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Rod Smith

The Strip: Overbuilt? Not Yet ...

16 May 2005

Although 30,000 more hotel rooms will likely open on the Strip between now and 2010, there is little chance Las Vegas faces a glut or price wars, insiders and analysts believe.

Still, a building boom of that magnitude carries risks for developers and the destination alike, they said.

For now, Deutsche Bank analyst Andrew Zarnett said, demand and supply are protecting the Strip and local operators.

"The baby boomer population, the sweet spot for Las Vegas customers, is growing faster than Las Vegas operators can keep pace," he said.

"Second, adding 25,000 to 30,000 rooms to a 130,000-room inventory over the course of five years only means supply growth of 4 or 5 percent a year," Zarnett said. "At the same time, demand seems to be growing at a faster pace, possibly much faster, than supply and it's accelerating."

Keith Schwer, director of the University of Nevada, Las Vegas' Center for Business and Economic Research, said even at 5 percent, the growth of hotel inventory should be sustainable because it will only mirror national economic growth after accounting for inflation.

"A 5 to 6 percent annual growth rate in nominal terms for Las Vegas gaming growth is about what a national economy will do with average real growth of 2.5 to 3.5 percent growth and 2.5 to 3 percent inflation, he said.

University of Nevada, Las Vegas professor Bill Thompson, who specializes in gaming studies, said gambling's growing popularity may work in favor of the new and soon-to-come resorts. Governors around the country are going "gambling crazy," he said, and a new wave of proliferation could help accelerate the demand for gambling in Las Vegas.

Bear Stearns gaming analyst Joe Greff compared the coming growth wave with 1998, when the local room inventory increased 10 percent but demand increased by more than 10 percent, driven by interest in new attractions.

The boom may already be changing consumer spending on the Strip. Jim Medick, chief executive officer of MRC Group Research Institute, Nevada's largest market research company, said older Strip properties have become de facto bed and breakfasts, leaking gamblers, though not overnight guests, to newer properties.

Therefore, he suggested, resorts will have to adapt or fall victim to the building boom.

"These properties will need to find a way to compete -- which will be difficult -- or reinvent themselves through property makeovers," Medick said.

The need for reinvention is another reason redevelopment of properties at the Strip's north end, such as Stardust, Sahara, Riviera and New Frontier, is likely.

Adapting will matter for new resorts, too. Zarnett said developers could land in trouble if their projects are not coupled with innovations, new attractions, new dining experiences and shows.

Schwer and Zarnett also said the steep, and rising, costs of developing on the Strip may prevent overbuilding.

"The capital necessary to put a major complex together is sufficiently large that some of the more risky projects will not be financed," Schwer said. "In addition, there is a limited amount of land to develop."

Because Strip building is so expensive, Schwer said, developers in Las Vegas have tended to hang back and let a risk taker test the market, the way developer Steve Wynn did with the just-opened Wynn Las Vegas.

"After there is some positive feedback, the pack of followers join," UNLV's Schwer said.

"That is not all bad. Indeed, (it protects Las Vegas because) you get a glut and a bubble when a large number of people believe they know what is happening in the future and they rush in without taking into account the actions of each other."

Nevertheless, Thompson said, a replay of the Sept. 11, 2001, terrorist attacks that devastated the hospitality industry here and nationwide could disrupt the whole market. A visitor slump, he said, could spark price wars as operators cut rates to generate enough traffic to ensure enough cash flow just to make payroll.

And, UNLV history department Chairman Hal Rothman said, the rash of developing condominiums, or ownership properties, as opposed to hotel rooms, could cloud other market predictions.

Most buyers of these new condos won't be residents, he said, but speculators who are willing to lease their properties when they're not staying here.

"The result may set off competition with hotels in ways we've never experienced before," Rothman said.

The relatively high cost of the condo units, $400,000 and higher, shouldn't deter buyers, he said.

"What we're seeing nationwide and worldwide is a glut of cash chasing real estate. There are ample people who could choose this market," Rothman said.

"(But) if developers' eyes are bigger than their stomachs, if they do not price the units properly, or if they do not develop the necessary amenities to create the kind of streetscape that this kind of urban living is predicated on, the market could be smaller than they anticipate."