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