Overbuilding in Las Vegas?: Added Rooms Could Affect Rates - Thursday 9th of February 2006
by Rod Smith
Las Vegas Gaming Wire
New construction will likely depress average daily room rates as well as revenue generated by rooms at all Strip properties, a report from a New York City investment banking company warns.
Of particular concern is the effect of 40,000 added rooms a 25 percent increase over five years on rates Strip hotel-casinos will be able to charge, analyst Steve Kent wrote in a report for investment banker Goldman Sachs reports.Advertisement
Brian Gordon, a partner in the Las Vegas-based financial consulting firm Applied Analysis, said concern about overbuilding is warranted since the number of rooms coming online by 2010 is the largest number of rooms in any five-year period in Las Vegas history.
Other industry experts, however, aren't worried.
David Schwartz, coordinator of the Gaming Studies Research Center at the University of Nevada Las Vegas, said the construction boom is more the continuation of a steady trend rather than an explosion in capacity. He also said there is a strong chance up to a quarter of the new rooms especially some condo-hotel projects will not be built.
However, Kent said even if the 9,000 condo-hotel rooms included in the estimate are not built, inventory will increase 20 percent between 2005 and 2010.
"Operators will argue that we should not worry about overbuilding as eventually the demand fills the rooms, but historically there have been periods where overbuilding did not lead to significant gaming revenue growth," Kent said.
For example, from 1996 to 1998, the number of hotel rooms increased 17 percent while gaming revenue increased 5 percent, he said.
"Furthermore, there is always the fear that one more building boom will be the straw that breaks the camel's back," Kent said. "We remind investors that the cruise sectors maintained for many years that new supply would create demand until it didn't in 2000-2003."
He cited Aztar Corp.'s expected announcement of plans to redevelop the Tropicana at the south end of the Strip and Harrah's Entertainment's plans to redevelop the area around the Imperial Palace, which it acquired last year. The area including Harrah's Las Vegas, the Flamingo, Bally's and Paris Las Vegas.
"All this, combined with the opening of Las Vegas Sands Palazzo in 2007 with 3,025 rooms and Wynn Resorts' Encore in 2008 with 2,000 rooms, is causing oversupply concerns," Kent said.
Furthermore, the failure of several condominium projects worsens the problem of overbuilding because it leaves more land available for hotel and condo-hotel projects, Kent said.
The cancellations are also likely to depress land values and spur major projects, such as Boyd Gaming's Echelon Place and MGM Mirage's Project CityCenter, to add condominium units, he said.
He said there is already evidence that overbuilding is having an effect.
"Third-quarter results started to show some signs that RevPAR (revenue per available room) growth on the Strip could be decelerating," he said.
Goldman Sachs also highlighted concerns about overbuilding in the locals market.
"Our analysis of the locals market suggests that this concern is justified, given that it would take 5 percent population growth and 10 percent increased spending per person to grow same store sales 4 percent ... and to reach revenue targets for Red Rock (Resort) and South Coast," Kent said.
At Applied Analysis, Gordon said that while the room inventory bears watching, such concerns should not be blown out of proportion.
While there are more rooms being added to the Las Vegas inventory faster than ever before, the rate of increase is not as fast as it has been in the past because the destination has a larger base of rooms available, he said.
"That has to mitigate the concerns. In percent terms less than 5 percent a year compounded annually the growth is not out of line with historical trends and the destination has been able to support supply in the past," Gordon said. "Las Vegas is going through a transformation. The marketing and branding success of Las Vegas is continuing to drive demand for the destination."
Another analyst agreed there is little reason for major concern.
Andrew Zarnett of Deutsche Bank said the city should be able to easily absorb added inventory, given demand for Las Vegas as a destination and the critical mass that has developed on the Strip.
"Whether that means 10,000 rooms, or 20 or 50 is uncertain, but the market will set the pace and it's likely supply will pull demand, especially out of the baby boomer generation, which continues to have the most discretionary income and free time in history," he said.
"Looking at the past three waves (of hotel development), accelerations in hotel space have driven demand so that gaming (and other) revenues have grown faster than otherwise would have been the case," Ruggerio said.
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