By Jeff Clark, Principal, Investment Banking
I have been a Nevada resident and have seen it all, from boom to bust, over the past seven years since I moved here from California.
“Viva Las Vegas,” “Do or Die,” and “Money Plays” are just some of the sayings that come to mind when I think of Las Vegas. Whether you’re a lover or hater to this world-famous gaming resort and mecca of entertainment, it tends to move people emotionally— and demographically, as the city’s population has grown over the years.
When it comes to real estate development and urban planning surrounding the casino business, Elvis Presley summarized it best in his opening lyrics, “Bright light city gonna set my soul; gonna set my soul on fire. Got a whole lot of money that’s ready to burn, so get those stakes up higher…”
They did set the stakes higher starting with mega resorts in the ’70s. Higher, more expansive, and more elaborate every decade, each one trying to outshine the other in a race for riches that never ends. As a result, construction in Las Vegas is a major industry. The population has grown steadily and all other areas of construction have seen the benefits as well. As a friend in college who was a native of Las Vegas told me 20 years ago, “We have homes, churches, and schools too, you know.” To support the growth of a city with a highly tourist-driven workforce and population flux from out-of–state, second-home buyers, both high-rise residential condominium developments and master-planned suburban residential communities, are common in Las Vegas.
Despite the tremendous growth, city planners and private developers felt the Las Vegas Strip was missing something to serve as a nucleus and centerpiece like many other internationally renowned cities’ downtown districts offered. The CityCenter project broke ground in June of 2006 to address this perceived need. When finished, it was the largest privately funded building complex in the world, with a total price tag of over $9 billion. Several rounds of funding battles were won, amidst much uncertainty and distress during the downturn, to get this project completed or else Las Vegas would have a skeleton haunting the center of the strip today. MGM Resorts International controls the asset, one of several major assets in major markets such as Las Vegas— the so-called trophy assets that are more resilient to downward shifting trends in the marketplace.
In 2007, Las Vegas was named American City of the Year at the World Leadership Awards in London. It was recognized for its commitment to sustainability through its Alternative Fuel Program and the Centennial Hills Master Planned Campus.
My assumption is that in order to win urban planning awards, the casino business was doing very well indeed up until that point. A good indicator is the valuation of casinos being sold at that time. One month after receiving this award in January of 2008, Las Vegas witnessed one of the largest private equity buyouts ever, when publicly traded Harrah’s Entertainment Inc. was taken private at $90 a share for a purchase price of $17.1 billion. Harrah’s Entertainment and MGM Resorts International, the top two Fortune 500 gaming companies in the world, are based in Las Vegas.
Despite the larger players surviving and prospering through consolidation, with the economic downturn from 2007 to 2010 and to this day’s uncertainty, many of the smaller players in the casino business have gone under, prompting one local blogger, LV Revealed (lvrevealed.com), to title a column “Las Vegas Casino Death Watch.”
So far in 2011, here are some of the casino deaths and rebirths noted under new ownership through reorganization or foreclosure: The Sahara has closed its doors for good, it appears. The Riviera is being taken over by its creditor. The Hard Rock was foreclosed on and is now being run by a new owner operator… and there are several more.
How does this distressed asset situation for commercial real estate, specifically casinos in Las Vegas, compare with the rest of the country?
Prices on U.S. commercial real estate fell 4.2% in March, according to the national property price index released by Moody’s Investors Service in May. That drop brought the index down to its lowest level since its peak in October 2007.
Does this mean we’ve finally seen the bottom?
I think we are seeing the worst of the downturn in our rearview mirror.
With construction expected to increase slowly in 2011 and 2012— and a greater rate of growth expected in 2013— Las Vegas could truly be an indicator for the rest of the country, for where construction is headed.