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Rod Smith

On The Strip: Room Rates Head Down

20 June 2006

LAS VEGAS, Nevada -- Demand for rooms on the Strip is heading slowly south for the July Fourth weekend after flat-lining over the second quarter of 2006, reports from Wall Street firms say.

Rates for rooms on the Strip booked three weeks in advance over the Independence Day holiday are down an average of 3 percent, to $144 from $148 a year earlier, survey data from Bear Stearns shows.

Similarly, rates for rooms booked in advance during the second quarter were flat, averaging $204 over the second quarter compared with $203 a year earlier.

Following the Sept. 11, 2001, terrorist attacks, Strip properties generally have enjoyed double-digit rates of increase in room rates.

Brian Gordon, a partner in the Las Vegas-based consulting firm Applied Analysis, called the flat room rates surprising in light of the new and more expensive product mix on the Strip.

Since the beginning of the second quarter a year ago, Wynn Las Vegas, the Spa Tower at the Bellagio and the Augustus Tower at Caesars Tower have all opened, and Boardwalk, Westward Ho and Bourbon Street have closed.

Despite the current trends, Las Vegas Visitors and Convention Authority research director Kevin Bagger said room rates increased 15 percent over the first four months of the year, the most recent period for which the agency has data available.

He also said Las Vegas remains on target to see a projected 39.1 million visitors this year.

And Bagger said that the Fourth of July may be an exception to long-term trends since the holiday falls on a weekday this year rather than a weekend when demand is generally stronger.

Room rates in the Bear Stearns survey were weaker on the weekend during the week of July 2, down 3 percent, rather than midweek when rates are down 2 percent on average.

Bear Stearns analyst Joe Greff said this year's convention calendar probably has a lot to do with the room rates, with fewer major events with more than 1,000 attendees planned this year compared with 2005.

Gordon said the fact of economic life is that double-digit rates of increases in room rates that Las Vegas operators have enjoyed for several years cannot be sustained in the long run.

"At some point the economics of room pricing hits a ceiling for at least some products," he said.

Jim Medick, chief executive officer of the MRC Group, Nevada's largest market research firm, said the soft market is an unwelcome development for hotels here.

Medick said the demographics of Las Vegas visitors change over summer months, making hotel-casinos even more sensitive to dipping room rates.

"Convention and upscale visitors tend to disappear and the hotels depend more on niche and slot players to get through the summer. It will be a very tough time for the casinos," he said.

"They'll have to make changes in prices and their promotion activities just to keep holding rates flat," Medick said.

More fundamentally, however, he said there has been a drop off in demand for rooms at the bottom end of the scale.

"Value hunters are important for Las Vegas, and the sluggish economy, consumer prices, gas prices and air travel don't bode well for a great percent of the marketplace," Medick said.

Gordon said that for now, operators are turning their attention to managing rates and running marketing campaigns to keep heads in beds.

"It all boils down to yield management and the (casino) companies are very successful at maximizing revenue out of customers who frequent their properties," he said.

"That's why the casinos are offering amenity packages that cater to higher value consumers where companies are generating much of their revenue. And that is the concept behind the room rate adjustments we are seeing," he said.

Marc Falcone, gaming analyst at Deutsche Bank, whose surveys closely parallel those by Bears Stearns, said in the longer-run, through August, data suggests continued room rates will remain flat.