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June 28, 2016

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The future of tourism: Our fortress of cards

Las Vegas can protect itself from future recessions by building an economy that’s unbreakable

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Steve Marcus

Tourists take photos at the Welcome to Fabulous Las Vegas sign Saturday, March 14, 2015, on the Strip.

What would happen to Las Vegas if the global economy dipped into another recession this year or next year? Some experts say that’s a likely scenario, due in part to tough financial conditions in Europe and China.

Jeremy Aguero, an economist at Applied Analysis, said Las Vegas would be substantially better off than it was during the last recession. Even if another recession hit, Aguero said, it likely would be a much smaller downturn.

Still, it’s important for the economy to continue diversifying, Aguero said.

“The traditional gambling consumer, particularly as it relates to baccarat play, those folks just don’t exist the way they did a couple years ago,” Aguero said. “I think you’ll have to find additional things that are attractive to folks relative to diversifying the reasons that people come to Las Vegas.”

The tourism industry already has taken great strides on that front, which are reflected in the way tourists spend their money here. In 2010, 80 percent of visitors surveyed by GLS Research said they gambled while in Las Vegas; in 2014, only 71 percent did.

John Restrepo, principal of RCG Economics, said Las Vegas probably is more economically vulnerable than other metro areas with more diverse economies, but that doesn’t mean the local economy hasn’t made good progress.

“It takes time to transform an economy,” Restrepo said. “We’re making the right moves, and we’re headed in the right direction, but it takes a lot of time.”

A CHANGING LANDSCAPE

THEN

Halted construction

In June 2007, Boyd Gaming Corp. broke ground on a $4.8 billion resort development, Echelon, at the site where the Stardust once stood. Boyd halted construction in August 2008, citing a difficult environment in capital markets and challenging economic conditions. Echelon sat abandoned for several years.

Bankruptcy

Construction began in 2007 on the 68-story Fontainebleau Las Vegas. The 3,900-room resort already was topped out when developers filed for bankruptcy protection in 2009. Billionaire Carl Icahn bought the property for pennies on the dollar in 2010. It remains unfinished today.

Unfinished plans

Casino mogul Phil Ruffin sold the New Frontier for $1.2 billion in 2007 to Israeli investors who planned to replace it with a luxury casino-resort called Plaza Las Vegas. Then the economy went downhill, and construction on Plaza never got underway.

NOW

Plans to restart construction

Malaysia-based Genting Group plans to open the $4 billion Resorts World Las Vegas at the Echelon site in 2018. Genting bought the partially built development from Boyd in 2013 and had a ceremonial groundbreaking in May.

Location for sale

The mothballed Fontainebleau was put up for sale last year.

New plans on the move

The Frontier site was bought in 2014 by a group that includes Australian casino mogul James Packer and former Wynn Resorts executive Andrew Pascal. They plan to build a 3.4 million square foot, 1,100-room resort, Alon Las Vegas.

HOW FAR WE'VE COME

Seven years ago, Nevada’s largest employer teetered on the edge of bankruptcy.

MGM Mirage and its massive, $8.5 billion CityCenter, the Strip’s most ambitious construction project, were seriously threatened amid the Great Recession.

MGM needed to make a $200 million equity payment to stave off a bankruptcy filing for CityCenter, the cost of which had virtually doubled since the project was announced five years earlier. Construction was to grind to a halt if banks didn’t let MGM make the payment, half on behalf of the company’s partner, Dubai World, which had just sued MGM.

MGM had larger troubles as well: namely, billions of dollars in debt, which raised the possibility that the whole company would have to file for bankruptcy protection.

MGM and CityCenter both pulled through. A majority of the company’s banks allowed it to make the equity payment, and MGM and Dubai World reached an agreement to fund CityCenter. MGM later restructured to avoid bankruptcy.

But the company’s troubles highlighted just how badly the recession wounded the Strip. It was a far cry from the local casino industry’s standing when MGM announced the CityCenter project in 2004.

Jim Murren, CEO of MGM Resorts International, formerly MGM Mirage, said there were many moments when he thought his company might not bounce back. Referencing “many, many sleepless nights,” he called 2008 and 2009 “harrowing times” for MGM.

“We had the worst of every dimension you could imagine,” Murren said. “We had plummeting cash flows, we had no bank capacity … we had skyrocketing construction costs, and we had 10,000 men and women working on a site that everybody thought was going to shut down in a moment’s notice. So those scars will never heal.”

Fast forward to this year, and the Strip is in much better condition. MGM Resorts still owns CityCenter with Dubai World, and the development just reported its best quarterly cash flow ever.

Meanwhile, MGM Resorts in April will open a 20,000-seat arena and a $100 million dining-and-entertainment district. The company also is preparing to move seven of its Strip properties into a real estate investment trust, partly because Murren doesn’t think Wall Street has valued his company’s real estate highly enough.

MGM’s saga, in many ways, mirrored that of Las Vegas’ tourism industry overall. Gaming and tourism on the Strip tanked in 2008 and 2009 as the recession squeezed people’s wallets, eviscerating discretionary spending.

But as the economy has recovered over the past several years, so has the Strip. Visitation to Las Vegas is at a record level, revenue at the big resorts is higher than it ever has been, and hotel room rates and occupancy levels both are up from the depths of the downturn.

Some areas such as gaming revenue and convention attendance remain well below the highs they reached before the recession. In gaming’s case, that’s a reflection of a shift in customers’ habits: Tourists these days focus more on shopping, dining, drinking and entertainment than gambling. The good news is, the Strip has evolved to meet those changing tastes.

“People are still spending money in Las Vegas, they’re just not gambling as much,” said David Schwartz, director of UNLV’s Center for Gaming Research.

So it’s understandable, then, that the biggest projects coming up for MGM, the largest casino operator on the Strip, don’t involve gambling. In addition to T-Mobile Arena and the Park outdoor dining-and-entertainment district, MGM also is moving forward with plans to build a 5,000-seat theater at Monte Carlo and significantly expand the convention facility at Aria. That’s on top of the massive Mandalay Bay Convention Center expansion that MGM recently wrapped up.

Strengthening convention business is a top priority for Murren, who said it is a crucial component of the health of the Las Vegas tourism industry. Other priorities include giving visitors more incremental reasons, apart from gambling, to visit the Strip and continuing to market the destination effectively.

“I think this is our time,” he said.

STRIP REVENUE

The Strip is diversifying with an increased focus on nongaming revenue from shopping, entertainment and food. Gaming is evolving as well, with baccarat rising in popularity.

Before the recession, baccarat was a relatively small piece of the Strip’s and the state’s gaming revenue. But the popularity of baccarat has grown considerably in recent years and has helped gaming interests climb back from the depths of the economic downturn.

“Starting in 2010, we kind of were experiencing a baccarat-based recovery,” said Michael Lawton, senior research analyst at the Gaming Control Board.

Lawton attributed the rise to the presence of Las Vegas casino operators in Macau, where baccarat is popular. As companies strengthened their relationships with customers there, they brought Macau gamblers to Las Vegas too.

The effect was significant. In 2010, gaming revenue on the Strip increased 4.1 percent; without baccarat, it would have risen only 0.3 percent, according to Lawton. The market has grown without baccarat, just at a smaller pace.

Downtown Las Vegas, a much more slot-driven market, has experienced a slower recovery. In fact, when the recession hit, gaming revenue there already was down from a high in 1992. It remains today well below that peak.

Another big change for gaming in the state has been sports betting, a sector in which revenue has grown tremendously over the past decade. In 2005, Clark County reported $105.3 million in annual revenue from sports pools, which does not include race books. By 2010, that figure grew to $129.2 million, and in 2015, it was $203.3 million.

Lawton said the growth could be explained in part by a “sports-savvy culture” and by sports books that offer more bets on a larger variety of events. Another big contributor is mobile betting applications, which have been embraced by sports books and bettors.

GROWTH OF NONGAMING

The dynamic of the Strip was very different in 2007 than it was in 2015. In the 2007 fiscal year, gambling accounted for 41 percent of revenue at Strip resorts that make more than $1 million a year in gaming revenue. In 2015, that figure fell to 34.9 percent.

In 2007:

• The hotel room occupancy rate* on the Strip was 94.7 percent.

• The Strip’s average daily room rate* was $146.25.

• There were 132,947 hotel rooms available citywide.

• 39.2 million people visited Las Vegas.

• About 6.2 million people attended conventions.

• Strip casinos earned $6.8 billion in gaming revenue. Of that:

• $3.5 billion came from slot machines.

• $899.5 million came from baccarat.

In 2015:

• The hotel room occupancy rate* on the Strip was 90.2 percent.

• The Strip’s average daily room rate* was $151.20.

• There were 149,213 hotel rooms available citywide.

• 42.3 million people visited Las Vegas.

• About 5.9 million people attended conventions.

• Strip casinos earned $6.3 billion in gaming revenue. Of that:

• $3.1 billion came from slot machines.

• $1.3 billion came from baccarat.

HOTEL ROOM RATES

Hotel room rates in Las Vegas have not fully recovered from the highs they reached before the Great Recession. But Kevin Bagger, senior director of strategic research for the Las Vegas Convention and Visitors Authority, isn’t worried. “We have the largest room base in the country, and we have the highest occupancy in the country on that room base,” Bagger said. “Often in Las Vegas, we’re our own toughest competitor trying to beat our own performance.” Even during the recession, the number of hotel rooms in Las Vegas increased because CityCenter and the Cosmopolitan both opened.

CONVENTIONS

Another sector that continues to limp along is convention attendance, which reached a high of 6.3 million in 2006. Last year, 5.9 million people attended conventions here. And yet, the valley’s convention space keeps growing: Mandalay Bay just completed a huge expansion, Aria is embarking on one, and the LVCVA wants to build a new convention center on the site of the Riviera. Bagger said overall attendance counts failed to account for the difference between large and small trade shows. Conventions with 10,000 people or more, the shows the LVCVA generally goes after, are “effectively back to their pre-recession peak levels,” Bagger said.

In 2006, 1.8 million people came to conventions in Las Vegas with more than 15,000 attendees, the same number as in 2014, according to the LVCVA.

“We currently are turning away business,” Bagger said. “We have shows that need to expand or other shows who would come to Las Vegas, but we don’t have the space or dates available to be able to house them.”

Meanwhile, more tourists are coming to Las Vegas than ever. While annual visitor volume fell during the recession, it has set records in recent years. LVCVA officials anticipate 2016 will set another record with 42.5 million annual visitors.

That’s despite a slightly smaller room inventory because of the 2015 closure of the Riviera.

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