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Vegas Hotel Construction Heats Up

The construction cranes appearing up and down The Las Vegas Strip aren’t a desert mirage, although temperatures did hit 116 degrees there this month. Hotel development is blazing hot in Sin City, and a heat wave of construction is slated to add nearly 40,000 guest rooms in the next three years, at a total value of $30 billion.

At year-end 2006, the greater Las Vegas area had 132,605 hotel rooms. 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.

About a dozen projects account for the lion’s share of rooms to be built, the largest being City Center, a 75-acre mix of hotel, casino, and retail space under development by MGM Mirage that will dump about 6,800 hotel rooms onto the market by 2009. 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.

This month, Elad Properties closed the New Frontier after paying $1.2 billion for the 55-year-old hotel and casino. The purchase, which comes to $34 million per acre, will make way for an $8 billion resort to be completed in 2011. Goldman Sachs is buying four casinos, including the Stratosphere and 17 adjacent acres, for $1.3 billion. The trend in 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.”

In any other market, a pending 30% increase in inventory would sound alarm bells of a potential oversupply. Not so 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.”

Market observers are more concerned about the hotel boom’s impact on Las Vegas’ infrastructure than they are about overbuilding. Traffic on The Strip is already bumper to bumper at most times of the day and night, and the airport is already strained, conveying nearly 4 million passengers in April alone. Staffing is another serious challenge — unemployment is at 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.

On the positive side, Las Vegas has diversified its economic base and established itself as an international tourist destination. Foreign tourists make up 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 LVCVA.

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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