Are We Witnessing the End of Las Vegas?
Image Source: The Telegraph

Every year, millions of people hit sin city to gamble, enjoy the nightlife, and release their inner “demon”. It has been every spring breakers’, fun lovers’, gamblers’, and soon to be husbands’ and wives’ dream destination. It is also the 4th most visited city by international tourists in North America. But is Vegas losing its mojo?

This is not the first time Vegas has gone through turmoil. The 2008 financial crisis was a disaster for the resort/gambling town. The city went through a building spree in the early 2000s thanks to low-interest rates and easy money that poured into real estate. Then came the 2008 financial crisis. Tourism went down drastically and the construction of new casino projects abruptly stopped. But thanks to the economic recovery and growth of international tourists (especially from China), Las Vegas got its groove back. To lure Chinese tourists, Vegas hotels removed “the 4th floor” (number 4 is the unlucky number in China) and replaced them with “the 13th floor” (13 is the lucky number in China). But hard times are back again in Vegas. These hard times are here to stay.

COVID has already decimated the Vegas economy. The shutdown of casinos and tourists not being able to travel to the city has strongly affected the city’s economy. Even though Las Vegas has opened up, an increase in COVID (the second wave) due to the cold weather and bungled response to the pandemic will lead the Casinos to shut down again. But this time, the economic blow is severe and recovery will take a very long time.

According to the economist Jeremy Aguero, a proper Vegas recovery will take 18 to 36 months (he said this on 7/30). During the two years of the great recession, 96,000 people lost their jobs. Three times that amount of jobs were lost just in less than two months after the pandemic kicked into high gear in the US. Even the jobs that will come back will mostly be automated thanks to Artificial Intelligence.

I believe that Vegas’ economic woes will get worse. Here is my take:

Outside of the basic macroeconomic, demographic, and geopolitics, Vegas has another ticking time bomb: Climate Change. Extreme heat will make the city unlivable. Limited water resources will also create a lot of problems.

I am not the only one who is foreseeing doom for sin city. Even the late Vegas casino mogul Sheldon Adelson saw the writing on the wall. That is why Las Vegas Sands is planning to sell his Vegas casinos for $6 billion. LVS is looking to sell Venetian Resorts, Palazzo, and the Sands Expo Convention Center. During the company’s last earnings call, it was revealed that Adelson’s Vegas casinos only accounted for 15% of the company’s overall revenue. But the Vegas casinos account for the majority of the company’s regulatory burdens. On the other hand, LVS’s Macau and Marina Bay Sands Casino in Singapore casinos accounted for 63% and 22% of the company’s total revenue respectively. Asia has been Adelson’s main source of revenue while Vegas has been his main source of burden. As more people don’t come to Vegas to gamble, COVID recovered faster in Asia, and as COVID got worse in the US, Adelson saw the writing on the wall and jumped off a sinking ship. Since the late 2000s, his efforts have been focused on Asia and as the Asian economy, tourism sector, and income of the Average Asian grow, it only made sense for him to shift his focus further into Asia.

But don’t bet against Vegas just yet. The city has become a hub for water innovation. The city of sin can also expect many migrants to leave the high tax state of California. Popular YouTuber and high profile Los Angeles based luxury real estate broker Graham Stephen is leaving Los Angeles and relocating to Las Vegas. Las Vegas also has the potential to be a tech hub. Online retailer Zappos already has its HQ in Vegas. The late Tony Hsieh, who founded and led Zappos, was a big believer in the city and invested a lot of his own wealth to develop the downtown Las Vegas area. As many tech workers leave the Bay Area/Silicon Valley due to the high cost of living and unfriendly business policies, many entrepreneurs can build their start-ups in Las Vegas. Of course, Vegas will have to compete against emerging tech hubs in business-friendly states like Texas, Utah, and Colorado. As the population of the city has grown, the city has established an NFL (American Football) and NHL (Ice Hockey) team. The new T-Mobile center is not just the home of the Las Vegas Golden Knights, the lastest NHL franchise, but an all-out concert and entertainment center. Vegas is also still a great place to get hitched.

It is clear that Vegas is pivoting. Vegas is trying to shed its “sin city” reputation and create a city with more nightlife, live entertainment, concerts, fine dining, and even sports. As Vegas undergoes changes due to the pandemic, look out for firms that have betted (pun intended) on sin city real estate. No other firm has gone big on Vegas other than the private equity giant Blackstone. Blackstone Real Estate Investment Trust (BREIT) and MGM Growth Properties (the REIT that owns MGM International’s Casino portfolio) have joined together to create a joint venture to purchase the Mandalay Bay and MGM Grand. Blackstone’s Jonathan Grey, who used to run the firm’s real estate practice but now serves and president and COO of the firm, is a strong believer in Las Vegas. Many wall street banks have also a stake in Vegas’ success. Citibank, Deutsche Bank, Barclays, and SocGen have lent $3 billion to the Blackstone and MGM joint venture. Deutsche Bank is also trying to sell the Cosmopolitan Casino in the Vegas City Center. Dubai World, a diversified investment company owned by the government of Dubai, UAE, which invested heavily into Vegas during the recession and partnered with MGM to build the Las Vegas City Center is shedding its Vegas real estate portfolio. Even the Tropicana casino is for sale.

Las Vegas will need to diversity fast. The majority of the State of Nevada’s revenue comes from sales tax and gaming revenue. These revenue sources are thanks to tourists wanting to come to the state to shop and gamble. Tourism is still the driver and the main source of revenue for the state of Nevada.

As Vegas is changing, watch out for the REITs, private equity investors, and banks that have stakes in the strip and its key casino real estate. Las Vegas has the potential to be the next American tech hub, water innovation center, and the next American urban and suburban metropolis. But as for still being Sin City, I am not so sure.
['Armchair Banker']
['Gambling', 'Nightlife', 'Covid 19', 'Climate Change', 'Travel']