Build it: They will come!

Jun 7, 2005 6:03 AM

It seems that every time a new mega resort opens on the Strip, cries of "oversupply of hotel rooms" ring out, along with fears of a slowdown in visitor demand.

After Wynn Las Vegas opened five weeks ago, several Wall Street analysts cited a glut of new hotel rooms as among the reasons that gaming stocks have fallen slightly out of favor in recent weeks.

Fears of too many hotel rooms and of a slowdown are unfounded, according to Bear Stearns analyst Joe Greff.

Greff said it would take at least five years before Las Vegas’ room supply catches up with visitor demand.

"The Las Vegas Strip is a unique market in that new room supply typically stimulates room demand, visitation volume and increased spending levels," Greff said, adding that the opening of Wynn Las Vegas doesn’t change that equation. He further believes that the tumbling prices of gaming stocks are not unusual as shares are often sold off in the summer months.

Greff’s assessment of the impact of new hotel rooms on Las Vegas tourism is based on a new Bear Stearns report released last week.

The report tracks construction of new hotel rooms from 1970 to the present, and makes projections through 2010.

"Since 1970, visitor volumes have grown at a faster pace than the Las Vegas room supply," Greff said. "This in turn has driven room demand and led to consistently strong occupancy in the 80 percent to 90 percent range."

Moreover, the average length of a visitor’s stay and his trip budget have increased as Las Vegas evolved from a one-dimensional casino town into a diversified destination-resort market, Greff said.

Interestingly, spikes in visitor volume can be tracked when a single mega resort opens, Greff said. For instance, room demand surged 17 percent in 1993 following the opening of the MGM Grand, which dumped more than 5,000 hotel rooms into the market.

In addition, the 10 percent increase in guest rooms attributable to three new resorts in 1999 produced a 13 percent increase in demand.

Over the years, Las Vegas has grown in spurts and visitor demand has always followed, almost religiously.

"In each year that supply grew by more than 8 percent, demand grew on average by 10.4 percent," Greff said. "History suggests that new Las Vegas development will spur increased visitation volumes."

It will be interesting to see how new development affects visitation statistics, since much of the new development over the next five years will be residential and condominium hotels.

"We expect the Las Vegas Strip to undergo capital improvements of approximately $25 billion-plus in new hotels, condo/hotels and casinos over the next five years," Greff said.

New construction over the next five years will consist of about 46,000 hotel, condo-hotel and timeshare units. But the growth rate will be about 5.2 percent a year, nearly the same aggregate growth rate registered between 1970 and 2004.

Greff said the influx of new condo and timeshare units shouldn’t change visitor demand.

"We believe this relatively new trend of tourist-driven real estate demand (sparked by the first Turnberry Place tower in 1999) is strong and will continue to intensify in the next few years," he said.

And, despite a possible erosion of some hotel revenue as some former customers buy their own condo units, demand should once again follow supply.

"The coming wave of capacity increases will again induce demand and revenue growth, as was the case in the past," Greff said.