LV business forecasters call 1998 a tune-up for 1999

Monday, Jan. 5, 1998 | 12:14 p.m.

This will be a year of slower growth for the Las Vegas metro area -- but the local economy will build up steam for what should be a banner 1999.

That's the near-unanimous consensus of analysts and economic forecasters who watch the Southern Nevada economy. Over the past month, the economic prognosticators have appeared before business and civic groups, offering their views on what lies ahead. Some of the recurring themes:

* The gaming industry will continue to be challenged by declines in occupancy rates and weak gaming win statistics. No new major gaming venues will begin operations next year and the only major resort openings are planned by Mirage Resorts Inc., which will offer Bellagio in Las Vegas and Beau Rivage in Mississippi.

* Efforts to build visitation to fill hotel rooms will be affected positively and negatively by a number of forces. While any negative effect of the Asian financial crisis and the increased value of the American dollar would begin manifesting itself on the United States this year, the rejuvenation of the economy in California should mean good news for Nevada as Golden Staters rediscover the way to Las Vegas. In the summer, a new terminal will open at McCarran International Airport, increasing capacity. But some analysts are cautious about getting too excited about the opening, noting that airlines haven't committed to more flights.

* The home-building industry will continue to be squeezed in '98 with industry insiders predicting just under 20,000 new homes will be purchased in the valley, a number close to the total sold in 1997.

* A lack of skilled laborers will have a cooling effect on the economy as the high demand and low supply of workers could drive up costs. Many workers who retreated from California during its economic downturn are returning there in the wake of the state's revitalization.

* Job growth, which has slid from the 8 percent range to about 6 percent in the past year, should continue its downward trend, analysts said, but Nevada's growth should still be better than most of the rest of the nation.

* An estimated 3.6 million square feet of retail space -- the equivalent of about 3 1/2 regional malls -- is expected to be built in Southern Nevada in 1998.

* The buoyant national economy -- forecast by economists to ramble along at a healthy pace -- should translate into steady growth for Nevada.

The gaming industry is locked in a low-growth mode because of the fierce competition to fill hotel rooms and casinos. Analysts say most U.S. casino companies will show little or no earnings growth for the 1997 fourth quarter and in early 1998.

"Fourth-quarter business trends were weak," said analyst Jason Ader of Bear Stearns & Co.

Part of the problem is that an increase in the number of hotel rooms outstripped the rise in visitors. The number of hotel rooms in Las Vegas alone rose by 10,000, or 10 percent, in 1997, as companies invested heavily in construction to attract customers. Higher spending on marketing, though, didn't pull in enough business.

On the housing front, two analysts who watch the Southern Nevada market only disagree on how much lower 1998's numbers will be from 1997's.

Richard Lee, director of public relations for First American Title in Las Vegas who is known as "Mr. Growth," said '98 will be similar to '97 in that margins will continue to be tight for area builders.

"There's a lot of posturing going on," Lee said. "They (builders) are having a hard time finding land. A lot of homebuilders are selling to each other."

Dennis Smith, who operates Home Builders Research in Southern Nevada, said he expects there will be about 1,000 fewer homes sold in the area this year from last.

"It's getting very difficult (for builders) to find replacement lots," Smith said. "We're seeing a trend of declining absorption rates."

Absorption rates are the average number of recorded sales per month per subdivision.

Lee said the problem for builders is they're caught in a squeeze between lagging demand and rising costs in the midst of a highly competitive market.

"There's pressure from both directions," Lee said. "On one side, you don't have the broad white-collar market buying as readily," due to the lull in resort openings.

"On the other side are the increases in land costs, construction costs and impact fees," he said.

"One of the little secrets about Las Vegas has been its affordable housing market," Lee said. "But we're all getting concerned that the quality of life is disappearing."

Smith said there are a few factors that could play into the local market's favor. With the arrival of 1998 came a series of changes in tax laws affecting capital gains that could motivate some buying.

"But I don't see any reason for it to increase overnight," Smith said. "Our cycle is one that we've seen level off in the last couple of years. Most builders are projecting sales to be lower than in '97."

Meanwhile, Smith looks at 1999 to be a better year for home builders, primarily because demand should pick up as a new cluster of resorts comes on line. The Venetian, Paris and Project Paradise resorts are scheduled to open and Bellagio should be in midstride by that time.

The new resorts should be buoyed by the transformation of the new D concourse at McCarran International Airport, which will be complete by '99. Observers are hoping the move of most of the major carriers to the new gates eventually will turn into additional direct flights to the East Coast. Right now, the airlines are mum about expansion, although Southwest Airlines, the carrier with the most flights at McCarran, has committed to occupying more gates in United's and American's old slots in the C concourse.

Company officials have said spreading out in the C concourse should result in better service for passengers, but Southwest has made no commitment for expansion in Las Vegas, primarily because the airline is expanding in the Southeast and Northeast and will retire older planes when Boeing delivers new jets to the company in '98.

The airlines that seem poised to make the biggest growth surges at McCarran are small regional carriers Reno Air and Alaska Airlines, which continue to slowly add routes through McCarran.

Meantime, some observers take the view that growth in '98 will be in moderation.

Keith Schwer, director of the Center for Business and Economic Research at UNLV, noted it's hard to slow down a locomotive going at full steam.

"It's not easy to decelerate an economy in a state of unconstrained exuberance," he said.

But Schwer does have a few questions: Will the economy be able to keep up with the rapidly rising room capacity and will the heavy development of office, retail and industrial properties lead to faster growth or more vacancies?

Pat Shalmy, executive director of the Las Vegas Chamber of Commerce, said his organization is optimistic that '98 will be a good year -- and one in which growth issues are addressed head on.

"The outlook continues to be rosy," Shalmy said. "We're confident the leadership in the community from the private sector is going to step up to the plate and address the growth issues and deal with them appropriately. It's a broad spectrum of issues -- pollution, the environment, traffic. Our government affairs committee has resolved to be very active in solving problems in traffic and land use."

Shalmy also noted that the chamber's major forecasting event is scheduled Jan. 14 at the Las Vegas Hilton. He said one of the highlights of Preview '98 will be addresses from the new ownership of the Frontier hotel-casino and Caesars Palace. In addition to Starwood acquiring ITT and its Caesars Palace and Desert Inn hotel-casinos, Kansas industrialist Phil Ruffin bought the Frontier last year and is expected to take the reins of the property in February.

"I think we're all anxiously awaiting word on what some of their plans are," Shalmy said.

He added a panel of elected officials from the U.S. Senate to council representatives from local municipalities will give a regulatory perspective in addition to analysis from local CEOs.

Meanwhile, John Mitchell, chief economist for U.S. Bank, believes strength in the national economy should keep Southern Nevada healthy. Mitchell cited the stable monetary policy and Fed Chairman Alan Greenspan's clamp on inflation, which has hovered around 3 percent since 1992, as key factors on the national scene that will keep individual states on track.

But Gary Schlossberg, Wells Fargo Bank's senior economist, warned that a lack of skilled laborers and continued transportation bottlenecks could cool off the state's economy. He also warned that the stock market, which has enjoyed its best three-year performance in 70 years, could be in for some buffeting in the months ahead as rising interest rates and slower earnings growth chill investors.

BLOOMBERG BUSINESS NEWS contributed to this report.

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