Las Vegas Strip Booms Again - Monday 19th of June 2006
by Rod Smith
Las Vegas Gaming Wire
LAS VEGAS, Nevada The five-year, $20 billion building boom under way on the Strip will roughly double the high-end inventory of rooms costing $200 a night or more, a new Standard & Poor's study said.
This newfound focus on upscale visitors is largely a response to continuing demographic shifts, the report said.
But it will leave Las Vegas vulnerable to the throes of the national economy and could prove challenging to absorb.
Projects that S&P said probably would be completed include:
-The $1.8 billion Palazzo with 3,025 rooms.
-The $1.7 billion Encore at Wynn Las Vegas with 2,054 rooms.
-The $7 billion Project CityCenter with 7,700 rooms.
-The $4 billion Echelon Place with 3,300 rooms.
Projects whose fates S&P called uncertain include:
-The $2 billion Cosmopolitan with 3,000 rooms.
-The $1.5 billion Fontainebleau with 4,000 rooms.
-The canceled $3 billion Las Ramblas with 1,225 rooms.
-The $1.7 billion W Las Vegas with 3,000 rooms.
-Las Ramblas was sold to Edge Resorts for $202 million earlier this month.
Together, those projects represent a 30 percent increase in room inventory, gaming space, convention space and retail space.
"A key factor (in deciding which proceed) will be the capital markets' willingness to fund many of these projects, particularly single-site developments pursued by less established gaming industry investors," according to the S&P report.
The expansion mainly will be in the high-end segment of the market, which at the end of 2005 accounted for about 15,000 of the 75,000 total rooms on the Strip.
If some of the more speculative projects fail to materialize, S&P said that would still mean an 80 percent increase in the Strip inventory charging $200 a night or more. If all materialize, a 150 percent increase in the upscale room inventory on the Strip would result.
"While the current positive operating momentum on the market will likely continue to increase demand for higher-end hotel rooms in the near term, the state of the (national) economy will be a major determining factor relative to absorption," S&P analyst Michael Scerbo said in the report.
He said the gradually changing characteristics of the average Las Vegas visitor are driving the transformation of the Strip into a ritzy resort destination. The report found the average Las Vegas visitor is wealthier, younger and spends more on each trip, both on gaming and amenities.
"This is evidenced by the higher-end properties on the Strip, such as Bellagio, Venetian and Mandalay Bay, that have consistently been some of the best performers in the market," Scerbo said.
Deutsche Bank analyst Andrew Zarnett said all such developments start with customer demand. The leisure and business markets are demanding more luxury capacity in Las Vegas and are willing to pay "that price point."
"The Venetian, Bellagio and Caesars' new tower all proved the point. There is sufficient demand for existing capacity and a lot more. And then Wynn Las Vegas showed the market is willing to pay still higher prices, around $300 a room," Zarnett said.
The S&P report found the biggest risks for the Strip developments involve the addition of residential components, several of which include condominiums. Operators are adding such components to meet demand from prospective, upscale visitors and to help finance the high-ticket developments, Scerbo said.
Simple hotel developments have to pay themselves off over years of renting out rooms one night at a time, while condominiums are paid for upfront, cutting the time for which developers have to leave their capital at risk.
S&P cited many risks for the developers, the Strip and Las Vegas.
"First, high-end residential development is dependent upon the real estate cycle, both for pre-selling and financing," the report said.
Second, construction costs continue to escalate in Las Vegas and could result in presale prices insufficient to cover development costs.
"Third, the lending environment for single-site development projects by new entrants on the Las Vegas Strip seems to be becoming less attractive due to higher interest rates and the uncertainty regarding consumer spending," the report said.
Zarnett said there is an appetite for residential development in Las Vegas among investors, but condominiums make the most sense financially when the buyers are also residents.
In either instance, however, he said rising interest rates probably will slow development, not stop it, and in the long run, that may cut the cost of construction, too.
"In other words, the market will work it out. There is some price point where more expensive room rates won't work," he said. "But market pressures will tip developments away from (the danger zone)."
David Schwartz, director of the Center for Gaming Research at the University of Nevada, Las Vegas, said the market for upscale, adult leisure will keep pace with developments and the supply they generate.
Demand created by the new resorts will exceed the supply of high priced rooms they add to the market, as it has in the past, Schwartz said.
"Developers, promoters, and marketers have been supremely successful in establishing and continually updating the brand identity of Las Vegas as an adult playground (to keep building demand)," Schwartz said, and they probably will keep growing the market, barring any national calamity.
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