12/23/2009
By Conley Turner, Research Analyst

The impact of the economic crisis on the casino industry in Las Vegas can best be characterized as severe. The well documented housing bust in the country and its corresponding cascading issues reached epic levels in the Las Vegas region. The casino industry was shaken to its desert foundations as business plummeted in dramatic fashion.  More than a few casinos went bankrupt or were shuttered as a result.  Fast forward to present day and though the broader economy appears be improving, Vegas is still stumbling.

The effects of the economic crisis persist with scant evidence of the situation changing anytime soon.  The housing market continues to be depressed as a reminder of all that went wrong in the first place. While national unemployment remains elevated at about 10.0 %, the rate for the Las Vegas region hovers above 12.0%.
The largest percentage of the clientele for the casinos on the Strip originates from the drive market of southern California where economically, things are not any more favorable. In fact, average trips per day at the Nevada-California border on Interstate 15 actually trails prior year levels.

An even more immediate problem has to be the number of hotel rooms coming onto a market that already has a lot of capacity. The opening of City Center adds an additional 6,000 rooms to a market.  There are another 3,815 rooms pending at the stalled Fontainebleau resort. 

Room rates, which are an indicator of demand, have not shown any increase as operators have had to keep rates low in order to lure business. The outlook for the Strip is complicated by the fact that many airlines have placed limits to their capacity into Las Vegas and the convention business, while stabilizing, is not expected to recover to prior year levels in the immediate future.

The opening of CityCenter is expected to be instrumental in increasing the amount of foot traffic on that property and on the Strip in general.  However, it will likely take time to gain traction for the full potential of the property to be realized as much of the retail space remains unfilled. Nonetheless, some branded stores that are currently opened there are benefitting from the initial surge.

On the other side of the world in Macau, China, the state of the gaming market is profoundly different. Measuring only about 11 square miles, the former Portuguese territory has in a matter of only a few years preempted Las Vegas as the gambling capital of the world. Since the Chinese government took over the administration of the territory 10 years ago, a very deliberate effort has been expended in order to fine tune that region's growth.   The success of the strategy is borne out in the results thus far.  It stands to reason then that the authorities are not likely to squander gains already achieved by the implementation of any adverse policy measures.

As the broader Chinese economy continues to grow impressively, the appetite for gaming in the region is increasing proportionately.  In its strategy for growth, the authorities have been very diligent about not over building and have implemented stringent limits on the supply of hotel rooms coming onto the market. As such, there is always a balance between the supply and demand dynamic.  Furthermore, restrictions on visits by guests from the surrounding Guangdong region are periodically implemented in order to control the flow of visitors into Macau.  While this act can and does create some short term disruptions in operations of the casinos, it does ostensibly create a sense of pent up demand among visitors.
Restricted access tends to have the effect of filtering many of the region's travelers to a handful of casinos. As such, the resulting demand has been instrumental in spurring more spending per customer once they are actually granted the visas needed to access the travel region. Furthermore, Casinos operators in the region have agreed to curtail the commissions paid out to junket operators that transport high rollers to the territory. This move increases the potential earnings of the casino industry in the Macau by over 25%.

As it stands, there remains a lot at stake from investment point of view and from a prestige point of view for Macau. Adequate infrastructure is a key issue in Macau's development, and the authorities have mapped out a clear plan to address this.  This includes the construction of among other things, new roads and bridges, rail and concourse expansion at the airport. The most notable of these however is the construction of a massive bridge connecting two Special Administrative regions of China and the Zhuhai to Macau.  All of this is in preparation for the growth of the gaming market and the completion of the massive expansion of the Las Vegas Sands resort on the Cotai strip. The bridge is anticipated to be completed 2015 and coupled with all the other initiatives portends a long term positive term positive for the Macau gaming market. All in all, the outlook for the region remains quite upbeat.

Conley Turner
Wall Street Strategies