dunes in 1998; the Venetian, opening on the site of Sheldon Adelson's demolished Sands in 1999.

That same year Circus Circus Enterprises, the owner of the unprepossessing Circus Circus casino, opened the luxurious Mandalay Bay to such acclaim that the company changed its name to Mandalay Resort Group. (It was later acquired by MGM Mirage, formed when Kerkorian's MGM Grand took over Wynn's Mirage Resorts.)

A family-friendly marketing theme in the 1990s proved ill-fated (parents turned out to be light spenders), and 9/11 was another brief slump. Nonetheless, the Strip embarked on its greatest decade.

And by the mid-2000s a new cycle, even grander than the last, was seen in the offing.

Wynn, rebounding from his loss of Mirage Resorts, founded Wynn Resorts Ltd. and opened the Wynn Las Vegas in 2005. Ian Bruce Eichner, a condo developer from New York, launched the 2,250-unit Cosmopolitan. Veteran casino executive Glenn Schaeffer partnered with condo developer Jeffrey Soffer to initiate the 3,815-room Fontainebleau on the Strip's far northern reach.

Then the music stopped.

Defaults, lawsuits

Eichner defaulted on construction loans in January 2008 and lost the project to its major lender, Deutsche Bank. Construction on the Fontainebleau, 70% complete, mostly halted in April this year; it ended up in litigation with its lenders, who alleged poor management and cost overruns. In June Fontainebleau filed for bankruptcy protection.

CityCenter became the subject of a lawsuit filed by MGM's development partner, the government of Dubai; that was settled this year with refinancing that allowed the project to proceed toward a phased opening beginning in December.

The most graphic illustration of the conflict on the Strip between high expectations and harsh economic reality is an 88-acre lot across from Wynn Las Vegas, an expanse of sandy waste harboring rusting steel frameworks. This is the site of Echelon, which was launched as a $4-billion luxury resort by Boyd Gaming Corp.

Boyd made its name as an owner of low-end casinos catering to Las Vegas-area residents, and of a string of downtown casino-hotels marketed chiefly to Hawaiian tourists. It owned 10 properties in the Las Vegas area in 2006 when it announced Echelon, an effort to bump up its profile with "a significant presence" on the Strip.

Boyd acquired and imploded the storied Stardust hotel. By the time of Echelon's groundbreaking in June 2007, the project had expanded into a complex of four hotels totaling 5,300 rooms, a convention center, two theaters and a luxury retail mall. Its new price tag of $4.8 billion made it the second-costliest project on the Strip, behind only the $8.4-billion CityCenter.

One year later, after investing $700 million in the project, Boyd shut it down. At the time, the company cited "economic conditions" and the credit freeze, but although both have begun to moderate, it hasn't reconsidered its decision.

"We continue to look at the project, and we don't see a natural restarting point," Boyd Chief Executive Keith Smith said in an interview. "We're taking the rest of 2009 to analyze our options."

Striking bargains

Meanwhile, relentless price-cutting remains the watchword on the Strip. Wynn Resorts recorded revenue in Las Vegas of $291.3 million in the first quarter of this year, only a hair ahead of the $287.2 million in the same period of 2008, despite having doubled its room inventory by opening the 2,034-room Encore in December.

Wynn reported that discounts lowered its average revenue per room to $194 for the first half of this year, from $289 a year earlier -- although its aggressive promotional rates didn't help overall occupancy, which fell to 88% from 96.2%.

Some casino industry experts fear that continued heavy discounting will dim the Vegas aura for the longer term.

"You've got to drop your rates, but you don't want to create a sense that this is a discount experience or that the experience itself has been diminished," says Billy Vassiliadis, chief executive of R&R Partners, the Las Vegas public relations firm that created the renowned "What happens here, stays here" marketing campaign. "It's been a real dilemma."

Another concern is that bargain hunters lured to the Strip by cut-rate rooms may not belong to the market segment that its business model -- a symbiosis of expensive accommodations, gourmet dining and entertainment -- relies on. Rather than dining at a hotel's high-margin Wolfgang Puck restaurant, for example, they may hop across the street for a fast-food meal.

On the bright side

Still, it's hard to find a casino executive in Las Vegas who doesn't profess fundamental optimism about the resort community's future.

Their conviction is that although Las Vegas may have overspent and overbuilt more excessively this time than before, it has learned to tap into a part of human nature that not even a long, deep recession can eradicate.

"The public will continue the habits they've had for a hundred years," Wynn predicted at the Milken Institute's global investment conference in April. "Las Vegas will be there. It will recover more quickly than people think. Everybody will be a little smarter. They will believe in the tooth fairy a little less. And everyone will be better off for it."

Can Las Vegas keep believing that if it builds, visitors will come?
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