The Las Vegas construction boom has hit a brick wall, creating omnipresent worry in a town that isn’t used to the jitters. After 20 years of boom, Sin City casino executives didn’t gamble on a softening economy evaporating business or tightening financial markets that would make it difficult to get the cash needed to build resorts.
Las Vegas is feeling the pinch of a softening economy. // Image (c) 2011 Destination360.com
Unfortunately, the expansion side of the business has gone bust. Several notable projects have been cancelled, others are getting pushed back and some investors are finding that they need to scramble for dollars if they plan to finish uncompleted ventures.
Most notably, Boyd Gaming has delayed its $4.8 billion Echelon for at least nine months. It was a surprise blow to a company that has been in a transformative stage from locals market player to Las Vegas Strip contender. But it’s also a major blow to Morgans Hotel Group, which has a 50/50 joint venture with Boyd to develop a Mondrian and Delano within Boyd's Echelon development. Now that relationship is in question as Morgans executives do “not intend to further extend the joint venture agreement on its current terms,” said a statement. They do hope to evaluate future proposals relating to the project with Boyd.
Interestingly, Boyd Gaming is getting some short-term gain from its decision to delay the project. Investors are rewarding the decision and its stock immediately jumped. The company has now diverted cash into a $100 million buyback program.
“You’re seeing projects supposed to open in 2009 and beyond slowing down,” said Bruce Ford, SVP sales with Lodging Econometrics, a firm that tracks all hotel and casino projects globally. “[Projects] are clearly slowing down. Most projects are not in a hurry to complete right now because of the soft demand time right now and declining revenues.”
Ford explained that many construction loans have some wiggle room built into them for the start of payback— meaning a project can open six to nine months later than scheduled with no adverse affect on the status of the loan.
More Trouble on the Strip
More telling are the problems taking places further down the Strip. Take MGM Mirage’s CityCenter, for example. Known as the largest privately-funded construction project in U.S. history, there is little surprise that the developers are having trouble completing financing for this mega project, which was originally estimated to cost $7.5 billion. Now reports have pegged the final cost at between $9 and $10 billion. Before the credit markets turned sour, it had already sold half the property to Dubai World, which is now a 50/50 partner in the venture, but the company needs cash to complete construction and meet its late 2009 open date.
During the second quarter of 2008, MGM Mirage and Dubai World each funded $300 million of construction costs for CityCenter. Now they’re working with several relationship lenders regarding a $3 billion financing package for the joint venture. To date, CityCenter has received commitments totaling $1.65 billion from the lead banks— Bank of America, Royal Bank of Scotland, UBS, BNP Paribas and Sumitomo Mitsui. In addition, CityCenter has received commitments from Deutsche Bank, Morgan Stanley and the Bank of Nova Scotia.
CityCenter will feature a main 60-story structure housing 4,000 hotel rooms and a 500,000-square-foot entertainment district. Also here will be the city’s first Mandarin Oriental, residential apartments and more amenities than any other resort in the world.
"In an unprecedented credit market, CityCenter has received to date well over half of the financing committed from these institutions and anticipates finalizing its bank financing this quarter," says executive vice president and chief financial officer of MGM Mirage, Dan D'Arrigo. On the subject of MGM Mirage capital spending, D'Arrigo notes, "Over the past several years, we have invested significant capital in our resorts in the form of new restaurants, entertainment venues and upgraded rooms, and we maintain them at the highest level. As a result, our required capital spending for the remainder of this year and into 2009 will be lower than in the recent past, enhancing our available free cash flow."
Spokespeople insist this project is right on schedule and will open without delays.
Another project that’s had a number of issues even before the latest credit crunch is The Cosmopolitan. Located on a sliver of land next to Bellagio, this hotel has been in foreclosure proceedings since January because its management defaulted on a $760 million construction loan. After a mad scramble to see who is going to take it on, Hyatt would seem to have captured the rights. Details on this have been sketchy at best, but the Las Vegas CVB’s most recent construction report has Hyatt listed as a name on the project. Deutsche Bank has taken possession of the property because it is owed more than $900 million on the property, which is a couple of years behind schedule and only half built.
One project that has evaporated is a massive expansion of the Tropicana Las Vegas. With an estimated cost of $2 billion, the plan was to reinvent the resort as it upped the room count to a staggering 10,000 rooms. However, owners Columbia Sussex have lost their gaming license to operate the Tropicana in Atlantic City, causing the entire company to essentially implode. It’s unlikely this project will move forward.
In visits to the property, we have been repeatedly been told by staff that they were not confident in management’s ability to run the Las Vegas property properly, let alone recreate the entire resort.
The pedestrian promenade in downtown Las Vegas
Other projects have been put on indefinite hold, such as The Plaza, a $5 billion offshoot of the New York City icon from Elad IDB Las Vegas LLC, a partnership between the Elad Group and IDB Group of Israel. This resort was to feature 4,100 hotel rooms and 2,600 resort condominium units as well as a 175,900-square-foot casino, and more than a million square feet of space devoted to dining, entertainment and shopping. Though spokespeople insist the project will see shovels in the ground sometime in 2009, the company deferred payment on a $625 million loan, which was used with additional cash to buy the site for a record price of $35 million per acre, the highest ever fetched for land in Las Vegas. Totaling $1.25 billion, the 2007 purchase significantly raised the price per acre of land on the Strip from $17 million just the year prior.
One hotel that has not gotten much ink lately is the 56-year-old Sahara. Sam Nazarian bought the property for $300 million in 2007, with hopes of turning it into a hotspot for youthful partiers who don’t have money to spend at uber-chic casino resorts. The mogul already has street cred from creating nightclub and restaurant concepts in Los Angeles that have attracted such gossip column staples as Paris Hilton and Lindsey Lohan. Nazarian has already freshened up some of the property with more than $2 million in changes, but rumors persist that he’ll do a total makeover, which would include the construction of a new hotel tower. But whether he can meet a self-imposed deadline of 2011 remains to be seen, as construction financing in the hotel industry and especially for Las Vegas has all but evaporated.
In the short term, there are still numerous resort openings that have already secured the necessary funding to continue construction and stay on schedule. Encore, the latest venture from Steve Wynn, is set to open later this year at a cost of $2.3 billion. It will feature more than 2,000 suites. Coming in 2009 is the $2.9 billion, 3,900-room Fontainebleau Las Vegas. Also opening will be the $1 billion M Resort, which held a topping-off ceremony at the end of August. Other funded projects in the works include a $1.2 billion tower at Planet Hollywood and a $1 billion Caesars Palace expansion.
Overall, the softening demand that’s at the root of the real estate struggles in Las Vegas is good news for travel agents. Room prices are plummeting and value add-ons are on the rise.