Las Vegas Tries to Build Out of Its Slump

At a time when high-rolling Asian baccarat players are staying home and U.S. tourists are having more trouble getting here, this city is poised to roll out four new luxury mega-resorts for gamblers just like them, adding more than 12,000 rooms in a city whose economy has gone flat.

Construction cranes arch high over the Strip, as Sin City strains toward tastefulness. Steve Wynn’s Bellagio will open its Italianate doors this spring on 3,000 sumptuous rooms and an art museum boasting the works of Renoir, Picasso, Cezanne and Matisse.

The beginnings of a spiky Eiffel Tower are surrounded by scaffolding at the Hilton’s Paris. Gondolas will eventually ply the canals of the Las Vegas Sands Inc.’s upscale Venetian, with its suites the size of an average apartment. Even low-end Circus Circus is getting into the high-end act with the island-flavored Mandalay Bay, which will also house a Four Seasons hotel.

Las Vegas now has nearly 106,000 hotel and motel rooms; through 2000, the tourism industry here will be forced to absorb more than 21,000 others at a construction price tag of nearly $7 billion in one of the biggest room booms in the city’s history.

The timing, some say, couldn’t be worse. To fill these expensive new hotel rooms, Las Vegas will need 6 million more visitors each year. If the first four months of 1998 are any indication, the number of visitors will drop, not rise. Hotel occupancy rates are at their lowest levels since 1992.

The number of passengers coming through the newly expanded McCarran International Airport is down for the first time since 1984. Gambling revenues are showing slower growth, and casino stocks are trading near their 52-week lows. The state is bracing for a tax shortfall, although the slowdown has yet to ripple out from the Strip into the real world of classrooms, local government and jobs.

For the first time in nearly a decade of explosive growth, the bloom may be off this desert rose--likely until the millennium dawns--for a complicated array of interconnected reasons. The Asian financial flu is one. Ironically, the robust U.S. economy is another, as airlines reroute planes usually intended for vacationers in cheap seats to pricier business destinations.

“It has become very difficult for the gaming consumer to get there, and at the same time you have all these rooms being built,” said Jason Ader, casino analyst for Bear, Stearns & Co. “Therein lies the issue in Las Vegas.”

In addition, the casino industry acknowledged last week that it was guilty of some minor hubris in the heady days of the early 1990s. The region had just begun a major growth spurt, and the rapid spread of gambling nationwide was dismissed as an appetizer for main course Las Vegas instead of serious competition.

Lavishness to Try to Lure New Breed

But in a major survey of the region’s No. 1 industry, the Las Vegas Convention and Visitors Authority said that card rooms and casinos in 29 other states have made a serious dent in their market, with tourists visiting less often or not at all.

“High-frequency gamers, people from markets near Las Vegas and past-year visitors were especially likely to replace trips to Las Vegas with visits to other gaming venues,” the survey concluded.

Does this mean “you can stick a fork in Las Vegas and say it’s done?” asks Alan Feldman, vice president of public affairs for Mirage Resorts. Absolutely not, he says, and notes that overbuilding was bemoaned way back in 1946.

“Las Vegas has gone through these plateaus before,” Feldman said. “We are definitely in one now. The question is what does it mean for the future? Las Vegas has always pulled out of this and improved yet again when there has been a compelling and creative product that reinvigorates peoples’ interest.”

The Sands, Mirage, Circus Circus and Hilton are all hoping that lavishness is the key to bringing well-heeled tourists to a destination once best known for its cookie-cutter rooms and nearly free food--a place that most recently tried to style itself as a family resort only to change its mind when the strategy landed with a thud.

The Mirage’s Bellagio--an elegant structure of muted tones instead of neon, with an Italian lake country theme and a cost of $1.8 billion--will be the first entry in Las Vegas’ more tasteful future. Rooms in what is being billed as the most expensive resort ever constructed will range from $159 a night to $499; suites will start at $375 and reach $1,400.

“If I try to describe it, I will do it a bit of a disservice,” gushed Feldman. “How do you describe Beethoven’s Fourth Symphony? It’s so much better heard.”

Bellagio’s restaurants will include satellites of New York’s famed Le Cirque and Aqua, San Francisco’s premier seafood restaurant with its signature dish combining foie gras and seared tuna. Retail outlets will include Gucci, Georgio Armani, Chanel, Tiffany & Co. and Prada. Guests will be encouraged not to bring children.

Bellagio’s Oct. 15 opening “will be one of the most important events this year in gaming,” states the most recent issue of Gaming Intelligence Report. “Investors should gauge the future health of Las Vegas based on incremental market growth spurred by the opening.”

Just up the Strip from the Bellagio, phase one of the Venetian will open the doors next spring to its 700-square-foot suites, with their crown moldings and custom-woven fabrics, their Drexel Heritage furniture, Italian marble bathrooms, multiple phone lines, in-room faxes and safes that can fit a laptop computer.

Patterned after Renaissance Venice, the resort will be home to a scale model of the Doge’s Palace, an actual-sized campanile and a miniature Grand Canal lined with shops and restaurants. “Over there,” said Sands Executive Vice President Bradley H. Stone, gesturing beyond bulldozers and a sea of white hard hats, “will be the Bridge of Sighs.” On this day, such a sight is hard to imagine behind intricate scaffolding and sparks from a busy welding torch.

By incorporating an existing convention center, the Venetian will have 1.7-million square feet of meeting and trade show space, second only to Chicago’s McCormick Place. A team of artists has the sole task of painting clouds on faux-sky ceilings. The task is expected to take four months.

“This is what Las Vegas will become, not what it has been,” said Sands President William P. Weidner. “It represents a paradigm shift in Las Vegas. . . . It starts with challenging the assumptions that people don’t want to spend time in their rooms.”

Will a new breed of tourists bite? Will business travelers and college-educated women with incomes over $40,000 a year--two groups the city knows it needs to woo--actually take the new Las Vegas plunge?

William N. Thompson, professor of public administration at the University of Nevada, Las Vegas and a gaming expert, is betting they will. He does, however, acknowledge this “problem of introducing a new level of hotel for the sophisticated business traveler,” particularly at such a high volume.

“If we have a national economic slump, we’re timing it wrong,” Thompson said. “If the boom goes on two to three more years, we’ll absorb these new rooms.”

‘Stall’ Has Not Led to Cutbacks

Although questions have been raised this past week about the robustness of the American economy, it has been on a roll for the past several years--a time when the Las Vegas gaming economy has begun to stall even as the population here has continued to push Nevada to record growth.

“Stall” for Las Vegas does not mean exactly the same thing as “stall” for the rest of the world. Sales tax revenues are one good example. For most of fiscal year 1998, sales tax revenues for the state of Nevada (most of which comes from the Las Vegas area) were up 3.2%. In May, they were up only 1.5%

“In Nevada, we’re working on the current budget with a forecast of 8.7% growth” in sales tax revenues, said Michael Pitlock, executive director of the state Department of Taxation. “Since we’re only achieving 3.2%, we’re experiencing a significant shortfall--$30 million.”

In addition, gaming tax revenues are coming in short of the mark, with revenue growth of 3.2% instead of a projected 6.8%. Sales and gaming tax revenues combine to make up 78% of the state’s general fund.

So far, the state has not had to cut back any programs or services because Nevada’s drop in revenues has been balanced out by lower expenditures for welfare and Medicare. Local government and schools have not been affected.

“The biggest concern is for the current fiscal year,” Pitlock said. “If the revenue trends continue, we could see things tighten up toward the end of this fiscal year . . . and in 1999, the Legislature will face some serious choices.”

Said Keith Schwer, director of the Center for Business and Economic Research: “There are some people yelling doom, and I think that’s premature. But things are far more cautious than they have been in the past five to 10 years.”

The caution is the result of the slowed gaming economy. Because business travel has boomed nationally, the airlines have begun to divert flights to more profitable markets.

This week, McCarran International Airport announced that the number of passengers going through its terminals was down 1.8% in June, 1.9% for the year to date.

The airline problem is of such great concern that Richard Bryan, a U.S. senator from Nevada, hosted hearings on the matter in April. “Our concern was that, at a time when thousands of new hotel rooms are coming online, we need to get people into Las Vegas,” said Karen Kirchgasser, a spokeswoman for Bryan.

Troubles in Asia are evident at the Las Vegas baccarat tables, with revenues dropping 15% to 20% regionwide since the last quarter of 1997. Mirage Resorts took the unprecedented step of “reevaluating” the standing of all high-rollers, who are often allowed to carry heavy losses.

“Everyone was reevaluated,” Feldman said. “We want everyone to play within their ability. . . . You absolutely had to protect the company and these people.”

Circus Circus also is blamed in part for the industry’s difficulties because the company added nearly 3,000 rooms last year at its Circus and Luxor resorts to little fanfare. The new rooms, critics said, absorbed increases in demand without creating the excitement to bring in new tourists.

Circus President Glenn Schaeffer refuses to take the blame for whatever ails Las Vegas. In fact, although he acknowledges an economic “soft spot” these days, he doesn’t think much ails Las Vegas.

“During the most prosperous decade in the history of the American experience, Las Vegas is the most successful city in terms of growth,” he said.

And he has few doubts that the lush new hotel-casinos--including his own Mandalay Bay--will fill up when they open over the next year. The question is what will happen to the rest of the resorts over the long haul. For now, it’s too soon to tell.

“The new buildings will spurt [tourism growth],” Schaeffer said. “No one doubts a nice pop. But will it be enough?”