At what point does the Las Vegas hotel/resort industry surpass the point of general profitability and fall into a dog-eat-dog scenario where profitability becomes a mirage in the desert sands? I recently returned from last Vegas and noticed that the building of new mega resorts is still in full swing. Yet, I couldn’t help myself from thinking about the point at which the tourism industry breeds an unsustainable environment?
Currently, Las Vegas boasts roughly 150,000 rooms available to rent for a night stay or longer. On The Strip, occupancy rates typically average around 90% per month, while the Downtown region averages around 80%. While these are respectable numbers, these are what is to be expected by owners/investors and do not speak to room rate pricing and other promotions.
In its present state, the newest mega resort on The Strip, know as CityCenter along with the Cosmopolitan have a track record being unable to turn a profit. The Cosmopolitan has reporting annual losses of roughly $100 per year since opening in 2010. The neighboring CityCenter reported a $2.1 million operating loss for the 2nd quarter.
This isn’t to say all resort properties are struggling. Take the Wynn hotels for example, 2nd quarter results show revenue up 12.5% from the prior year and their cash flow up 18.3%. What’s even more impressive is that the Wynn property’s annual cash flow is in the neighborhood of $500 million, while the CityCenter property is $330 million. When you compare the total construction prices of each property ($5 billion vs 8.7 billion) the contrast becomes even more stark.
When you visit the Wynn properties in Las Vegas, you notice something strange compared to the majority of other hotels along The Strip. What is different is the fact that the gaming area isn’t overly large and it’s not the focal point of the common first floor level. As a result, and to Wynn’s benefit, the majority of revenue is derived from restaurants, clubs, and retail shops. Gaming does play an important role, but it’s not THE role to riches for Wynn.
The contrast in resort profitability gives insight to how things will likely play out in the future for a heavily saturated tourism market in Las Vegas. In times economic growth, as we are in now, certain resorts with the correct marketing and attractions will be poised to survive and grow, while others that lack the necessary appeal will be shunned and find themselves in a very sticky financial bind.
Crown Resorts along with the Genting Group are in the process of constructing two new mega resorts north of where the Wynn properties are located. The Genting Group is planning on building the Asian themed Echelon Place, which will have 3,000 rooms and 3,500 slot machines in operation by 2017. The Crown Resorts property is expected to be smaller in size and open in 2018. Both will bring yet another attraction and a boost to the number of rooms available for rent in the area.
The growth Las Vegas experienced in the 90’s and early 2000’s is a thing of the past. The size of the overall inventory, whether it be rooms, slot machines, restaurants, or a different measurement, paint a picture of a behemoth. Under such conditions, growth, in comparison to the whole, is much more difficult to achieve compared to when activity was on a smaller scale.
From my experience there and research, I would anticipate the Downtown area to continue to experience a re-birth, while the main drag of the strip continues to fight for and re-define its customer base. It’s what I see as the changing dynamics and composition of what tourists know as ‘Vegas’.
Disclosure: No Positions