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Developers Bet a Fortune on Vegas

Casino-hotel complex debuts on the famed Strip as room demand slackens.

CityCenter arrived on the Las Vegas Strip like a diva, dripping in sequins and shiny architectural garments. And why not, since the hotel, casino and retail project cost $8.5 billion to develop, according to its owners. Unofficial estimates put the cost closer to $11.2 billion.

A joint venture between MGM Mirage (NYSE: MGM) and Infinity World Development Corp., a subsidiary of Dubai World, CityCenter unveiled its three high-rise hotels in December. A fourth will open later this year. But star power aside, can the market support 5,000 new hotel rooms at a time when tourism is in retreat and conventions have become scarce?

More than a month after the project's opening, analysts are carefully watching to see whether room prices rise or fall. They are also curious to see if the glitzy mixed-use development totaling 18 million sq. ft. can attract new visitors to lift the city from its doldrums, underscored by a 13% unemployment rate.

Along the Strip, owners of older casino hotels fear that the 67-acre project, with its curved silver buildings and 150,000 sq. ft. of gaming space with private salons for high-limit slots, will cannibalize their meager profits and put some weaker casino hotels out of business.

And those fears may be well founded. “Some of CityCenter's revenue will be revenue that Las Vegas didn't have before, but we project that 70% to 90% will be at the expense of existing properties,” says Jacob Oberman, director of gaming research with CB Richard Ellis in Las Vegas.

Although gaming revenue on the Strip rose 8.2% in November after 22 months of decline, according to the Nevada Gaming Control Board, CBRE projects that older properties operating as of September 2009 before CityCenter opened will be hit this year by revenue declines of up to 6%.

The hotels were already facing difficulty. Hotel occupancy in the metro area dropped from 83.8% in October 2008 to 82.6% in October 2009, and average daily room rates declined from $115.68 to $99.59 over the same period, according to the Las Vegas Convention and Visitors Authority.

Meanwhile, CityCenter faces its own daunting problems. Besides needing to fill thousands of hotel rooms each night during an economic downturn, it has dropped prices for 2,400 luxury condos by at least 30% from the pre-construction prices of two years ago.

Area brokers are marketing condos at the 1,495-unit Vdara Hotel & Spa from $600,000 to more than $2.5 million, while its hotel suites cost $149 to $2,000 per night. A suite at the Aria Resort & Casino, the development's centerpiece, costs up to $7,500 per night.

Troubled Fontainebleau

In this harsh winter, many Vegas developments are struggling with turbulent financial issues. The 3,815-room Fontainebleau hotel-casino was nearly 70% completed in mid-2009 when a group of lenders, including Bank of America and Deutsche Bank, yanked an $800 million revolving loan and the project fell into bankruptcy.

Despite the nearly $2 billion already invested in the resort — it still needs roughly $1 billion more to complete — the Fontainebleau is likely to be sold for just a fraction of the investment made to date. Billionaire investor Carl Icahn has bid $156.2 million. A bankruptcy judge was expected to review any additional bids in late January.

The auction is unlikely to draw more than $400 million, says Al Barbagallo, senior vice president for investment advisory services for brokerage Grubb & Ellis in Las Vegas.

“We've had a real big hit here. We've been hit harder than other parts of the country,” he says. “Our economy is driven by tourism. When tourism went down, so did our economy. There was no financing to purchase existing properties, and no construction financing.”

Barbagallo has bitter words for lenders. “What has really hurt us more than anything else is the banks. The banks have destroyed our economy because there is no loan money available. So whether it be hotel-casinos, multifamily housing or [other] commercial projects, the financing has dried up. It's been a devastating blow to the Las Vegas economy.”

In the downward spiral involving recession and lack of credit, property prices have been in freefall. “As a general rule of thumb, land values have come down 50% to 55% citywide” since their peak about two years ago, notes Barbagallo. Some properties plunged 70% to 80% in value.

For instance, the Pinnacle hotel-condo property, nearly 10 acres of vacant land on West Tropicana Avenue, was previously valued at $90 million, but now is priced at just $29 million, says Barbagallo.

The Pinnacle is 1.5 miles from the Strip and is zoned for two 36-story towers with 1,104 rooms. Another parcel earlier valued at $40 million has been marked down to $9 million.

Using LoopNet's digital marketplace, Prestige Realty & Developers is advertising a 128-room motel and bar on Dean Martin Drive for $20 million with the plea, “Must sell! Drastically reduced from $100 million.” The property, the broker notes, is approved for a 60-story, 1,800-unit hotel-casino.

King of distress

Las Vegas recently earned the unwelcome distinction of becoming the national king city of commercial real estate distress. The metro market ranked highest in the country by dollar value of troubled assets, according to New York-based research firm Real Capital Analytics.

Las Vegas had $17.7 billion of properties classified as delinquent, in default, bankrupt, foreclosed or otherwise owned by lenders as of Dec. 1, 2009. The gaming capital eclipsed Manhattan, which posted the second-highest amount of troubled properties at $12.3 billion. Miami ranked third with $7.6 billion. Nationwide, distressed commercial real estate properties totaled a record $180 billion.

“The distress is formidable,” says Dan Fasulo, managing director of Real Capital Analytics. Most of the financial problems accumulated between September 2008, following the collapse of Lehman Brothers, and November 2009, he adds. “I think we'll continue to see more distress come to market well into 2010.” By mid-year, the problems could start to ease.

Some of the distressed commercial property lies in the Las Vegas suburbs, where new shopping centers were erected to accommodate planned residential developments that were never completed after the recession and credit crisis struck.

“I'll never forget driving around the loop in Vegas. There's a brand new retail center on the desert next to the highway,” adjacent to an abandoned housing development, says Fasulo. “It's all plotted out for new houses. Obviously they're not going to build the houses now.”

Gaming employment declines

Clark County gaming revenue is expected to decrease 3.8% to $8.5 billion this year after declining 10.2% to $8.8 billion in 2009, according to the University of Nevada Center for Business and Economic Research. Annual gaming revenue isn't expected to rise until 2011, and even then the increase is expected to be an underwhelming 1.2%.

Although last year's visitor volume declined an estimated 1.8%, hotel space grew by 8,627 rooms to 149,156 in 2009, according to the business research center. Visitor traffic is expected to grow another 2.7% in 2010 as more hotel rooms compete for guests.

Feeling the pinch, a number of hotels have laid off workers. Employment in Las Vegas-Paradise casino hotels and gaming dropped from 162,300 in November 2008 to 148,300 in November 2009, according to the Nevada Department of Employment, Training and Rehabilitation. On the bright side, CityCenter is hiring a workforce of 12,000, making it the region's largest private employer.

Some beleaguered hotels have taken drastic steps to weather the downturn. In December, the 1,720-room Sahara Hotel closed two hotel towers temporarily, but it left open a third tower, the Tangiers, plus a casino. The Sahara is owned by Los Angeles-based SBE Entertainment and San Francisco-based private equity firm Stockbridge Real Estate Funds.

Other properties have had difficulty getting out of the starting gate. After Deutsche Bank foreclosed on developer Ian Bruce Eichner's Cosmopolitan Resort & Casino in 2008 following a $760 million loan default, the lender took over construction of the project. It has been plagued by delays and construction problems, and is reportedly $2 billion over budget.

Throughout the country, many projects that were in advanced stages of development over the past 12 months have experienced similar problems, points out Mark Gordon, head of the U.S. hotel group at brokerage Cushman & Wakefield Sonnenblick Goldman in New York. “Unfortunately the projects in Vegas are disproportionately large.”

Better days ahead?

Ultimately the projects will work out, says Gordon. “We're seeing investors express interest in these deals.” All over the world, investors have Vegas in their sights, he adds, and many find the Fontainebleau particularly attractive. “It has the potential to be a spectacular asset. There's lots of capital available to work through these distress transactions.”

It could take months to work through the distress issues, but that effort could pay off, says Gordon. “Now is a very opportunistic time to buy into some of these projects that are not completed.”

In the short term, Las Vegas is unlikely to return to its old, high-rolling property values. “I think what's occurring is a resetting of values,” says Gordon. “Values had gotten incredibly aggressive. There will be a lot of opportunity for investors who would otherwise have been shut out of the market because of the way properties were being valued.”

Jan Freitag, vice president of global development for Smith Travel Research, based in Hendersonville, Tenn., agrees that many investors are drawn to the gaming capital. “I think Vegas always attracts people with big checkbooks. Not everybody's hurting. There are high-net-worth individuals who think maybe this is the time to step in and get myself into the business of gaming.”

The jury is still out on whether the striking new CityCenter will help or hurt the city's hospitality and casino market. “The verdict on CityCenter is still out because the U.S. and the globe are just coming out of a recession,” Freitag says.

On a recent trip, he visited the CityCenter complex. “It's all very impressive,” Freitag says. “It was built for the future. Only one of the hotels has a casino, so it's trying to get to this post-gaming Vegas that is a little more upscale.”

But can CityCenter fill more than 5,000 rooms nightly? “A lot of these properties are built with the long term in mind. They were conceived to do well over the next 50 years,” says Freitag.

If the city can lure enough corporate business travelers, then the hotel rooms may well get filled. “But it's not going to be tomorrow.”

Denise Kalette is senior associate editor.



  1. CityCenter

    12,000* employees

  2. Wynn Las Vegas LLC

    8,500 employees

  3. Bellagio Hotel & Casino

    8,500 employees

Source: Nevada Workforce Informer, CityCenter

1.8 million

Source: U.S. Census Bureau

Source: U.S. Bureau of Labor Statistics



23.3% vacancy, 3Q 2009

18.2% vacancy, 3Q 2008

$19.27 rent per sq. ft., 3Q 2009

$21.01 rent per sq. ft., 3Q 2008

Source: Reis Inc.


10.3% vacancy, 3Q 2009

7.5% vacancy, 3Q 2008

$795 monthly rent, 3Q 2009

$833 monthly rent, 3Q 2008

Source: Reis Inc.


12.4% vacancy, 3Q 2009

7.5% vacancy, 3Q 2008

$19.53 rent per sq. ft., 3Q 2009

$21.02 rent per sq. ft., 3Q 2008

Source: Reis Inc.


13.4% vacancy, 3Q 2009

9.9% vacancy, 3Q 2008

$7.76 rent per sq. ft. 3Q 2009

$8.57 rent per sq. ft. 3Q 2008

Source: Marcus & Millichap


82.6% occupancy, October 2009

83.8% occupancy, October 2008

$99.59 average daily rate, October 2009

$115.68 average daily rate, October 2008

Source: Las Vegas Convention and Visitors Authority


CityCenter: Located on 67 acres, the complex includes the Aria Resort & Casino, with 61 stories and 4,004 rooms, the 47-story Mandarin Oriental and the 57-story Vdara Hotel & Spa. All three opened in December. A fourth hotel, the Harmon, is set to open later this year. Crystals, a shopping and entertainment center, debuted in December. The complex includes condo units, and residents planned to begin moving into the condos in late January. A tram provides access from CityCenter to the nearby Monte Carlo and Bellagio casino resorts.

Developer: MGM Mirage and Infinity World Development Corp.

Completion: 2010

Cost: $8.5 billion

The Cosmopolitan Resort & Casino: The project, begun in 2005, calls for 2,200 condo-hotel units, 800 hotel rooms and 150,000 sq. ft. of meeting space. Deutsche Bank foreclosed in 2008 and later hired Related Cos. to guide construction.

Developer: Deutsche Bank

Completion: 2010

Cost: $3.9 billion

Hotels feel the economic pinch as biz travelers avoid Sin City

As fewer business and leisure travelers spend time and money in Las Vegas, the spending decline has hit the city hard. For the first 10 months of 2009, 30.7 million visitors flocked to the city compared with 31.9 million during the same period in 2008, according to the Las Vegas Convention and Visitors Authority.

Hotel occupancy dropped from 83.8% in October 2008 to 82.6% in October 2009, and average daily room rates declined from $115.68 to $99.59 over the same period, the authority reports.

Annual convention attendance fell 25.7% from January through October 2009 compared with the same period the prior year, authority figures show. A couple of examples highlight the loss. In April 2008, convention attendance rose a healthy 3.9% above the same period a year earlier. But by August 2009, as the economic slowdown dragged on, convention attendance plummeted 58.9% from the same month a year earlier.

Convention travel is unlikely to rebound immediately, says Jan Freitag, vice president of global development for Smith Travel Research, based in Hendersonville, Tenn.

“It has a lot to do with travel policy at the Fortune 1000 companies, which was really curtailed at the end of 2008,” says Freitag. Many companies are reluctant to hold meetings in attractive destinations during an economic slowdown. “The corporate meeting planners are saying we can't quite risk it yet.”

When hoteliers lose convention customers who tend to spend freely for catering and other services, they are under pressure to fill rooms with leisure travelers, says Jacob Oberman, director of gaming research for CB Richard Ellis in Las Vegas. But leisure travelers already were reeling.

“The decline in home prices really hurt the leisure customer. There's the wealth effect. Your home is going down in value, so you feel less wealthy and therefore you spend less,” says Oberman. Some studies show that for every $1 decrease in home value, consumers tend to allot six cents to 15 cents less for discretionary spending. And from late 2008 through 2009, homeowners had less home equity available for loans than from 2005 to 2007.

In the mid-2000s, Americans were more flush with spending money, says Oberman. “If they were able to refinance their home, and all of a sudden had $100,000, maybe they took a trip to Las Vegas. Not necessarily with all $100,000, but with $5,000. We believe that phenomenon was occurring.”
— Denise Kalette

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