WSJ901231-0134
901231-0134.
Las Vegas Confronts Economic Crunch
As Rapid Expansion Bumps Into Slump
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By Neil Barsky and Pauline Yoshihashi
Staff Reporters of The Wall Street Journal
12/31/90
WALL STREET JOURNAL (J), PAGE 9
ECONOMIC NEWS (ECO)
REAL ESTATE INVESTMENTS (REA)
CASINOS AND GAMBLING (CNO)
LODGING, HOTELS, MOTELS, LODGES, CAMPGROUNDS (LOD)
HEAVY CONSTRUCTION; INDUSTRIAL AND COMMERCIAL (CON)
HOME CONSTRUCTION (HOM)
Las Vegas, Nev., the fastest growing city in the nation,
faces an economic squeeze.
The city's ambitious development plans are coming to
fruition just as the regional economy is beginning to slow.
Even as the city's gambling industry is adding thousands of
new hotel rooms, many casinos have been laying off workers.
And just as thousands of new homes are ready to go on the
market, housing sales are falling.
"Las Vegas is an accident waiting to happen," says David
Shulman, a Salomon Brothers economist who tracks real estate
markets. "The only reason Las Vegas has been booming is
because it was on the periphery of Southern California. Now,
that's stopped and things are bound to change."
Exciting new projects and aggressive marketing could help
the casinos goose their gambling numbers for a while --
barring a shooting war in the Mideast that plays havoc with
fuel supplies. But the same can't be said in the housing
industry, where out-of-state wealth has fueled growth over
the past decade.
As a city that thrived on the free-spending ways of
others, Las Vegas was made for the 1980s. It grew up during
those years from a purely gambling town to a destination
resort attracting families and conventioneers. While gamblers
spent money wildly, builders transformed the Las Vegas
valley's dirt roads, rock and sand into a carpet of housing
developments, man-made ponds and golf courses. Jobs, crisp
desert air and the cheap cost of living lured immigrants from
around the country, and the population nearly doubled, to
780,000 residents from fewer than 450,000.
"We are now a mature and diverse community that just
doesn't have the same reliance on casino gaming as it once
did," boasts Don Haze, a commercial real estate broker who
opened a Coldwell Banker commercial leasing office in 1981.
But a lengthy downturn could undo some of the
image-building that Las Vegas underwent in the 1980s. "You
must remember that the people who have been successful in
this town have always had their feet on the gas pedal," says
R. Keith Schwer, of the University of Nevada, Las Vegas's
Center for Business and Economic Research. When the city was
hit by the recession of 1981, tourism spending grew a little
less than 1%, though visitor volume posted a slight decline.
"The movers and shakers have not been conditioned to deal
with great economic downturns," Mr. Schwer says.
The recession in the early '80s spurred city leaders to
mount a campaign to help Las Vegas break out of its
dependency on the casino industry. In 1983, the Nevada state
Legislature passed a law permitting interstate banking that
led Citibank to move its credit card distribution center to
Las Vegas. Today, 2,000 people work there. By contrast, the
city's huge new Mirage casino employs about 7,000.
But almost no major companies have followed Citibank's
lead. The Nevada Development Authority estimates that in the
past two years only 3,103 new jobs were created by private
sector firms either expanding or moving into Nevada. As a
result, experts say, the economy still lacks the diversity
that would help it weather another prolonged downturn.
Still, Las Vegas isn't Phoenix, and there haven't been any
billion-dollar thrift seizures or distressed land sales yet.
Even the most pessimistic economists expect Nevada's
population growth to remain healthy. What's more, the
national credit crunch has saved developers from building
projects with no prospect of success.
"What we need to do now is take a few deep breaths," says
Donald Snyder, chairman and chief executive of First
Interstate Bank of Nevada, a unit of First Interstate Bancorp
and Nevada's biggest bank.
Las Vegas does have excesses that are uniquely its own.
Huge new Disney-like facilities such as the 3,000-room Mirage
and the 4,000-room Excalibur have forced the industry into a
Darwinian struggle in which older, undercapitalized
facilities are falling behind more modern competitors.
"The strong will survive," says Golden Nugget's chairman,
Stephen Wynn, whose $710 million Mirage continues to lure
crowds from neighboring casinos. "But I am worried about some
of our competitors. You can't just build boxes, rent out the
rooms and get by anymore."
Size is no indicator of success, either.
Bally Manufacturing Corp., one of the nation's biggest
gambling companies, has defaulted on its casino debt, and it
has trimmed its staff by 600 workers. Other big names have
also hit cold streaks. At Hilton Hotels Corp., high-roller
competition from the Mirage and Caesars Palace has cut into
operating profit, which fell 50% in the third quarter. Now
Hilton, Nevada's biggest employer, plans to trim operating
costs -- and staff -- in Las Vegas by about 8%. Altogether,
that means layoffs of more than 500.
Other once-proud Las Vegas names have been tarnished by
closings and bankruptcy filings. The Landmark hotel and
casino shut its doors earlier this year; the Aladdin has
filed for bankruptcy protection and is slated for auction.
Meanwhile, aging casinos like the Dunes and the Stardust have
struggled to keep pace.
And even before the town has recovered from the one-two
punch of the Excalibur and Mirage, the industry faces another
challenge from MGM Grand Inc.'s Kirk Kerkorian, who has vowed
to forge ahead with plans for a 5,000-room megafacility. Add
to that the Riviera's 1,600-room new wing, the Stardust's
additional 1,200 rooms and dozens of other projects on the
boards, and further fallout appears certain.
"It's what I call the rule of 500," says Alan Pomerantz, a
real estate attorney with Weil, Gotshal & Manges in New York
City. "If a city projects a need for 500 hotel rooms, then
500 developers will build 500 hotels each with 500 rooms."
The rule of 500 appears to apply to residential
developers, as well. While the twin engines of Las Vegas's
housing growth -- the casino industry and the spillover from
the California market -- are beginning to sputter, housing
starts continue to climb. Over the next year, builders have
applied for permits to put up more than 49,000 housing units
in Clark County, which includes Las Vegas.
Tight credit could keep as many as 30% from being built,
says Glen Barton of the Meyers Group, a market research
company based in Los Angeles. But that would still leave
34,000 new homes and apartments to absorb.
Economists cite another disturbing trend in Las Vegas's
growth pattern: A full 8.1% of all payroll workers are in the
construction sector, suggesting that there aren't enough
indigenous industries to pick up the slack once things quiet
down.
And home buying has begun to taper off. According to the
Meyers Group, the number of home sales in the third quarter
dropped 27.3% from a year earlier, while the inventory of
unsold homes was up 15.4%.
Consider the case of Leon Cohen, a 75-year-old former real
estate broker from Encino, Calif. He cashed in on the
California real estate boom last year and moved to the
serenity of the Nevada desert, where he lives in Del Webb
Corp.'s Sun City, a planned community. As a retiree and
former Californian, Mr. Cohen is the type of resident Las
Vegas planners dreamed of when they imagined an economy freed
from the cyclical whims of the gambling industry.
But there may not be many Leon Cohens left. "With the
California real estate market going down, I'm sure I couldn't
have made my deal today," he says. "I was lucky things went
so well in California when they did."
Some development companies are betting that any slowdown
will be brief and are plunging ahead with ambitious projects.
One is a 25-village city-within-a-city called Summerlin,
developed by Howard Hughes Properties. Designed on 39 square
miles of property, the project won't be completed until early
next century. Construction has already begun on Lake Las
Vegas, a $3.5 billion project bankrolled by the Bass brothers
on 2,200 desert acres.
"We all know there'll be a slowdown here, just like
there's going to be one everywhere," says Coldwell Banker's
Mr. Haze. "But they used to say that when California got a
cold, Las Vegas got pneumonia. Now I think when California
gets its cold, we just might only get a case of sniffles."