Thanks to more attractive financing schemes and the growing ranks of wealthier visitors – and the money they’re leaving behind – the investment appetite for Las Vegas is hotter than ever.
The new developers, coupled with the Strip’s current bulls, promise to build the casino corridor up and out, and into a posh, multiuse urban core.
Las Vegas‘ newest wheeler-dealers are private equity companies that historically invest in traditional real estate such as office buildings and malls, and hotel companies that want to position their brands alongside the best-known casino resorts in the world.
At least $ 6 billion of the estimated USD 30 billion in hotel projects expected to open on and near the Strip through 2010 stem from investors who are new to the gaming industry or Las Vegas.
„There are (real estate companies) coming to town that never would have considered coming to town before,“ said Larry Woolf, chief executive of Navegante Group in Las Vegas, one of a few management companies that work with private investors to develop and launch major casinos.
Jim Murren, president of MGM Mirage, the Strip’s largest resort operator and landowner, said he welcomes Las Vegas‘ new investors because they may stimulate urban development along the Strip – as outsiders have done in other cities.
„You can get so myopic in Las Vegas,“ he said. „The more people who come from outside Las Vegas to inject money and ideas, the better. We don’t have all the answers here.“
Companies wary of the cyclical tourist trade and the risks associated with discretionary dollars are appreciating ever more Las Vegas‘ casino-stoked economy. Conservative investors are seeking Nevada gaming licenses to share in the record profits casinos are generating on the Strip, and hiring veteran casino managers to operate them.
And major hotels want a Las Vegas presence to capture customers who already are loyal to their brands elsewhere.
„It’s like being Gucci or Armani and not having a store on Rodeo Drive in Beverly Hills or on Fifth Avenue in New York,“ said Adam Frank, a partner in a resort development near the Strip that will include Las Vegas‘ first W hotel, an upscale brand in Los Angeles, San Francisco, New York and elsewhere.
Frank’s gaming management company, Edge Resorts, is a newly created casino operator that is seeking out hotel partners.
These newer investors are targeting the last few big parcels on the Strip, driving up land prices as they bid against the big gaming companies.
Within weeks of each other, two Las Vegas newcomers have established a new price of entry on the Strip. The two casino deals are the richest in history relative to the properties‘ relatively small earning power.
Hotel operator Columbia Sussex is paying USD 2.8 billion to acquire Aztar Corp. – a deal that values Aztar’s 34-acre Tropicana site at about USD 30 million per acre.
On Paradise Road, Morgans Hotel Group is paying USD 770 million to buy the Hard Rock Hotel – a property that made about USD 45 million before taxes and other expenses last year and is part of a larger parcel of about 30 acres.
By comparison, about six years ago Steve Wynn spent USD 270 million for the Desert Inn’s 217 acres, which is now home to Wynn Las Vegas and the Encore resort being built next door.
Experts anticipate pricier deals still to come, although Strip pickings have become slim. In play are the 55-acre Sahara and surrounding vacant land; the 27-acre site of the former Wet ’n Wild water park; 15 acres of land across the Strip from the Luxor; and at least 40 acres of underdeveloped land across the Strip from Mandalay Bay.
More development opportunities await to the east and west of the Strip, where low-rise buildings dot the landscape and vacant land lies fallow next to low-rent apartments and warehouses.
A year and a half ago Clark County expanded the resort corridor by allowing a higher density development at least a half mile east and west of the Strip. Over the next decade, developers are expected to build outward as available Strip land disappears.
A handful of such developments are under way, such as the two, 32-story condominium towers on Dean Martin Drive known as Panorama Towers, expected to open by summer.
High rises will bring a new, multiuse dimension to the casino corridor.
„The Strip is like beachfront property,“ said Carlton Geer, director of CB Richard Ellis‘ Global Gaming Group in Las Vegas, which was created to help investors better understand the casino business. „Developers are going to have to move east and west.“
MGM Mirage has long-range plans to develop some of its roughly 300 vacant or underused acres along Las Vegas Boulevard.
„The Strip is going to be far more vertical, far more dense and have a more prominent skyline,“ Murren said. „It will almost universally be mixed-use with resorts and a combination of condos and retail. Companies are going to get creative.“
The company hasn’t ruled out selling some parcels while focusing on CityCenter, the USD 7 billion collection of high rises that will squeeze about 18 million square feet of development – at least six towers – onto 66 acres. It is expected to be the largest privately funded construction project in the country.
New financing schemes are allowing developers to build more profitable, Manhattan-style projects.
The privately owned Cosmopolitan Resort at Harmon Avenue and the Strip, which will feature about 3,000 rooms and a casino, retail shops and entertainment venues, will be larger than most megaresorts.
The $ 2 billion resort, due to open by early 2009, will be mostly financed with a construction loan – a traditional bank loan that has much lower rates than the typical corporate bonds that financed many Las Vegas megaresorts.
The bank loans are greased by the advance sales of luxury condominium units that have become part of a new wave of Strip resort projects. The Cosmopolitan, for example, hopes to sell at least USD 1.8 billion worth of condo-hotel and traditional condo units well before the building is complete.
Similarly, MGM Mirage expects to help finance CityCenter with at least USD 2.5 billion from the sale of condo units.
The flood of new investor interest didn’t happen overnight.
The long-term strength of the casino business has attracted buyers wary of the cyclical tourist trade. On the Strip, business has grown amid competition from tribal casinos and other markets around the country that have whet the appetite for the larger Las Vegas experience.
Other than a few dips in visitor traffic in the winter and summer months, the Strip has become a year-round economic engine that defies seasonal trends.
„This is a highly regulated, transparent industry that’s on a roll,“ said Jay Kornmayer, chairman of Wells Fargo Bank of Nevada and a national gaming lending expert.
„It’s bricks and mortar that generate a lot of cash. There’s no accounting issues to worry about.“
Rising land prices on the Strip will limit the number of potential bidders. But pricey deals won’t shut out companies with a good management team and business plan, experts say.
Higher costs are pushing developers to build upward, creating more densely built projects that can reap a higher profit per square foot than the sprawling casinos of years past.
„I don’t think land prices will ever reach a point where they’re a barrier to development,“ Geer said.
„Land prices are a consequence of the opportunities developers see in the land, not the other way around. The fact that there is so much interest in Las Vegas, the fact that there’s an economic scarcity of land, drives the price.“
There’s also plenty of financing available in the capital markets.
Private equity companies have eyed casinos for years but are now richer than ever and have more money to invest, said bond analyst Andrew Zarnett of Deutsche Bank, which is financing the Cosmopolitan and other resorts.
„The amount of capital seeking private investment today versus three years ago is up by close to 300 percent,“ Zarnett said.
„We’re talking about billions of dollars in equity going after all kinds of industries. These are firms that you’ve never heard of, firms that started last week and firms that started years ago.“
Morgans, which recently went public to expand its boutique hotel empire, was one of many bidders on the Hard Rock.
An unsolicited offer from an investment banking firm prompted owner Peter Morton – who hadn’t been considering a sale – to initiate a formal auction process for the property.
And his decision to sell offers evidence that anything in Las Vegas is for sale for the right price.