Monday, March 15, 2010

No New Casinos in Vegas? This Is Nevada's Rude Awakening.

OK, so you've been hearing me talk lately about Las Vegas Sands eyeing Florida for new casino resorts as it expands Sands Behthlehem in Pennsylavania and Wynn Resorts jumps into Pennsylvania with a new Philadelphia casino. And of course, we've been hearing constantly about all of our big casino companies flocking to Macau to cash in on the Asian gambling bonanza...

So why aren't we seeing this here in Las Vegas? That's a good question, and one that today's Sun ponders. Why was Harrah's rushing to buy PHo, but not to build a new casino? Why is Wynn rushing to build the Switch Beach Club at Encore, but not move on what had been its plan to build more hotel towers on what's now the golf course?

So what makes a pool or restaurant worth opening in the midst of a recession but a new Strip resort or hotel expansion a terrible idea? It’s not that casinos, in and of themselves, are the problem. After all, Steve Wynn wants to invest $250 million in a Philadelphia casino under development. And his competitor Las Vegas Sands — which already has a Pennsylvania casino — is lobbying to build a Las Vegas-style resort in Florida. So what makes Las Vegas casino owners swear off new resorts in their hometowns for developments in other parts of the world?

The answer is the Strip’s return on investment, which is, at its most basic, what a project earns divided by its cost. This equation, which drives business decisions in any industry, best explains why developers won’t be building hotels or casino resorts in Las Vegas for years to come.

Revenue generated by major Strip operators fell up to 21 percent last year and earnings fell by up to 37 percent. Returns for new projects — especially Encore, which opened in the midst of the recession and which has a year of operations under its belt — is close to zero.

That’s a dramatic change. In the early 1990s, new projects in Las Vegas generated returns in the 20 percent range, peaking at 29 percent in 1993, according to an analysis by casino consulting firm Union Gaming Group. Returns were sliding in the teens by the year 2000, plummeting to an all-time low of 5 percent in fiscal year 2009.

New properties increased competition in Las Vegas but also helped the market by attracting first-time visitors. That trick has become harder to pull off with the limited number of visitors able to afford the Strip’s increasing number of higher-end hotels. It’s even more difficult to do in a recession.

It's the law of diminishing marginal returns, plain and simple. As the 1990s Strip construction boom came to a close and the 2000s "luxury megaresort craze" began, Las Vegas began to reach the point of saturation with high-end megaresort casinos. The law of diminishing marginal returns began to take hold as the potential for profit decreased as the number of megaresorts vying for tourist dollars continued to increase.

This is why the Las Vegas of 2010 is a whole new ball game. We're no longer that tiny outlaw outpost in The High Mojave, but rather a maturing resort destination that already attracts over 37 million visitors annually. And while there are still some possibilities to expand that tourist pool, we don't have as much growth potential in gaming these days, like we did in 1950 or 1990.

Dr. Dave Schwartz at UNLV's Center for Gaming Research has examined the numbers and does a good job at explaining what's happening. By looking at the 2000-09 casino winnings and adjusting the numbers for inflation, we see that Las Vegas casinos are actually earning less today than they were in 2000. Again, we're dealing with the law od diminishing marginal returns as casinos realize they've "maxed out" earnings potential on The Strip.

Now contrast this to newer markets, like Florida and Pennsylvania domestically and Macau globally. Pennsylvania and Macau are nowhere near full saturation yet, and Florida is a potential gold mine with already desirable tourist destinations that haven't yet been tapped by casinos. Now we can see why all the big casino companies are rushing to build abroad as they only agree to minor spruce-ups at their respective Las Vegas home bases.

So what does this mean? No, it's not the end of the world! Las Vegas will go on, albeit now as a more mature gaming destination rather than some place with unrealistic "limitless" growth potential.

And yes, this also means something that I've been hammering here for some time: We MUST diversify our economy in Southern Nevada! This recession should be our "reality check" that gaming is not the "free ride" we thought it was. We talk a whole lot about economic diversification, but we never seem to get around to doing something about it.

This needs to change. Oh yes, and guess what attracts other industries the most?

Although recent economic studies show taxes are a rising concern for business, they generally remain low on the list of priorities of a company considering relocation.

More important is the availability of skilled, educated labor, says Robert Tannenwald, economist at the Boston Fed and director of the New England Public Policy Center.

And it’s usually found in communities with quality education, including research universities.

That’s why Colorado, with a first-class research university system, has emerged as a hub for the aerospace, biosciences and renewable energy industries.

Yep, yep, yep. It's all about education. Too bad for us that we're near dead last in education funding.

Now this all goes back to what I've been saying here for months. We get what we pay for. If we don't invest in needed infrastructure like better schools, we'll continue to suffer.

Again, gaming is NOT a "free ride". We can't count on just gaming any more to save our sorry asses. We need to get serious, fix our PreK-12 school system, make our university system truly world-class (a la Colorado), and offer the kind of top-notch workforce that will mean a better and more stable future in Nevada.

So when will we stop betting the farm in the casino and start planting the seeds for that better future?


  1. I've talked to lefty friends nationwide about Nevada and education, and I've found that although the opening refrain about education seems to always be a need for more teacher pay, compared to teacher pay around the country our state is fairly comfortably in the middle. I know it's higher than Texas which, textbook issues aside, had been budgeting pretty well.

    I'm fine with education spending so long as I know exactly what it is we'll be buying. California's educational system has been an example of throwing good money after bad and more money has not raised their status. So, spending money with the expressed desire of chasing other states does not interest me.

  2. Mike C-

    "compared to teacher pay around the country our state is fairly comfortably in the middle."

    But the conservatives who always counter with that stat aren't telling the whole story. They want us to forget that:

    1. Nevada has the smallest and cheapest state government in the country with the cheapest state government per capita and the fewest public employees per resident.

    2. Because of this and recent layoffs and hiring freezes, most public employees these days tend to be more senior (hence the higher average salaries) and do more work than public employees in California or Arizona.

    Again, we get what we pay for. And because we don't have enough teachers and enough schools (especially for our colleges!), we don't produce enough college graduates... And that means more of our workforce remains overdependent on the casinos. Unless we get serious about diversifying the economy by investing in educating a smarter workforce, we'll continue to be tied too much to the ups and downs of The Strip.

  3. I'm not sure where the size of the rest of our state government comes in. I'm just responding to the criticism that has been around since, well, since I moved here, that we have trouble attracting teachers because Other States Pay More.

    And the people who rattled that stat off weren't conservatives, they're progressives from around the country having a discussion about education. Many/most are further to the left than me.

    And I only bring up CA because it's proof that just spending money isn't a cure-all solution. We have to spend it WISELY. That means more classrooms. Honestly, I'd like to see more classrooms at existing schools more than new schools, because CCSD desperately trying to keep up with the sprawl (putting schools next to pig farms and the like) has simply encouraged more sprawl.

    Our poorest neighbourhoods are also some of our oldest neighbourhoods, so a moratorium on new campuses would also not unfairly target the poor.

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