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Capacity crunch
More than 12,000 hotel rooms are set to open, threatening already soft room rates
Fri, Apr 24, 2009 (2 a.m.)
A view of Aria, the 4,004-room centerpiece resort at MGM Mirage's CityCenter, which is scheduled to open this year. The increase in Las Vegas' room inventory is expected to put more pressure on falling room rates as supply climbs while demand languishes.
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Times are tough in the Las Vegas resort business, and they are about to get a lot tougher.
Hotel room occupancy and rates plummeted last year as the bottom fell out of the demand side of the supply-demand curve. Resort operators are bracing for a big challenge on the supply side as CityCenter and Fontainebleau prepare to open before year’s end, part of a capacity increase of more than 12,000 rooms that threatens to send rates spiraling lower.
Last year’s shake-up on the demand side was dramatic. Although visitation was off 4.4 percent to 44.1 million people in 2008, the average daily room rate plunged 9.8 percent to $119.19 a night. That compares with an average rate of $132.09 in 2007, the all-time high, and $119.66 in 2006.
The Las Vegas Convention and Visitors Authority calculates the average daily room rate based on a monthly survey of hotels and motels. The monthly figures fluctuate through the year because of demand. Typically, the hot summer months and the family-oriented time between Thanksgiving and Christmas are slow periods, a pattern that held true during the past few years.
With room charges, restaurants and entertainment amenities playing an bigger role in a resort’s revenue, the average daily room rate has become crucial.
An average Las Vegas megaresort has about 3,000 rooms. With 365 room nights each year and occupancy levels about 90 percent, every dollar change in room rates represents a potential shift of about $1 million in revenue.
The challenge that lies ahead for Las Vegas is that while visitor volume and average daily room rates are in decline, room capacity is on the verge of a major expansion. Southern Nevada has already added 390 rooms this year with the March opening of M Resort.
By the end of the year room capacity is expected to increase 8 percent to 156,696. Among the 12,563 rooms coming on line are nearly 6,000 at MGM Mirage’s CityCenter — 4,004 at Aria, 1,495 at the condo-hotel Vdara and 400 at the nongaming Mandarin Oriental. Another 3,815 are to open at Fontainebleau at the north end of the Strip. Expansions will account for nearly another 1,000, with 490 new rooms at the Hard Rock and 500 in a new tower at the Golden Nugget.
Las Vegas’ history has been filled with periods of explosive capacity increases, but resorts absorbed the growth and higher room rates as the new resorts generated excitement and a lot of visitors. Visitation growth outweighed capacity increases 20 years ago when Mirage and Excalibur opened, 16 years ago when MGM Grand, Luxor and Treasure Island debuted and a decade ago when the biggest cluster opened: Bellagio, Mandalay Bay, Venetian, Paris Las Vegas and the Aladdin’s remodeling.
But with Nevada and the world grappling with the worst recession since the Great Depression, banking on a visitation boost big enough to overcome the capacity increase isn’t the safest bet.
Alan Feldman, senior vice president of public affairs at MGM Mirage, said the result of the most recent capacity expansion ran counter to historic trends, citing the Palazzo and Encore openings in 2008.
“Even with great products like those, consumers didn’t respond the way they did in the past,” Feldman said. “I can’t remember a time when a new product didn’t drive occupancy and, ultimately, ADR (average daily room rates).”
Jeremy Aguero, principal analyst for Applied Analysis, a Las Vegas-based economic consulting firm, said he expects the issues of capacity and driving higher room rates will be around for at least three years, but he also thinks MGM Mirage may be best equipped to address it.
“The guys at MGM Mirage are smart, and I expect they will sustain market share,” Aguero said. “They are uniquely positioned to provide something for everyone in the market and it has been an advantage to them.”
He was referring to MGM Mirage’s diverse marketing strategy that offers high end resorts such as the upcoming Aria and the Bellagio, to the budget products Circus Circus and Excalibur, and every market in between.
Aguero thinks it’s possible that underperforming properties or portions of hotels would be closed. But he wouldn’t speculate which ones they would be.
There is precedence for such drastic action: During the winter lull Herbst Gaming closed hotel rooms Mondays through Thursdays at Buffalo Bill’s in Primm, and Black Gaming cut capacity by closing rooms at the Oasis in Mesquite.
Would MGM Mirage reduce capacity and close some of its rooms when CityCenter comes on line?
Feldman acknowledged it’s an option, but at this point, not a likely one.
It isn’t a matter of just closing a tower or several floors in one wing of a hotel. There’s much more to the art of yield management or hotel management systems that attempt to maximize room rates and occupancy.
Feldman said finding the right mix in capacity is “like playing multidimensional chess.”
“As to where things are going, it’s not an easy answer,” he said. “It’s a complex organism, this thing we call yield management.”
Many companies in the tourism industry have yield management formulas, which involve optimizing revenue opportunities based on inventory, which has a finite shelf life. For airlines, the value of the product ends as soon as the plane leaves the gate. For hotels, tonight’s hotel room can’t be restocked and sold tomorrow.
The airline industry has cut capacity by grounding some planes and eliminating flights to drive up ticket prices.
Cutting capacity is riskier in the resort industry because other revenue could be affected if rooms are closed.
“We may end up harming our casinos, restaurants and entertainment offerings, which could result in less overall spending per night,” Feldman said. “It’s a pretty involved calculation. Most of our properties are sized in such a way that they work best when near full capacity.”
In addition, closing rooms means laying off employees, a move MGM Mirage doesn’t want to make.
“We want to keep as many workers employed as possible,” Feldman said. “We don’t want to lose people and go through excessive turnover because we’ll need an experienced workforce when things turn around, which invariably they will.”
Bill Lerner, a Las Vegas-based gaming analyst with the newly formed Union Gaming Group, doesn’t expect MGM Mirage to close rooms.
“To take supply out of the market probably doesn’t make sense,” Lerner said. “That’s not how multiproperty operators view the world anyway.”
But he expects CityCenter will cannibalize business from existing resorts, including MGM’s.
The result likely will be a longer period of absorption as demand catches up with capacity and room rates gradually return to 2007 levels. It also means the likelihood of a five- to 10-year hiatus in Strip construction.
Lerner anticipates projects that are under way will be completed, including the Cosmopolitan in 2010. How Boyd Gaming’s uncompleted Echelon plays out is unknown, as that company is leaving its options open and has discussed the possibility of scaling down the project.
Aguero said educating tourists about available bargains is the way to go while Las Vegas weathers the recession.
“We need consumer confidence and consumer spending to rebound,” Aguero said. “What we need to have happen is for the nation as a whole to see some clear and consistent signs of a recovery.”
Educating the public through advertising and marketing may be the best way to deliver the message.
“If you look at San Francisco, Chicago, Los Angeles and New York, we remain a value proposition,” Aguero said. “Las Vegas is in a much better position competitively.”
Discussion: 11 comments so far…
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just what Las Vegas needs.....good grief !!
Let's add up all the construction jobs that are coming to an end this year. Look at the loss of wages and jobs. Most of these people will have to move. Vacancies and defaults to increase geometrically. This town is going to hurt and the politicians keep spending like hope will change all this. What is harry Reid doing? Trying to pass a trillion dollar health bill without 60 votes in the Senate and hoping to tax all power generation in America. This is a disaster coming.
We need less casinos. What is the rush to complete the City Center and Fountainblu? We need more Drs and more qualified teachers.We should be able to attract business's especially with no state tax.
You wont get more doctors by declaring war on lawsuir settlements. It will be very Expensive and Difficult for doctors with unlimited lawsuits being approved.
Teachers are being laid off and salaries are low.
I agree Nevada is good with taxes and needs to attract business. When CA hit major recession in the 1990s they diversified. That is what we need here. Attract new business with low tax, plenty of workers and a low cost of living.
Nevada is a very attractive option if you can land a job.
give the rooms away for free and then people will have more money to loose in the machines - LOL
neiman1, Harry Reid is working on passing the Dream Act 2009. You know the bill defeated last year? Where the Senate wanted to give children brought here with illegal parents the path to citizenship. We don't know how many children the government is looking at because , of course, there is no record of them. Our Government claims the number to be around 2 million. I'm reading that the Senate has a bill,S.729, and the House has a bill,H.R.1751. Both bills will enable illegals up to the age of 35 years old, who were brought here as children,(again there are no records) to participate in obtaining citizenship.
Once these immigrants have been granted citizenship, they then can bring in all their relitives with a greencard through family member. Figure 10 to 20 per so called "child".
Now we're looking at 10 to 20 million if not more.
With our country heading towards a depression allready, why aren't our elected officials working to correct our problems here? Why aren't our elected officials ridding our country of immigrants who have decided to enter illegally? This would only give our unemployed a chance to get back a job that need to survive.
Look up Dream Act 2009, this will give you a start.
Respectfully, welcome to Las Vegas, Mr. Lerner, just off the plane from Wall Street to speak out. May I ask how many rooms you are currently operating, and what is your current investment stake in Vegas room inventory? What is your VESTMENT?
Come meet the hospitality employees, who have been in town a long time making the room revenues happen year to year, for decades, while you sifted their beans for hundreds of thousands behind a NYC desk, and supported loaned monies that inevitably harmed employees with overbuilding in Vegas. Curious, were you one of the ones who helped suppress the price of Mirage stock when the Bellagio opened?
Here's one for you. If your former buddy at Duestche Bank sells his better revpar rooms for much needed cash, then Steve Wynn is going to eat his sack lunch for ten years as an operator. That's a fact which will be proved in investor pricing of shares. Welcome to Las Vegas, and Analyze That.
Eliminate excess capacity by demolishing some of the worn out properties. Circus Circus maybe Riviera or the Trop. Perhaps build an attraction that does not involve gaming or hotels.
Las Vegas has no Golden Gate Bridge, No Ocean, no natural resources to speak of except one: HOSPITALITY!
Nowhere else on the planet do I get treated like a King like I do in Las Vegas.
When will the flood of new rooms drop the price (what month will discounts begin to be offered?) If the deal is sweet I'll come a 2nd time this year, glad to help out!
And Thanks for being guest focused. THAT will be what saves Vegas and pays for those Dr's and children's programs, street improvements, everything.
Hello COSMO unit owners.
I am part of a group of over 300 unit owners that have filed a class-action to get our hard earned deposits back. Care to join us before it is too late? Send me an email at ruffus327@aol.com
I was downtown all weekend and downtown really is the best game in town. Casinos were packed, restaurants had waiting lines, entertainment was free!! They seem to have gone back to the way Vegas USED to be. Oscar should be proud!! I hope Strip casino/hotel owners take notice....before downtown takes over....again!!