The Last Resort
by Paul Doocey
November 1, 2010
The $3.9 billion Cosmopolitan will bring more than 2,900 rooms, a 100,000-square-foot casino, three pools, gourmet restaurants and more retail to a crowded Las Vegas Strip.
Unsettled markets, an uncertain future await Cosmopolitan's high-end model
The Cosmopolitan — 'polished without pretense'
If everything had gone according to plan The Cosmopolitan of Las Vegas would be celebrating its second anniversary. Owner and developer Bruce Eichner would be reaping the rewards of his multibillion-dollar mixed-use resort, which was to feature two 600-foot towers with a combined 2,998 condominium/hotel units, one-of-a-kind restaurants and retail outlets, a quirky 74,000-square-foot second-floor casino and a 5-acre beach club overlooking the Strip. Its location between Bellagio and CityCenter would have guaranteed constant foot traffic and built-in high-end appeal. Rarely had a development’s prospects seemed brighter.
Unfortunately for Eichner and his dream, epic economic recessions have a way of altering even the best laid of plans. The project broke ground in 2005 with a planned mid-2008 opening, but Eichner and his partners were forced out in early 2008 when they defaulted on a $760 million loan and were eventually foreclosed by Deutsche Bank, the project’s sole lender. After months searching for a developer to purchase the uncompleted project, the bank decided to open the resort itself, investing a further $1.1 billion to finish it.
Today, the $3.9 billion Cosmopolitan stands on the cusp of completion, with a scheduled soft opening in December and a grand opening set for New Year’s Eve. The project may not look exactly as originally envisioned by Eichner, but it still has a rather unique amenities package and, importantly, an arrangement with Marriot International to market its hotel. To Deutsche Bank’s way of thinking, the two-and-a-half-year delay in completing the resort may actually work in favor of the project, since the Las Vegas Strip gaming market appears to be stabilizing after more than two years of declining revenue and visitation. The bank believes it has the facility, management structure and market strategy needed to grow in the midst of a long-awaited Las Vegas resurgence.
“Deutsche Bank concluded that building a new brand, with a unique identity and guest experience, was central to the overall vision for The Cosmopolitan of Las Vegas,” says John Gallagher, a director in Deutsche Bank’s media relations group. “As a result, rather than partnering with a existing hotel brand, the bank brought on some of the best executives in the gaming and lodging space to form a highly experienced management and operations team. We’re confident The Cosmopolitan will become a premier feature of the city’s business and entertainment landscape.”
This rosy vision is not shared by all, needless to say. Gaming analysts and long-time Sin City observers predict sharp growing pains for the resort, at least until the national economy recovers. That recovery may take a while. Gaming win on the Strip was roughly flat in the 2010 fiscal year against a decline of more than 15 percent in 2009. Then in August, revenues broke out of a four-month slump with a 21 percent increase over the previous year to $544.3 million. It was the largest year-over-year increase since February’s 33 percent jump, and like February’s it was fueled by baccarat. August’s baccarat drop of $1.9 billion is the largest in state history. Up to that point, however, it was only the third month this year in which revenues did not decline compared with last year, and many question whether those results are sustainable or indicative of an overall market recovery.
“Both the locals market and the Strip remain depressed,” says Eugene Martin Christiansen, CEO of Christiansen Capital Advisors. “Whether, if, visitation and consumer spending on the Strip recover to pre-August 2007 levels isn’t knowable. Thus Cosmopolitan will open in weak market conditions and an uncertain economic outlook.”
“With the last revenue numbers, everyone is really sort of holding their breath,” says Bill Thompson, a professor of public administration at the University of Nevada, Las Vegas and a long-time observer of the city’s gaming industry. “We were really down in the dumps, but now maybe there is some hope that a turnaround is beginning. But I think the turnaround will have to come nationally in some sort of definitive and dramatic way for us to sustain good numbers. Initially, I would just put the last few months off as an aberration.”
Thompson’s short-term prediction for Cosmopolitan Las Vegas is rather harsh. “I don’t think the time is right for a new casino to open, but you can’t always predict things five years ahead,” he says. “I think they will employ a lot of people and tell them that they are basically hired for two weeks. Be prepared to wait six months before the property really starts to perform.”
“There is always a ramp-up period for casino resorts,” adds Michael Paladino, senior director for Fitch ratings. “All new resorts have a ramp-up period because they open with an expense structure that is a little bit heavy. The month after you open you try to work that down, so slow results at new resorts are not unexpected. That said, everyone in the Las Vegas market would certainly prefer not to have additional capacity come on line right now.”
Las Vegas-based equities analysts Union Gaming Group hold to a more sanguine view. “Ultimately, we aren’t that concerned about Cosmopolitan’s impact on Las Vegas,” they wrote in a note to investors earlier this year. “In a worst-case scenario, Cosmopolitan can generate no more than 730,000 occupied room nights (2,000 rooms x 100 percent occupancy x 365 nights). Using current market averages of 2.1 persons per occupied room and an average length of stay of 3.6 nights, this translates to 425,833 lost customers, or just over 1 percent of [total] visitation.”
UGG acknowledges that the market is still absorbing the late-2009 openings of CityCenter and Hard Rock’s HRH, but compared with supply growth on the Strip in previous years, which typically ran in excess of 4 percent annually, this isn’t bad, they say.
“Las Vegas has a room-rate problem these days, not a visitation or even a gaming problem. Part of this in our view is limited rate-leadership in the market, so if operators theoretically colluded and took rates higher we’re not sure demand would be negatively impacted of note. That said, Cosmopolitan’s room-rate strategy [of pricing above the market] could have an odd, unintended impact on the market as it could pull rates up, not down.”
UGG points up other factors that set the property apart in their view, competitively speaking: 1) it’s a “single property in-market, unlike virtually all of its competition with clusters”; 2) it has no “out-of-market ‘spokes’” to drive visitation; and 3) owners Deutsche Bank have opted against a “gaming brand management structure” in favor of a traditional hotel affiliation.
Finally, UGG believes those same German bankers don’t want the volatility associated with high-end play and will control credit strategy accordingly, “rendering [Cosmopolitan] non-competitive with Wynn/Encore, Venetian/Palazzo, Caesars and Bellagio/MGM Grand/Mirage/Aria.”
THE '50-YARD LINE'
But questions of short-term market saturation aside, there may be a more intrinsic problem with Cosmopolitan, which is a problem with the super-resort model itself. Cosmopolitan and properties of its ilk may have become anachronisms in today’s world of ravaged consumers, a moribund housing market and straightened credit — resorts envisioned for a world where bigger was always better and over-the-top opulence was a necessity — two traits that may be done for good in Las Vegas moving forward.
“Unless the capital markets recover to their pre-August 2007 condition there will not be sufficient financing for another bigger-better construction cycle in Las Vegas or anywhere else in the United States,” Christiansen says. “Pacific Asian markets are a different story. Both Singapore properties are performing above even optimistic expectations and, moreover, are exhibiting more robust non-casino spending than Macau. Those numbers strongly imply that such capital as is available for casino resort investment will flow to Pacific Asia, where returns are higher, and not to Las Vegas. If Japan legalizes gaming the tilt towards Pacific Asia will become even steeper.”
Indeed, The Cosmopolitan of Las Vegas is probably the last large-scale mixed-use casino resort to open on the Strip for some time to come. Others that were in development over the last five years — Echelon, Plaza, Las Ramblas, Fontainebleau — have either been delayed or canceled. Not all those that have opened have fared so well. The $8.5 billion CityCenter did not turn a profit until the second quarter of this year. Jim Murren, CEO of MGM Resorts International, the project’s joint-venture developer, recently told Bloomberg. “We didn’t do as well as I hoped we would do when we first opened.” The $1 billion M Resort, which debuted in March 2009, was recently purchased by Penn National Gaming for $230.5 million, a massive discount on the property’s $860 million in debt.
“The property has done exceptionally well through this economy,” former owner Anthony Marnell III told the Las Vegas Review-Journal. “The place is busy and it makes good money. The only problem it had was how much debt it was carrying. That’s a problem everybody in this industry is having.”
By some estimates, there are currently 26,000 premium hotel rooms available on the Strip at any one time. Cosmopolitan is poised to add almost 3,000 more to that total. To sell rooms in such a saturated marketplace, Cosmopolitan will need to find ways to stand out from an already tony crowd.
“Any property’s ability to appeal to high-end customers is highly dependent on design and execution,” Christiansen says. “Build a turkey like Aladdin and the strategy fails; build something comparable in quality to Steve Wynn’s properties and returns on invested capital can approximate returns on Encore in this market in these conditions.”
Management at Cosmopolitan admits there is little they can do about opening in the current economy, but they contend that the resort they have designed and nurtured has the amenities package and market strategy needed to succeed on the Strip. The $3.9 billion property will include 2,995 hotel rooms housed in two towers that will open in phases, a 100,000-square-foot casino, 150,000 square feet of meeting space, a 50,000-square-foot spa, 14 restaurants, nightclubs, 36,000 square feet of retail and a 3,800-space underground parking garage. Deutsche Bank has been heavily involved in the resort’s appearance, forcing it to undergo at least three redesigns while under construction. In the end, they chose architects David Rockwell, Jeffrey Beers, Adam D. Tihany and the Friedmutter Group to oversee the design.
“The Cosmopolitan is about creating a resort experience that is truly different from anything that exists right now in Las Vegas,” says CEO John Unwin. “When you combine spacious suites, high design from talent like David Rockwell, an award-winning dining collection, unparalleled service and gaming, we know we are giving guests an experience that’s been missing in Las Vegas and harkens back to an era when guests felt connected, inspired and engaged by their resort.”
Among the amenities to be offered: hotel rooms with private outdoor terraces that offer spectacular views of the city; three separately themed pool areas — the Boulevard Pool overlooking the Strip, the Bamboo Pool offering a more private, canyon-like motif and a Day Club pool that will convert to a nightclub at night; nightclubs developed by the Tao Group that include a three-level venue that will overlook the casino floor; seven ballrooms and 46 meeting rooms to handle conventions and meetings; and celebrity chef restaurants, including the first Las Vegas outlets for the renowned Scott Conant and José Andrés. Another unique aspect is that all these functions and services will be offered on a very compact (for Vegas) 8.7-acre footprint, which means shorter walking distances between attractions for customers.
“We have all the components our competitors have,” Unwin recently told the Review-Journal. “But I would describe the Cosmopolitan as polished without pretense. We’re built close to the Strip, right on the 50-yard line. Instead of being on a huge acreage, we’ve taken everything and squeezed to create a whole different feeling.”
From a marketing standpoint, Cosmopolitan will rely on its arrangement with Marriot International to drive hotel visitation. Cosmopolitan will operate as an independent unit under Marriot’s Autograph Collection with access to the hotel giant’s data base of 32 million customers.
“This opportunity creates a powerful partnership for The Cosmopolitan and the Autograph Collection by aligning interests, broadening market share and driving growth,” Unwin said. “This platform enables us to build an iconic luxury brand at the heart of the Las Vegas Strip while simultaneously leveraging the seventh-largest retail Web site in the world.”
Also, in a bow to current market conditions, Unwin announced during recent licensing hearings before state gaming regulators that Cosmopolitan will focus on the “premium” market, which is a notch below the high-end market the resort originally intended to pursue. Some observes believe this may prove a wise long-term strategy. “The public has a notion in its mind right now that Las Vegas is an expensive place,” Thompson says. “We have to shake out of that. People have money to spend, but they don’t want to feel like they’re being gouged.”
Paladino rates Cosmopolitan’s chances this way:
“It depends on how you define success. Will it generate EBITDA? I think it probably will generate cash flow at some point, maybe not initially, as you saw with CityCenter, which struggled out of the gate. But to the extent it removed an eyesore from the Strip it is probably a good thing for the market overall.”
Paul Doocey is a New York-based writer and editor specializing in the casino, gambling and betting industries.
is editor of Casino Journal magazine. He can be reached at firstname.lastname@example.org.
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