As Occupancy Slips, Las Vegas Bets On Demand

A recent report by the Las Vegas Convention and Visitors Authority shows declining hotel occupancy and average daily rates in the city, which experts attribute to such factors as a slowing economy and capacity cuts at McCarran International Airport. Though the market is softening, some analysts said Las Vegas will remain a strong market.

Las Vegas saw a 2.4 percent drop in total occupancy levels and a 5.5 percent decline of average daily rates in May compared with the same time last year, according to the LVCVA report. Though "the magnitude of the drop is surprising, the more important number to focus on is occupied room nights," said Jeff Lugosi, senior vice president of PKF Consulting in Los Angeles. "They are basically flat over last year through May. Tourist numbers are up and convention numbers are down, but Las Vegas is still maintaining its number of occupied rooms and demand is growing."

Indeed, the 3.2 percent rise in room nights booked by leisure travelers and the 9 percent decline in those booked by convention attendees to Las Vegas netted Sin City a paltry 0.3 percent drop in occupied room nights, from 3,801,554 in May 2007 to 3,791,067 in May 2008.

Plus, Las Vegas already is operating at above-average occupancy levels. "A weekend occupancy of 92 percent and an ADR of $130 is phenomenal," said Jan Freitag, vice president of global development at Smith Travel Research, quoting STR data. "That is an incredible occupancy, but in Vegas that is a gloom and doom number because their numbers used to be so high."

"Yes, occupancy is down, but how do you interpret that?" Freitag continued. "Those numbers are not sustainable, so is it a slip-slide down or are we returning to normal levels? Maybe for Vegas, it's time to say that the more normal occupancy for all those new rooms is in the 80s and we will still be OK."

PKF's Lugosi said he believes the drop is "a blip." If history is any indication, he said, Las Vegas hotels will weather the perfect storm of an unsteady economy and airlines cutting back on service to the city due to the high cost of fuel.

"If you look at long-term average daily rate and the quality of product and amenities, Las Vegas has always increased year over year, even in serious economic situations like 9/11 and the fallout after the dot-com boom," Lugosi said. "They've always been able to absorb new hotels rooms."

However, some figures show Las Vegas may have trouble rectifying supply with demand. In Las Vegas, seat capacity is expected to decline 12 percent annually by the fourth quarter of 2008, according to a June 27 research note by JP Morgan Chase airline analyst Jamie Baker, though these capacity cuts likely will most affect the more leisure-oriented hotels on the Strip—properties business travelers tend to avoid due to lack of meeting space or a desire to be closer to the airport.

"The airlines are cutting back on less-profitable routes and those routes are to leisure destinations," said Warren Marr, director of PricewaterhouseCoopers in Philadelphia, "but getting someone to pay up for a convention is a different story. They need to go to the shows, so there is less resistance on the air travel price for the convention attendee. If you're a hotel in Las Vegas with a lot of meeting space, you're likely less impacted than a hotel that does not have meeting space."

The capacity cuts coincide with the construction of 32,095 rooms Las Vegas is set to add through 2011, according to LVCVA data, with the bulk debuting later this year and in 2009. As of May, the most recent month the LVCVA made data available, 8,789 rooms are scheduled to arrive by the end of 2008, with an additional 16,810 rooms coming online throughout 2009. These figures represent hotels and motels on and off the strip and include such projects as the 123-room Element Las Vegas Summerlin, set to open in December, as well as the 230-room Aloft Las Vegas and the 400-room Mandarin Oriental at MGM Mirage, both planned to open in 2009.

There are barriers new hotels may face, such as rising construction costs and finance rates—two problems that are not unique to Las Vegas. "If you haven't come out of the ground, it's taking longer to put financing together," according to PwC's Marr, "but the LVCVA has done a good job of vetting those projects so that the ones that are there now are pretty solid."

That's not to say that financing is a problem specific to smaller or boutique hotels. Earlier this month, Morgans Hotel Group and Boyd Gaming Corporation announced they are putting their Echelon Las Vegas project on hold, due to "challenging" economic conditions. The project was scheduled to open in 2010 with an 860-room Mondrian and 550-room Delano Hotel.

"The deadline to obtain construction financing for the Echelon project was extended to Sept. 15, 2008," Morgans Hotel Group explained in a statement. "Given Boyd's announcement and the difficulties in the credit markets, MHG believes that the joint venture will be unable to secure financing at favorable rates and conditions by Sept. 15, 2008. MHG does not intend to further extend the joint venture agreement on its current terms but expects to evaluate future proposals relating to the project with Boyd."

Announcements such as this are proof that no hotel market, no matter how strong, is unaffected by a weakening economy. Said STR's Freitag, "Vegas had talked itself into thinking that they're somewhat recession-proof, and that may not be quite as true."