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Arnold M. Knightly

Analyst says gaming won't save Vegas

6 October 2009

LAS VEGAS, Nevada -- Many things went wrong with the gaming industry in Las Vegas, and new casinos aren't going to rescue the local economy from the current recession, a gaming analyst said at a recent roundtable discussion on the real estate market.

Consumers lost wealth, casino operators increased debt burdens, liquidity dried up and projects weren't fully funded at the start of construction, Grant Govertsen, principal and analyst at Union Gaming Group in Las Vegas, said last week.

As the cost of a trip to Las Vegas noticeably outgrew the pace of inflation, leisure travelers changed their behavior and looked for destinations with better value, he said. That's a slap in the face for Las Vegas, a city that built its reputation on inexpensive hotel rooms and complimentary buffets.

However, Las Vegas is resilient and the appeal of the Strip has not diminished, Govertsen said at Colliers International's third-quarter review on Thursday. Capital markets are heating up and lenders are talking about financing projects again, he said.

"Wall Street is not running away from gaming. That's not the case at all," the former gaming analyst for Deutsche Bank said. "If you look at MGM (Mirage), obviously they're highly leveraged," he said. "Throw in Station (Casinos), Harrah's (Entertainment). In theory, they could go bankrupt. With CityCenter, they won't. They did a pretty good job refinancing, pushing up securities. They're now trading at $12 a share. They're not really a bankruptcy threat."

Can the opening of MGM Mirage's CityCenter and other gaming properties lead Las Vegas out of recession? No, Govertsen said.

"It's the opposite," he said. "You're going to need the economic recovery to get gaming back. Recovery has to happen first. Then wallets are going to be a lot looser."

Hotel-condo sales at CityCenter probably will exceed Wall Street expectations, which are zero, he said. Palms Place closed escrow on about 30 units, and Govertsen said he expects to see about the same number at CityCenter when the first phase of the $8.5 billion project opens in a couple of months.

Current trends suggest the Las Vegas market is stabilizing, he said. Occupancy levels are better than perceived and booking windows are expanding. Declines in visitor numbers and gaming revenue are leveling off.

Union Gaming estimates $3.9 billion in room revenue for 2009, down 31 percent from the 2007 peak of $5.8 billion. Gaming revenue has declined 13 percent in Clark County and visitation has declined 6 percent. Hotel occupancy dropped to 82.9 percent with average daily room rates of $94, compared with 90.4 percent occupancy and $132 average rates in 2007.

CityCenter will surely cannibalize some of the high-end players from Bellagio, Wynn Las Vegas and The Venetian, but shouldn't affect lower-tier properties, Govertsen said. Overall, room rates will rise.

The loss of construction jobs at CityCenter may be less than the 8,000 to 10,000 estimated, Govertsen said. Roughly one-fourth of the workers traveled from other states and are likely to return home when the project is finished.

There will be more regional expansion in gaming, not necessarily in existing markets, Govertsen said. That's good news for Las Vegas because it generally results in increased visitation.

The midmarket remains underserved in Las Vegas, he said. The supply of 9,343 rooms coming on line for the next 12 months targets the high-end market, including CityCenter, Hard Rock Hotel and Cosmopolitan. Any new development should be limited to renovation of properties such as the Sahara and Riviera.