Las Vegas firms learning from recession

By Buck Wargo

Friday, Jan. 1, 2010 | 3 a.m.

Having endured the brutal economic downturn of 2009, Las Vegas businesses have learned a thing or two from the continuing recession.

“I would assume the biggest lesson businesses learned overall is how to manage their debt loads to revenue,” said John Restrepo, principal of Restrepo Consulting Group. “We need to overcome this idea that you can take on debt because revenue will keep growing at a set percentage. You can’t take on too much debt because you never know when the downturn will come that depletes your cash that you need to carry you through the lean times.”

Companies have learned how to manage hiring practices and determine how many people they need to do certain jobs, Restrepo said. When the economy recovers, many businesses will operate with leaner staffs because of the lessons they learned.

“It is not good for the employment rate, but it makes sense from a business standpoint,” Restrepo said.

Gaming

The gaming industry has learned during the recession that when it comes to any major development, the project must be fully financed beforehand, said Grant Govertsen, an analyst with Union Gaming Group.

MGM Mirage, for example, got into trouble while completing CityCenter when it didn’t have the money to complete the project at first.

“I think if they could do it over again, they would lock in the financing prior to the development,” Govertsen said of MGM Mirage executives. “We had such a unique economic circumstance.

“Will it happen again? Maybe, but going forward developers are going to be much more careful.”

The lesson has come home that Las Vegas is not recession-resistant as some people thought it was, Govertsen said. In a recessionary environment when wallets are tighter, cash flow will fall. This round it dropped 40 percent to 50 percent from the peak in 2007, he said.

Regional gambling markets such as the riverboats have performed better than the Strip, Govertsen said. Gamblers have to spend money on hotels, food and flights when they come to Las Vegas. That’s money they can gamble with by staying close to home, he said.

“There, gambling trumps destination in this environment,” Govertsen said. “The demand is there, but the choice of venue might change.”

Other lessons learned by the gaming industry have been implemented such as lowering room rates to attract visitors. There is too much high-end supply that came online in this economy, and what Las Vegas needs more is midlevel to low-end supply, he said.

“Sahara and Binion’s couldn’t compete in this recession when the high end lowers its prices,” Govertsen said.

Govertsen said there won’t be any new development for a while, especially on the high end. The cost to develop is so great that gaming companies are forced to build high end.

“How many billions would it cost to rebuild Circus Circus?” Govertsen said. “If you are going to spend a couple of billion dollars, you are not going to go low end. You won’t get a return.”

Real estate and lending

The real estate industry has relearned the lesson of supply and demand because of all the overbuilding in the valley, Restrepo said.

The adage of location, location, location holds true even more, he added.

“There is going to be more attention paid before they start a project. Whether it is residential or commercial, you (need to) do your due diligence of what the future market conditions may be,” Restrepo said.

“They viewed what was happening as a permanent up cycle and didn’t think they needed a market analysis.”

Kyle Nagy, principal of CommCap Advisors, a commercial mortgage-banking firm, said his industry has learned the importance of lending to longtime developers rather than people who entered the business during the boom with no development background.

Loans were based on the appraisal of the land, and developers no longer had to put in additional funds for the construction of the project, Nagy said. The skill of the developer should have been the basis for the loan because, as lenders later learned, many people shouldn’t have been developing in the first place, he said.

“I think we have returned to the No. 1 fundamental for real estate,” Nagy said. “You lend to the borrower and the principal guarantees it. That lesson was lost because of the appreciation of land values in the marketplace.”

Lending to those without a development background led to poorly designed projects and people without the financial strength to weather a downturn, Nagy said. It’s been a hard lesson to learn about not lending to up and comers, some who even planned commercial projects without having the residential base around it.

“They are not always the best borrowers,” Nagy said. “They don’t know how to adjust to a changing market. It is easy to be a developer when everything is going smoothly.”

Retail

Pamela Joy Ring, president of the Ring Retail Advisory, said retailers have learned the importance of not putting themselves in debt and not overexpanding for the sake of market share.

“You cannibalize your brand for the sake of trying to increase your revenue,” Ring said.

The recession has taught retailers the importance of managing their supplies. Retailers have a long lead time and for the 2008 holiday shopping season, they planned their inventories with easy credit and excessive amounts of inventory.

Retailers were challenged to move that merchandise, and this year they didn’t buy as much and let consumers know they were only ordering limited quantities.

As for the mom-and-pop retailers, Ring said it’s true that the strong survive. Those who were smart managing their balance sheets and understanding their customers have kept going. They learned great service is vital and how important it is to collaborate with other retailers in their shopping center.

“There is no silver bullet,” Ring said. “It just goes back to watching your balance sheets and marketing to your customers …”

Construction

Steve Holloway, Associated General Contractors executive director, said the companies that have survived have learned the lesson that it’s important to keep a lot of cash in the bank.

That cash is needed to underwrite any bonds on performance, but there is a tendency to spend it on operations and for keeping people employed for longer periods than they otherwise might, Holloway said. Companies have lost projects because they couldn’t afford the bonds.

Contractors have learned it doesn’t pay to overextend themselves and expand their company more than they should have, Holloway said. Some general contractors, for example, decided to create a subsidiary where they did their own framing — but they have had to shut that operation down.

With the slowdown in construction in Las Vegas, companies are turning to other markets, including Salt Lake City.

“You just learn to tighten up and reduce your cost and learn to chase the work,” he said.