Aladdin caps unprecedented boom in Las Vegas Strip construction

David Strow

Friday, Aug. 18, 2000 | 10:44 a.m.

With the opening of the Aladdin, the Las Vegas Strip is coming to the end of one of the most explosive growth periods in its history.

Yet despite the fears raised when this growth was first started 23 months ago, Las Vegas appears to have emerged stronger than ever, as visitors pour into Las Vegas in ever-increasing numbers to see the newest wonders of Las Vegas Boulevard.

Since casino mogul Steve Wynn and Mirage Resorts Inc. opened the doors of the Bellagio in October 1998, four other new properties have opened on the Las Vegas Strip. Combined, these five properties -- Bellagio, Mandalay Bay, Venetian, Paris Las Vegas and Aladdin -- have added more than 15,000 rooms, increasing the city's hotel room inventory by nearly 15 percent.

Total cost: A mind-boggling $6.25 billion, more than the gross national product of such countries as Albania, the Bahamas, Bosnia and Mongolia.

In tandem, Las Vegas visitor counts have soared. About 36.7 million people are expected to visit Las Vegas in 2000, a 20 percent rise from 1998. The Strip's gaming win also soared in 1999, rising nearly 18 percent to $4.4 billion.

By comparison, the Strip's win rose just 0.1 percent in 1998.

"Las Vegas is just cranking," said Andrew Zarnett, gaming analyst with Deutsche Banc Alex. Brown. "We've seen such amazing growth in visitor volumes, exceeding the supply of new rooms. I've never seen anything like this before since I've been doing this."

Despite growing competition from such markets as a booming midwestern riverboat market, a resurgent Atlantic City and a newly approved California Indian gaming market, observers say the ever-changing environment of the Strip should keep visitors coming to the world's most famed gaming market.

"People will go to a place (to gamble) that's convenient," said Shannon Bybee, executive director of UNLV's International Gaming Institute. "But Las Vegas will still draw, because it offers something these other places don't offer. If you go to the same place all the time, you get bored. One thing Las Vegas has done is kept people from getting bored.

"Every time you add a new place to Las Vegas, it tends to protect the business, because no one else can reproduce all this."

But new sights and hotel rooms don't help much without ways of getting guests to Las Vegas. A boom in airline traffic at McCarran International Airport has rectified that issue -- in 1999, nearly 34 million passengers went through McCarran, up 29 percent from the year before. Nearly 63,000 airline seats per day came into Las Vegas in July, up 9 percent from 1999.

"There is no question that if you're sitting in New York, Miami or Chicago, you have more direct air service to Las Vegas than you've ever had before," said Dave Ehlers, chairman of Las Vegas Investment Advisors. "People are getting onto those planes and using those seats. They have a lot of money, relative to where they were a year ago."

If there's been a downside to the boom of the past two years, it may have been for the builders of the new properties.

Farley noted that the new properties on the Strip posted average returns on investment in the 10 to 15 percent range, below the 15 percent minimum casino developers usually shoot for. The lone exception has been Park Place Entertainment's Paris Las Vegas, which should post a return on investment in its first year of close to 20 percent.

"As the price of building a new property outdoes what's done before it, that clearly makes returns more challenging," Farley said.

Returns on newer projects across the country, such as riverboat casinos, have proven far higher than Las Vegas. Even the off-Strip market generates much more sizable returns -- Station Casinos, the largest operator of locals casinos in Las Vegas, posted a 31 percent return on investment in its most recent expansions.

But returns on new investments are starting to rise with time, Farley said. More significantly, the opportunities to invest in new markets, such as midwestern riverboats or tribal casinos in California, are limited. That means operators will look to build in Las Vegas and refine their products -- and it also should mean consolidation in the industry will continue, Farley said.

"The gaming industry is dependent on new jurisdictions (for expansion)," Farley said. "Without any new jurisdictions, a lot of capital is reinvested in the Las Vegas market."

The Aladdin's opening signals an end to the most recent spate of growth on the Strip, though a fresh recreation of the Strip should begin shortly. Most anticipated of these new projects is Wynn's plans to transform the Desert Inn site into the home of a huge new resort, complete with two 59-story, 3,000-room hotel towers. Wynn is still arranging private financing for the project, and a start date for construction has not been set.

Analysts and observers say Wynn's name and reputation will almost certainly draw visitors once his project is complete. Moreover, the development is expected to have a spill-over effect that could spark a renaissance on the neglected north end of the Strip.

"Each time he builds has been bigger and better than the last, and the whole industry has benefitted from that," Bybee said. "Whatever he does will have a major impact on the future of this city. Steve building down there will make it easier to raise money in that neighborhood (the north end of the Strip)."

Though most discussed, Wynn's project isn't the only one anticipated in the future. Observers are also watching MGM MIRAGE with keen interest, after Chairman Terry Lanni said he was eyeing the construction of a property aimed at "Generation X" just south of the Bellagio. But, like Wynn, MGM MIRAGE hasn't announced when it plans to build.

Another future possibility lies with Frontier owner Phil Ruffin, who has long-term plans to demolish his aging property and rebuild it into a San Francisco-themed resort. Observers are also eyeing Turnberry Associates, the developer of the Turnberry Place condominium projects, owner of the shuttered El Rancho. Turnberry plans to implode the El Rancho by year's end, though the company hasn't said what will take its place. In the longer term, other possible sites of development include a land parcel across from the Sahara hotel-casino, Boyd Gaming Corp.'s Stardust, and land held by Mandalay Resort Group south of Tropicana Avenue.

But none of these projects even has a firm starting date, spelling an end to the Strip's construction boom for now. Near the Strip, the only gaming projects planned immediately or under way are the 1,000-room expansion of the Stratosphere, the Maloof family's hotel-casino near the Rio, which will eventually have some 2,000 rooms; and the Herbst family's 400-room hotel-casino on Paradise Road, both slated for completion in 2001.

"Las Vegas could face, of all the ridiculous things, a room shortage," Ehlers said. "The transportation is there, people have the money, and there will be an extended period where we don't have much of an increase in room supply."

What should happen in the lull, Farley said, is that Las Vegas' torrid increase in visitor counts should slow to single-digit percentage growth. But that isn't bad news, she said.

"We don't view that as a negative ... you don't need a 10 percent increase in visitors when your inventory growth is less than 5 percent," Farley said. "Historically, Las Vegas has not had declines in visitor numbers. Based on the strength of those trends, we'd expect that kind of single-digit growth going forward."