Sunday, October 19, 2008

Weakening Pulse of Las Vegas's Economy

It's certainly no secret to many that I've been calling for a severe economic downturn in Las Vegas since the boom of late 2005/early 2006 - and until just recently, many considered my bleak outlook ludicrous, as past history has shown Vegas to be quite resilient and recession proof.

Well, thus far anyway, it's looking like (ok, this is a big stretch here) maybe I'm not quite as dumb as I look.




Latest LV Economic roundup:

Las Vegas Strip Casino Revenue Falls for Eighth Straight Month

Las Vegas Strip casino gambling revenue declined for the eighth straight month in August as cash-strapped U.S. consumers curbed entertainment and travel spending because of an economic slowdown.

Gambling proceeds from the Strip fell 7.4 percent to $494 million in August, Nevada's Gaming Control Board said today.

Casino revenue at the largest U.S. gambling center slid 6.7 percent to $4.21 billion this year through August as U.S. consumers struggled with higher gasoline and food prices, declining home values, job losses and the worst financial crisis since the Great Depression.

``Third-quarter results could prove to be challenging statewide, as September weakness could be greater than August revenue figures,'' Dennis Farrell, a debt analyst with Wachovia Capital Markets LLC in Charlotte, North Carolina, said today in a note to clients."


One of the big differences between this downturn and during years previous: Many of the MAJOR players today leveraged themselves to the hilt during the cheap-money driven boom years.

Even major players feel serious squeeze as revenue drops, debts rise

Casino companies’ earnings are plummeting by double digits. Debt costs are rising for many companies. And their customers are spending less.

In the financial world, in this economy, those are the trend lines of doom.

Indeed, a few smaller operators are already close to bankruptcy. But could giants like MGM Mirage and Harrah’s Entertainment be next?

The breathtaking series of Wall Street failures and Washington bailouts of recent months suggests anything is possible — even spectacular failures in Las Vegas.

Some companies have halted construction projects, and analysts expect more plans to be put on hold in the coming months. (The exceptions are big projects too far along to mothball, such as MGM Mirage’s CityCenter and the Octavius hotel tower at Harrah’s-owned Caesars Palace.)

Some experts believe there might be a cultural shift at play with longer-term implications for businesses, especially the Las Vegas resort industry, which encourages escapist, spendthrift behavior.

“Post the era of using homes as ‘piggy banks’ and overspending as a nation at every level, we believe a new era of national thrift is before us,” Andrew Zarnett, a bond analyst with Deutsche Bank, said in a research report last week. “We believe last week’s activities in the stock market have caused too much psychological damage and the general public has been traumatized by these events ... We believe Americans will be forced, if not at their own volition, to reduce household debt.”

The result, Zarnett says, will be reduced consumer spending and an unprecedented gaming industry recession.

For several casino companies, the economy began its slump soon after they took on massive debts. At the tail end of the credit boom, Station Casinos and Harrah’s went private with the help of private equity firms that borrowed extensively to make the deals happen.

It’s hard to blame these companies for taking on debt when they did because few business models would have assumed a decline this deep, according to one Las Vegas casino executive, who requested anonymity.

“Nobody considered a situation where your cash flow goes down by 25 percent because that would have been a ridiculous assumption to make a year ago,” the executive said. “You would have been laughed out of the room.”

Before the economic decline, major casino companies used cheap capital to build expensive properties and acquire others. Lenders gave them money at attractive interest rates on the assumption they would generate enough cash to pay off their ballooning debts, or at least refinance them at lower rates.


So, how is all this turmoil affecting Gaming Stocks?

That thud? It's casino stocks crashing

Like a mistress who has lost her allure, the gaming industry is getting the cold shoulder from Wall Street.

Stock prices of the major casino operators have plummeted in 2008. In the past week, shares of publicly traded casino operators and slot-machine manufacturers sank to historic lows.

MGM Mirage, Las Vegas Sands Corp. and International Game Technology, once the sector's most expensive shares, are trading in the teens. Ameristar Casinos Inc., Pinnacle Entertainment Inc. and Boyd Gaming Corp. stock can be bought for pocket change.

JPMorgan gaming analyst Joe Greff often ends his investor notes by telling clients to remain on the sidelines when it comes to the gaming industry. Like they need any encouragement?

Other research analysts are advising folks to pass on the gaming sector.

"The stocks of casino operators have been taken to the woodshed in 2008 after a multiyear bull run in the sector driven by cheap debt, mergers and acquisitions, and consolidation," Macquarie Capital analyst Joel Simkins said. "Year to date, the eight casino operators in our coverage universe have declined 61 percent on average."

Nationwide, gaming revenues have disintegrated. Through August, Nevada casinos have won almost 7 percent less than they did a year ago. Atlantic City's casino win is down 5 percent. Gaming revenues have declined 18 percent in Illinois, 10 percent in Colorado, 3 percent in Mississippi and 1 percent in Indiana.

Macau gaming revenues fell 3 percent in September, the first time in more than three years the Chinese gambling market recorded a monthly decline. That news was not well received.

Deutsche Bank gaming analyst Bill Lerner said the Nevada companies operating in Macau -- MGM Mirage, Wynn Resorts Ltd. and Las Vegas Sands -- could take a double slap to the face. Strip casino managers he spoke with said September revenues declined in the last two weeks of the month when the national economy worsened. Visitation levels fell as rising unemployment and financial fears kept customers home.

Simkins added that September's numbers look worse than August for MGM Mirage and Las Vegas Sands.


OK, I think I'm getting this: tourism and spending are down, gaming revenue is tanking, casinos are highly leveraged and gaming stocks have cratered. What about the local Las Vegas housing market - Is it holding up?

Prices, new-home sales continue slide

The housing outlook continues to be bleak for Las Vegas, with lagging new-home sales and falling prices, but existing-home sales topped 3,000 for the third straight month, Home Builders Research reported Thursday.

The median existing-home price in September was $189,000, a decrease of $73,377, or 28 percent, from a year ago.

New-home building permits remain at their lowest levels in decades. There were 461 permits pulled in September. The year-to-date total is down 53 percent at 5,452.

"My best bet is that a lot of buyers rushed to take advantage of down-payment assistance before it was no longer available. "The bump in September sales will probably take away from October sales, so I expect sales to be down quite a bit month to month."

What's missing from the Emergency Economic Stabilization Act is a "stay of execution" for the death of down-payment assistance, housing analyst Lisa Jackson of John Burns Real Estate Consulting said.

Despite some initial traction from a last-ditch, grass-roots effort to preserve seller-funded down payment assistance, the financial crisis engulfed the momentum, she said.

Elimination of down-payment assistance is going to hurt demand for housing as almost all buyers will need a 3.5 percent down payment. While some builders may have seen a recent uptick in sales, long-term demand will certainly fall, Jackson said.



"In other words, R.I.P. You'll be missed by many," Jackson said.

The housing slump has taken its toll on home builders, the latest being Concordia Homes of Nevada. The Henderson-based builder closed its sales offices at subdivisions in Southern Nevada and Arizona.


Well, you probably already knew Las Vegas had one of the worst residential housing markets in the nation, but what about the high-end condo market?

HOUSING: Credit squeeze hits high-rises

Buyers of high-end condos struggle to secure mortgages. Only 21 percent of the 1,284 condos at Trump International Hotel & Tower had closed sales by Sept. 29, while the number at Palms Place is just more than half, a report by Deutsche Bank shows.



"I've never seen anything like it," New York billionaire developer Donald Trump said. "Historically, the banks will call me and beg for end loans. But they don't do that any more because the banks are really out of business."



At Palms Place, 342 of the 599 units, or 57 percent, have closed sales.

Both properties began closings in February, during the beginning of the mortgage meltdown.

Brock Davis, founder of U.S. Express Mortgages, said prospective condo-hotel buyers are now facing lenders who want as much as 50 percent down and require borrowers to have exceptional credit.

The buyer must be willing to take adjustable-rate mortgages to obtain lower rates.

"The rules have changed on qualifying," said Davis, who has been involved in the area's mortgage industry for 30 years. "The still have to qualify better than normal on income, on credit and showing where your down payment is coming from."

Rates on 30-year fixed-rate mortgages for banks willing to loan on condo-hotel purchases are as high as 8 percent to 9 percent, according to the latest data Davis had seen.

"There's just not the financing available at the interest rate or small down payments there was two years ago," Davis said. "That's the problem."

A few potential buyers have had to walk away from their nonrefundable 20 percent deposits, Trump said.

No one seems to know how the struggles of current buyers will carry over to a new series of condo-hotels coming on line in the next few years.

Approximately 2,700 condo units at MGM Mirage's CityCenter are scheduled to begin closing in September. The company opened its Las Vegas sales pavilion, behind New York-New York, in January 2007, and recently opened a pavilion in Dubai.

"A year from now, I don't think there is anybody in this country who isn't hoping the economy is recovering by then," MGM Mirage Vice President of Public Affairs Gordon Absher said. "People are cautiously optimistic in that hope."

Officials at the Cosmopolitan, which has deposits on 1,825 of 2,184 condo units available, said market conditions should improve by the time their buyers begin applying for mortgages in the second quarter of 2010

Two other projects under construction, Fontainebleau, with 1,018 condo-hotel units, and the 398-unit St. Regis Residence at The Venetian Palazzo, have not begun selling their units.


Ouch! The Condo Market certainly looks bad. So how is Commercial Real Estate holding up?

Slumping economy hurts Las Vegas commercial real estate markets

Las Vegas commercial real estate markets have not escaped the turmoil of the national credit and housing crises, a third-quarter retail market report from CB Richard Ellis showed.

The retail market shows the strain of the economic downturn with steadily increasing vacancies and the first quarter of negative absorption, or the amount of new space taken by tenants, in a decade.

The vacancy rate ran 6.32 percent in the third quarter for nearly 59 million square feet of retail space in Las Vegas, up from 5.82 percent in the previous quarter and up 1.75 percentage points from a year ago, CB reported.


How about locals - are they managing to keep their heads above water?

Losing Las Vegas Shows How Americans Crap Out in Housing Casino

Leigh Sogoloff, who spends her evenings lap-dancing at Rick's Cabaret Vegas on Procyon Street, says she's making half her income of a year ago.

``You don't shop, you don't buy stuff you can't afford,'' the 36-year-old Sogoloff said between dances at the Las Vegas club. She has postponed buying a house and is reading Deepak Chopra. ``I know how to save money. I'm not a dumb stripper.''

Dimi Doronis, a banquet server for Aramark Corp stated: ``I've been 18 years in this town, and I've never seen what's gone on like it has this last month. ``I don't know how I'm still alive. I'm digging into my savings right now, but soon it's going to be done.''

Mark Stubbins, a cab driver in Las Vegas for two and a half years, watched his tips drop to as low as $30 a day from as much as $80 a day before business started slowing down in May. The 53- year-old said he's struggling to meet his company's daily fare goals, which were set a year ago, when more tourists and businesspeople were still coming to town.

The city that sold Americans on the dream they could lay down a small wager and walk away millionaires is reeling from speculation in the housing market that helped bring down Wall Street. The quick profits that so easily spread from Nevada to Florida, just as casino gambling migrated to 37 states, are now proving what happens in Vegas rarely stays in Vegas.

Other snippets from the above link:

- Las Vegas leads the nation in falling home prices, foreclosures and stalled construction projects. Rick's Cabaret International Inc., with 20 clubs in seven states and two in Buenos Aires, has lost 74 percent of its market value this year.

- More than $10 billion of hotel and casino projects with 10,000 rooms have been delayed on Las Vegas Boulevard.

- Las Vegas had the biggest home-price decline in the country in July and Nevada had the highest foreclosure rate in August. One in 91 homes in Nevada were in some stage of default, compared with one in 416 for the U.S. overall.

- At Las Vegas's McCarran International Airport, the total number of arriving and departing passengers in August dropped 9.9 percent from a year earlier

- The unemployment rate for the Las Vegas metropolitan area rose to 7.1 percent in August - one of the highest in the nation.

- Las Vegas's housing market is the worst in the U.S. Home values in the area at the end of the second quarter had fallen to March 2004 levels, according to the S&P/Case-Shiller Home-Price Index. Las Vegas prices fell 30 percent in July from a year earlier, the biggest drop among 20 U.S. metropolitan areas.

- Nevada's foreclosure rate was the highest of any state for the 20th straight month in August, according to RealtyTrac Inc.


Bottom Line:

As I've pointed out before, this downturn will be much larger than any that have come before it. Gaming revenues have fallen ONLY ONCE before since 1970 -- in the aftermath of the Sept. 11 terror attacks (they dropped a mere 1 percent from 2001 to 2002).

Thus far, compounded by the housing crisis, higher debt loads, job insecurities, reduced credit availability, reduced wealth effect, etc, gaming losses have been far worse than that experienced in 01/02 and the longer-term spillover effects will be crushing to the state and its residents. Heck, we're just now warming up - wait to see what happens when the real recession party kicks in. As you know, many "Experts" still deny that we're even in a recession today.

In closing:

I would like to leave you with my first Las Vegas post Las Vegas—A House of Cards Bound to fall

Regards from "possibly" a not quite as dumb as I look

Randy

10 Comments:

At 10/19/2008 1:09 PM, Anonymous Anonymous said...

I wonder how Vegas business is doing that is related to homes.

How are the Swimming Pool builders doing? Are any of them going out of business?

 
At 10/19/2008 4:53 PM, Blogger Randy said...

I have no data to back it up, but can't imagine any reason why they wouldn't be experiencing significant economic pain.

 
At 10/19/2008 6:44 PM, Anonymous Anonymous said...

Hi Randy, your too hard on yourself. You don't look dumb, and your certainly smart to be a manager and run this blog. I'm sure you have a degree as well. A few comments on Vegas. I was there a few months ago and the cocktail waitress at the Hard Rock Hotel Pool said business was way down. That evening the casino was busy but only because a convention from LA was there. On my way home stopped at the state line and Buffalo Bills was almost empty. I was the only one at the bar and the bartender said it has been this way every since gas went up in price. I noticed the freeway was quite vacant compared to years ago when the drive to/from LA was always congested. Just left the mall here in Orange County and the mall was packed. I had to park in the far back. The sports bar was jammed and there were people everywhere. I haven't seen much of a downturn around the OC but maybe because there is a lot of people and money here. People seem to still be spending a lot and I see a lot of new cars with dealer plates still. My company is feeling a pinch. We are very small and the President said his bank cut off his line of credit and a major client backed out of a huge sale. He mentioned in our sales meeting he might need to lay off some of us soon, ouch. Not many of my friends or associates know what is happening with the economy. As a matter of fact they are quite clueless. Everyone is in their own little world and could care less about anything else. I think many might be in for a rude awakening in 2009. Thanks for the great blog, I love the funnies, sure can bust up reading some of those!

 
At 10/19/2008 7:20 PM, Blogger Randy said...

Thanks for the confidence boost anon 6:44 ;>)

additionally, appreciate the ground floor perspective relating to your LV visit and life in the OC.

Certainly hope you're job remains secure - then again, I hope mine does too.

I couldn't agree more - 2009 will be a rude awakening for millions.

Don't know if had the chance to read this one, but my 2008 outlook was pretty much "Spot-on":

2008: Ushering In a New Economic Era

Regards

Randy

 
At 10/20/2008 11:43 AM, Anonymous Anonymous said...

Randy, I was on the strip in July and stopped to sit in the shadow of that paean to excess, the City Center development. With its massive bulk towering over the street, its skeletal buildings arranged in some narcotic circle where all the little pagans can live together in some sort of Logans Run community of 24/7/365 debauchery, I couldn’t help but wonder what is going to become of the place. It may have ruined the strip for a long time. What are the ramifications of this mistake going forward vis a vis the impact on the strip, the banks that lost on it, the people and politicians that OK’d it. Does Vegas go BK? Please comment. Thanks for the cool Vegas updates on the crash.

 
At 10/20/2008 12:39 PM, Anonymous greg h said...

Hi Randy,

Thank you for your great blog!

Regarding "nationwide gaming revenues", the September numbers are now in and Atlantic City's revenue really "disintegrated" once again ... it's worst month ever (since gaming was legalized in Atlantic City in 1978) ... falling 15 percent! More details here:
http://www.gamingtoday.com/industry-news/story.bv?storyid=18435

Excerpt from the link above:
"Every casino in town reported a decline. Eight of them posted double-digit downturns, and four reported revenue plunges of 22 percent or more."

Will October gaming numbers increase, finally "breaking the fever?" Since October got off to such a bad start, probably not :-(

Also, the longer term picture for Las Vegas will have more dark clouds if aviation consultant Mike Boyd's estimates are correct. Boyd forecasts McCarran "passenger count will fall by 15 percent in the next five years" decreasing back "to 2004 levels". More details here:
http://www.inbusinesslasvegas.com/2008/10/17/feature2.html

g

 
At 10/20/2008 8:42 PM, Blogger Randy said...

Anon 11:43,

Don't know if Vegas will go BK, but I certainly believe more of these big projects AND several MAJOR players in this town WILL.



Greg,

Great info - that's huge, and to think we're just now getting warmed up in this economic crisis. Much more pain to come!

Randy

 
At 10/20/2008 8:51 PM, Blogger 45north said...

its skeletal buildings arranged in some narcotic circle where all the little pagans can live together in some sort of Logans Run community of 24/7/365 debauchery

http://www.imdb.com/title/tt0074812/plotsummary

 
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At 5/10/2012 6:25 AM, Anonymous scarlet said...

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