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MADISON MARQUETTE
MARKET WATCH
Tourism — A Steady Driver
Anecdotal stories abound that ‘no one is gambling,’‘tourism has tanked’, and that ‘hotels are giving away rooms.’ While grounded in some fact, these observations donot paint the complete picture. At least through theend of 2008, Las Vegas tourism remained strong. oput the situation into clearer perspective, 37.5 mil-lion visitors came to Las Vegas in 2008. Although off its 2007 peak, Las Vegas remained one of the mostpopular tourist destinations in the world. Tese visi-tors were also still spending in the casinos as evidencedby 2008 gross gaming revenues of $9.8 billion — just$1.1 billion shy of the 2007 peak. For the majority of 2008, hotel occupancy remained strong, under-scoring a market whose economic engine remained well-primed when many other parts of the country witnessed unprecedented decline. Te accompanyingcharts highlight these long term growth trends in tour-ism and gaming revenues.Te first part of 2009 shows that there has beensome recent slippage in these year-end numbers. Asof February, total visitors are down 10% and gamingrevenues have declined 17%. Hotel occupancy alsodeclined to 81.5% versus 90.6% the pervious year.Te problem today is that the region’s uncheckedoptimism has created a serious disconnect between LasVegas’ monolithic plans and the realities of a slowingeconomy. In the past, the city was continually re-invented through the development of these large-scaleprojects — which spurred further tourist gains as visi-tors flocked to the area to see the new sights.During these times, the worst that ever happened wasthat too many rooms and casinos were added. De-mand, however, always quickly grew to accommodatethe new rooms and Las Vegas’ life blood, gaming rev-enues, never really showed any decline. For example, while national travel patterns dropped precipitously after the terrorist attacks of 9/11 and the tech bust— Las Vegas visitation, occupied room nights, andgaming revenues all grew.
This Time is Different — A War on TwoFronts
Te slowing visitor market — Las Vegas’ principal eco-nomic engine — is moving negative for essentially thefirst time in 40 years. Tis is happening at a time when8,700 hotel rooms came on-line in 2008, with another18,000 rooms poised to be added by 2010.In the past, the Las Vegas economy functioned rela-tively independently because its drivers — tourism andgaming — were unique and insulated from other partsof the macro economy. In some ways, it could havebeen called recession proof. Tis time, however, thefar-reaching effects of the housing bust have linked LasVegas to the broader economy — significantly impact-ing its domestic and international customer base.
The Local Housing Bust
What led Las Vegas into the slowdown was the ex-treme speculation in housing — not unlike the specu-lation on the gaming front. Las Vegas is, unfortunately,a case study for many of the most troubled marketsacross the U.S. As such, Las Vegas’ current economicdownturn is related not only to its own housing bust,but to the national and global repercussions.It is important to remember that Las Vegas was oneof the first markets to show extreme weakness in thehousing market — evident as early as 2006. In a nut-shell, speculators came into the market to make a fastbuck. Te home flipping strategy they employed droveprices up (in what had been a very affordable market).Teir investment activity also created housing demandthat was unreal and unsustainable.Te National Association of Realtors (NAR) reportedthat the median home price in Las Vegas rose from$132,000 in 2000 to $321,000 by mid-year 2006.Tis equates to an annual appreciation rate of 15%.oday, NAR estimates that the median home price hasfallen to $183,000 — an extraordinary decline of 43%from its peak. What is, perhaps, even more dramatic is the level of overbuilding that took place. While a variety of meth-odologies exist to estimate home demand, we looked atthe relationship between residential permit activity andemployment growth. Quite simply — new jobs createdemand for new homes.In looking back, Las Vegas clearly shows a boom-bustcycle in home construction since the 1980s. As inmany markets, home building periodically gets aheadof demand and then slows to fall back into balance.For example, looking at the economic expansion of 1993–2000, the region generated 214,500 buildingpermits and added 309,000 jobs. Tis translates into aratio of one new building permit for every 1.44 jobs.In comparison, between 2000 and 2007 the regionissued 256,100 housing permits on a base of 266,000new jobs a ratio of almost one permit for every one job. Tis recent one-to-one ratio was clearly not sup-ported by real housing demand, but rather by extensivespeculation from outside the market. Assuming the1993–2000 ratio of one permit for every 1.44 jobs isabout right for the market, Las Vegas was overbuilt be-tween 2000 and 2007 by as many as 100,000 homes.
Magnitude of the Distress
Realtyrac reports on home foreclosures nationally.Teir data shows that as of first quarter Las Vegasranked at the top of U.S. metro areas, with over35,000 foreclosure filings. Tis equates to almost4.5%, seven times higher than the U.S. average. As could be expected, the top 10 zip codes with fore-closures in Las Vegas were in the expanding suburbs tothe northwest, southwest, and southeast parts of themetro area. (See accompanying map.) For example,the top ranked zip code (89108) is located in northLas Vegas and has had over 2,200 homes fall intoforeclosure since January 2008. Currently, the medianexisting home value is $132,000 — down 32% in thelast year.Retail has been especially hard hit by the downturn;particularly so in the greater Las Vegas area. Although
VEGAS TOURISM
510152025303540
1 9 7 6 1 9 7 2 1 9 8 0 1 9 8 4 1 9 8 8 1 9 9 2 1 9 9 6 2 0 0 0 2 0 0 4 2 0 0 8
024681012
1 9 7 6 1 9 7 2 1 9 8 0 1 9 8 4 1 9 8 8 1 9 9 2 1 9 9 6 2 0 0 0 2 0 0 4 2 0 0 8
As of first quarterLas Vegas rankedat thetop of U.S.metro areas,with over 35,000foreclosure filings.
LAS VEGAS VISITORS
(in millions)
GAMING REVENUES
(in $ billions)
Sources: Las Vegas Convention and Visitors Authority,Madison Marquette Market Research
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“All In” inLas Vegas
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