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Hotel Construction Heats Up in Las Vegas

Hotel development is blazing hot in Las Vegas, where a $30 billion heat wave of construction is slated to add nearly 40,000 guest rooms in the next three years. At year-end 2006, the inventory of hotel rooms in the greater Las Vegas area totaled 132,605. Projects scheduled for completion by the end of the decade would increase that number by 30% to 171,276, according to Applied Analysis, a Las Vegas-based market research firm.

Market observers are more concerned about the hotel boom's impact on infrastructure than they are about overbuilding, however. Traffic on The Strip is bumper to bumper at most times of the day and night, and McCarran International Airport is already straining under the sixth-largest passenger volume in the nation, transporting 4.2 million passengers in May alone.

Staffing is another challenge, since unemployment is a low 4.2%, and attracting new casino and hotel workers is difficult in a market where the median price of an existing home has doubled in the past three years to $278,000, according to Applied Analysis, which serves the public sector and gaming industry.

Even if investors suspend some of the currently announced projects, deals in the works could soon add to the number of hotels in the pipeline. The trend in Las Vegas is to replace aging casino hotels with a greater density of rooms and gaming or entertainment space, so any property changing hands along The Strip is likely to bring a significant net increase in hotel rooms.

“While 40,000 rooms may be an aggressive number through the 2010 timeline, we will probably reach that number by 2012 or 2013,” says Jeremy Aguero, principal analyst at Applied Analysis. “It's not a question of how much, it's a question of when.”

Compared with the burden on infrastructure, potential overbuilding is a small worry in Las Vegas, where lodging occupancy averaged 93.8% in April, according to the Las Vegas Convention & Visitors Authority. Excluding motels, April's hotel occupancy exceeded 97%.

“When you're running over 90% occupancy, the signal is to build. You don't have enough rooms,” says Dr. Keith Schwer, director of the Center for Business and Economic Research at the University of Nevada at Las Vegas.

Hotel development in the nation's gaming capital has historically occurred in waves, Schwer says, but the current pipeline is the largest yet. He attributes the surge to strong demand and an ample supply of investor capital available at low interest rates. “When borrowing rates were in the double digits, we didn't have a lot of room expansions.”

On the positive side, Las Vegas has diversified its economic base and established itself as an international tourist destination. Foreign tourists comprise about 13% of visitors to Las Vegas, up from about 9% in 2002.

That number may reflect increasing wealth and leisure spending around the globe, but at least part of the uptick in foreign visitors is due to marketing. “One of our goals is to expand to new markets,” says Jeremy Handel, a spokesman for the convention authority.

Gaming now provides only 40.4% of revenues along The Strip, down from almost 53% in 1996. “The destination is not just about gaming anymore. It's as much about shopping, entertainment, food, drinking and lodging,” says Aguero, the Applied Analysis researcher. “Las Vegas has done very well through the normal ups and downs of the business cycle, and we have every expectation that will continue.”

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