Tuesday, May 06, 2008

Economic Troubles Affect the Vegas Strip

This non-economist writer has been forecasting the looming Las Vegas economic downturn since early 2006: Las Vegas—A House of Cards Bound to fall -- if you read the comments/feedback section to that post, you'll realize that some felt I belonged in a loony bin...

Quote 1:


"You're certainty about the fragility of Vegas in the face of a national economic downturn belies a level of profound ignorance to it's past. Stated in terms more suited to you, betting against Vegas is a sucker bet. "

Quote 2:


"Randy, the level of certainty you work yourself into regarding things you know absolutely nothing about is fun to watch, in the same way one watches "Jack Ass". Whether or not that is at cross purposes to your own best interest will be for you to decide."


Ouch! Yes, pretty harsh indeed... But I was un-fazed, because I knew this national economic downturn would be bigger than any seen in many decades, and that the final outcome would be very difficult for our non-diversified Las Vegas economy...

Well, it now looks as if I may be vindicated, as the tide is beginning to turn...

Take my recent (April 08) piece which listed some downturning indicators; illustrating that all is not well in Las Vegas: The Las Vegas Economic Downturn Has Started


And just today the the New York Times released an article that backs me up: Economic Troubles Affect the Vegas Strip

For decades, this gambling center seemed nearly immune to the economic swings of the rest of the country. But these days, the city built on excess is seeing a troubling sign: moderation.

Gambling revenue and hotel occupancy are down. Resorts are slashing room rates and offering coupons or free nights. Casino operators are firing hundreds of workers, and their stock prices have plummeted since October. Credit is drying up for hotel and condominium projects planned before the slowdown arrived.

Even the people still coming to Las Vegas are spending less. Julia Lee, 27, of Los Angeles said she normally brings $10,000 on her trips here to play blackjack. As Ms. Lee picked up show tickets the other night, she said she had brought less than half that on this trip. “My parents are in real estate, and we’re worried,” she said.

So are this city’s hoteliers, retailers, wedding chapel operators and anyone else who depends on the extravagance of gamblers and tourists. The spending declines are relatively modest, a few percentage points here and there. But Las Vegas has a huge inventory of new casinos and hotels due for completion in the next few years, and a long national recession could send the city reeling.

The Las Vegas outlook would be far worse if not for foreign visitors. They are taking advantage of the low dollar to savor the fare of celebrity chefs like Alex Stratta and to snap up goods that might cost twice as much in Europe.

To manage the slowdown, Las Vegas is revving up an overseas marketing campaign, and in the United States, it is pitching spontaneous Vegas escapes. “Do it without thinking!” says one television spot.

But representing only 13 percent of visitors, foreigners can take up only so much slack. Deutsche Bank recently started foreclosure on a $760 million construction loan for the Cosmopolitan Resort and Casino, a partly built project in the heart of the Las Vegas Strip.

Crown Las Vegas, a bullet-shaped hotel and casino resort that was supposed to become the tallest building in the city, was scrapped a few weeks ago for lack of financing.

One of the most prominent Las Vegas casino operators, Tropicana Entertainment, said Monday it would seek bankruptcy protection. The company, beset by financial difficulties, made cutbacks at a casino in Atlantic City that prompted New Jersey regulators to strip it of its license there; that set off a cascade of fresh financial problems.

Other multibillion-dollar Las Vegas projects are facing delays or have been put up for sale because of tightening credit and changing Wall Street perceptions about the city. The city’s resort properties already have 130,000 rooms, and Wall Street — which financed much of the recent boom — is worried that Las Vegas cannot absorb the 40,000 more that are on the drawing board or under construction.

“In this market, it is not good business to be confident,” said Jan L. Jones, a senior vice president at Harrah’s Entertainment and a former Las Vegas mayor. “I’ve never seen an economy like this nationally. Nobody knows how deep what nobody wants to call a recession will go.”

Historically, Las Vegas has been resistant to recessions, entering them later and exiting them sooner than the country at large. Gamblers, particularly high rollers, tend to play no matter which way the economic winds are blowing.

But executives here worry this recession could be different from the last two — in 1990-1 and 2001 — when consumer spending was propped up by easy credit. Now credit is drying up. And high gas and food prices, declining home values and rising unemployment are keeping many Americans closer to home.

More important, over the last two decades Las Vegas has shifted from a destination dominated by gambling to one with more appeal to middle-class shoppers, diners, golfers and others who can afford brief splurges. Whereas gambling represented 58 percent of revenue for Las Vegas Strip resorts in 1990, it represented only 41 percent of revenue in 2007, according to a Deutsche Bank report.

As gambling was legalized in more parts of the country in recent years, Las Vegas was forced to expand its own offerings to keep growing. It worked, but it made the city more susceptible to recessionary declines in disposable income.

Las Vegas is now as vulnerable as other communities,” said J. Terrence Lanni, chairman of the board of MGM Mirage.

Hotel occupancy was down for January and February, the most recent figures, by 1.5 percent, despite average daily room rates 3.8 percent below the year before. Gambling revenue in the Las Vegas metropolitan area for the same period was down about 4 percent.

“It’s accelerating to the downside,” said Bill Lerner, a senior gambling analyst at Deutsche Bank who lives in Las Vegas. “Las Vegas’s economy is more reflective of the general economy than ever.”

Las Vegas visitors said in recent interviews that they were spending less than in the past.

Rita Keene, a retired insurance risk manager from Collinsville, Ill., said she has been coming to Las Vegas several times a year since 1978 and had never set gambling limits. This year she is betting no more than $300 a day at the slot machines, and she is not going to shows.

“We have investments, and you know what the stock market has been doing,” she said while putting quarters in a slot machine at the Orleans casino. “My husband and I have even talked about this maybe being our last time.”


Closing:

Allow me to repeat my 2006 closing post (from: Las Vegas -- A House of Cards) below:

"Once the LV layoffs begin, more homes will go into foreclosure, as people won’t be able to make their mortgage payments. Then businesses outside of the casino industry (local restaurants, retail, home improvements, beauty, health care, etc) will also begin to feel the pain. Eventually, a chain reaction of dominoes will begin to fall, and ultimately the number of outbound U-hauls will vastly exceed those inbound..."

Well, Nevada is already leading the nation in both foreclosures and price declines ( Nevada Tops in Foreclosures AND Price Declines! ), so as tourism continues to fall and the layoffs increase, I expect we'll see a far worse economy down the road...

Bottom Line:

The Las Vegas downturn has just started and we're merely seeing the opening salvo today.

Better reserve that U-haul now!!!

Regards

Randy

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10 Comments:

At 5/06/2008 11:14 PM, Anonymous Anonymous said...

I find it hard to believe anyone would be dumb enough to think that a city that is based ultimately on discretionary spending (habits notwithstanding) could NOT be affected by this downturn. I still think many Americans have no idea at the scale of the damage that has been done to their currency and economy.

 
At 5/07/2008 5:53 AM, Blogger Randy said...

Anon,

Regarding your comment: "I still think many Americans have no idea at the scale of the damage that has been done to their currency and economy."

You've hit the nail squarely on the head!

They will soon enough though -- as the consumer inflation waves, simultaneous w/deflating credit lines and declining asset values, rapidly erode the American standard of living.

Who will really care about gambling when they can't even afford to put food on the table for the kids and gas in the car to go find a new job? Maslow’s Hierarchy of Needs and the U.S. Economy

Thanks for posting up

Randy

 
At 5/07/2008 6:19 AM, Anonymous Anonymous said...

Randy,
I've read on several Blogs about people seemingly going over the edge on survival. While I have and continue to put away a good store of #10 can freeze dried foods, trips to Sam's for can goods on ocassion I'm not thinking about leaving the house and going to the country to live in a sod hut. There has to be some reasonable middle ground between the two. We are building a new home of which I plan on putting in a storm shelter and a PV system with battery plant. What is your view of all this activity. I read last night that the US Government has bought up all the Mountain House inventory, if that is true then what the heck is going on? Some doomers are saying all the suburbs will be gettos due to high fuel prices, riots in the streets, mobs burning and taking from those who have prepared for troubled times. We are simple people, pay as we go, no debt.

Conjecture

 
At 5/07/2008 7:25 AM, Anonymous Anonymous said...

Well I think we will finally enter an era when engineers and people of science will do better than lawyers. Because the way I see it only manufacturing of goods can pull the nation out of the abyss.

Science will rule again !!!

And by the way with the collapse of the dollar these wars will end due to the lack of money.

 
At 5/07/2008 10:52 PM, Anonymous OperationNorthwoods said...

Conjecture,

What would you have done if you had lived in the USSR/Russia as it started to fall apart? Things could certainly be worse in the USSA as people are so unprepared for hard times, and the society is built around cheap gas and elaborate distribution systems.

For starters, it's reasonable to read some of the preparedness books and websites.

 
At 5/08/2008 1:09 PM, Anonymous anon916 said...

Ha, I wish you had posted this Vegas info 3 weeks ago. My father just bought a house there last week. When we chatted about it 3 weeks ago he told me that he followed Vegas Real Estate (not Bubble)Blogs. They were stating all to points that you just made, but in reverse. Example; within 2 years X number of resorts are opening with Y new jobs. Foreign investors on the Forclosure Buses are buying houses on the spot, etc.

I didn't know what to say so I said nothing. Anyway, I sensed a strong 'better buy now or else...' and 'Vegas is different' energy in him. I thought it was odd that Vegas would already be returning to that mantra, we are not even close, here in Cali.

Fortunately for him he won't be hit as bad, he got in to a pre-built Del Webb retirement community. Price reductions have already been built in, credit standards are tough. Retirees will be less affected there, I believe.

 
At 5/08/2008 3:57 PM, Anonymous Anonymous said...

LV bank shuts down

Nevada officials say voluntary closing a first for state

A Las Vegas bank voluntarily shut its doors in late April due to worsening economic conditions, a first for Southern Nevada's usually vibrant banking community.

Fifth Street Bank had been operating for about a year before bank officers decided to notify depositors and state officials of the decision.

Neither state regulators nor bank Chief Executive Officer Philip LaChapelle knew of any instance in which a bank had voluntarily closed, although bank regulators periodically take over and shut down failing banks.

"This has never taken place in this state to my knowledge," said Commissioner George Burns of the Financial Institutions Division.

Neither depositors nor borrowers will lose money as a result of the closing, LaChapelle said.

To keep overhead low, the bank operates with six employees and one location at 376 E. Warm Springs Road.

"This is a prudent business decision that has taken into account the unsettled nature of the economy and the shrinking investment options available to ensure our promise of high-yield deposit products to both our customers and our partners," LaChapelle said in an announcement.

He said the bank was finding it increasingly difficult to find borrowers with good credit.

Fifth Street did not have checking accounts but offered savings accounts, money market accounts and certificates of deposit. The bank did not originate loans itself.

It bought loans for owner-occupied, one- to four-unit residences, from the wholesale market, and relied on outside firms to service the loans, LaChapelle said. Most of its loan holdings were fixed-rate or adjustable mortgages, he said.

Fifth Street was paying an average of 7 percent for deposits and making loans that yielded an average 9.7 percent, extremely high rates compared to those of other banks.

Fifth Street used short-term, variable rate deposits to make long-term fixed-rate loans, according to two other bankers, who spoke anonymously. During the 1980s, S&Ls used short-term deposits to make fixed, long-term rates. Many thrifts failed when short-term rates soared higher than the fixed loan rates.

Yet, Fifth Street had a strong balance sheet and $13.6 million in startup capital. It reported no delinquent loans and no loan losses. A large part of its $582,000 loss last year stemmed from setting aside money in a loan loss reserve.

The new institution reached $47 million in assets. At the end of the year, Fifth Street reported $38 million in assets, including $20 million in deposits.

LaChapelle declined to identify the bank owners.

http://www.lvbusinesspress.com/articles/2008/05/06/news/iq_21210723.txt?ref=patrick.net

- PDM

 
At 5/08/2008 7:43 PM, Anonymous Jimbo said...

"faze". Not "phase". Un-fazed.

And you're totally on the money, Vegas is toast, baby.

 
At 5/08/2008 8:34 PM, Blogger Randy said...

Hello all, just got in from work--very long day... Thanks for posting up.

Conjecture, I believe preparing for potential social unrest and shortages is prudent... That's why I went out and got a CCW. Hopefully, I'll never have to use it, but I refuse to go down as an easy victim and will protect what I have.

As for the Mountain house inventory--I'm ignorant to that fact if indeed true.

Anon 7:25--agree 100%. Too bad so few (aside from foreigners) enter the engineers/science fields these days.

Anon 916; I'm seeing/hearing a bit of the same: "vegas is different" from those I know; mostly I just chuckle because there is no convincing those who believe the propaganda. Even if you did try to persuade your father that the time is not yet ripe, he would have discounted your view anyway.

PDM,

Wow! That's big... I'm friends with a corporate honcho/vested shareholder at a local startup bank -- a bank that primarily deals in Commercial real estate and they are certainly feeling major pains caused by increased underwriting standards/tightened credit conditions and falling values. I warned this honcho 2 years ago about the housing bubble-- Of course I was discounted (Vegas is different); I warned of commercial real estate shortly thereafter (same response); then warned of looming credit crisis back July (initially discounted, but finally got through after long discussion at 07 christmas party and the individual became VERY concerned)--feedback thus far is YES, it's bad!


Jimbo,

Good catch! I read it 3 times before actually posting and missed it during each review.

This poor dumb lay writer needs far more editorial oversight than most... :)

Thanks for the correction--fixed!



My best to all of you

Randy

 
At 5/27/2008 2:04 PM, Anonymous Anonymous said...

Randy,

Any thoughts on the moving of gambling overseas, i.e. Macau? Seems that the conglomerates are trying to diversify to other countries...

 

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