Strip Revenue Forecast: Growth Again in 2010

The 85-page analysis of the market concludes by predicting that total Strip revenue will increase between 3.0% and 7.0% while the same-store subset experiences a nearly identical decline of between 3.0% and 6.9% because the new supply will cannibalize existing inventory, which includes everything but CityCenter, the final tower of the Hard Rock resort expansion, set to open late this year, and a new condo-hotel tower at Planet Hollywood. The prediction is based on the following assumptions:

• The Las Vegas Strip is projected to experience 2%-4% growth before factoring in new competition;
• The new supply increases the room supply in the market by 7.2%;
• The new supply generates revenue per available room 35% above the current market average; and
• 10% to 30% of the revenue generated by the new supply will come from currently untapped sources--peak travel periods, return of some baccarat/mini baccarat play.

"Although most Las Vegas Strip casinos will likely experience revenue and earnings declines in 2010, future implications for Las Vegas are positive," Jacob Oberman, director gaming research and analysis for CBRE's Global Gaming Group and co-author of the report, says in a prepared statement. "Investor sentiment will likely improve as 'headline' market revenue data measured on a year-over-year basis turns positive. Additionally, market revenue growth sets the stage for net positive job growth for Strip casinos in 2010, which bodes well for the local Las Vegas economy."

The latest headline market revenue data, Strip gaming from September, released this week by the state Gaming Control Board, shows a year-over-year decline of just 3.58%, by far the slimmest decline year-to-date. The YOY decline has been between 9.0% and 23.4% every other month this year except for May, which is attributed to the MGM Grand hosting several high profile events that month.

Strip gaming revenue--the amount gamblers lose in casinos--is expected to show YOY increases the rest of the year, thanks to a steep drop-off in tourism in the final months of 2008. Gaming win during the final three months of 2008 equated to YOY declines of 25.8%, 16.0% and 23.2%, respectively. As a result, if Strip gaming win in October 2009--released next month--equals September's $506.4 million, it would represent a 6.8% increase from $474.2 million in October 2008--albeit still a 26% decline from $637.8 in October 2007. Indeed, if Strip casinos took in $506.4 million--below the 2008 monthly average--in each of the first nine months of 2010, it would represent an increase from 2009 of between 5.3% and 22.2% in every month but January 2009, when gaming win was less than 1% higher at $510.4 million.

"Las Vegas Strip operators have seen profits evaporate quickly as revenue has declined since 2008," concludes the CBRE report. "Conversely, profit potential on the upside should be equally strong when the Strip does recover, but moderate over time as some operators will have to make good on deferred capital costs and begin to push revenue enhancement--re-hiring in key areas, and re-focusing on development and other corporate strategies. Newer properties and those with less deferred capital expenses will fare better in a recovery, as they will not have to play catch-up on those costs."

That having been said, the forecast is for there to be some lag effect for the Las Vegas Strip to any national economic recovery. "To combat the drastic revenue declines, Strip operators have engaged in practices such as cost cutting, discounting, increasing 'complimentaries' (comps) and tightening casino credit standards to maximize profitability," concludes the report. "GGG believes there will be some lag effect for the Las Vegas Strip to any national economic recovery, as some of these strategies become counterproductive to increasing profitability during an upturn. As such, operators will continue to face most of the challenges in 2010 they faced in 2008 and 2009."