Lessons from the recent past
BY JACOB OBERMAN AND BRENT PIROSCH, CB RICHARD ELLIS(Excerpted from the report Analysis of Recent Financial Market Stress’ Potential Impact on Las Vegas. Reprinted with permission from CB Richard Ellis.)
It is unlikely that the recent stress that has gripped the financial markets will materially impact Las Vegas Strip gaming revenues in the third quarter because it is almost half over. However, past experience suggests that it is becoming increasingly likely that Strip gaming revenue could show weakness as early as September and into the fourth quarter.
Looking back to 2007 and 2008 (the last time Wall Street suffered such a precipitous decline in such a short period of time), it is interesting to note that Strip gaming revenue did not falter until several months into the housing market decline. The likely reason why Strip gaming revenue remained strong until early 2008 was that the stock market was still making new highs as late as October 2007-several months into the housing market correction. However, when the stock market began to crack in November 2007, it only took a month or two for the Strip to start seeing a drop-off in gaming spend.
Nobody knows the duration and severity of the recent stock market decline. If the stock market continues lower or does not recover, however, we could see a repeat of the late 2007/early 2008 experience, and start to see gaming revenue declines in the very near future. Quite simply, similar to much of 2007, the strong stock market could have been masking underlying economic problems. The key similarity between then and now is the weakness in the housing market. On a seasonally adjusted basis, the Case-Shiller 20 City Composite Home Price Index hit a post credit crunch peaked at 147.58 in May 2010. In May 2011, the Index had declined to 140.95.
Another similarity between then and now is oil prices. Oil prices rose more than 100 percent between early 2007 and early 2008. By late 2007, WTI oil prices were above $90-about the same level they were up this year.
With the recent strength in Strip gaming revenue over the last few months, one can surmise that corporations and the affluent, or those less impacted by changes in home prices, have buoyed the Las Vegas market. However, like 2008, we believe that the strength and confidence these two groups have had could be quickly stripped away. Although it would take some time for any softness in the economy to impact the convention market, any stock market slowdown could cause the affluent to pull back on gaming spend very quickly.
We recognize that there was short-lived stock market weakness in the summer of 2010 that seemed to have little impact on the Strip. We think the reason why Strip revenue did not falter in 2010 was because U.S. home prices were at a post-credit crunch high in May 2010. Today, home prices are at post credit crunch lows.
Although we have painted a bleak picture of what could be in store for the Strip if the stock market does not recover, some Las Vegas Strip fundamentals are much stronger today than they were in 2008. The key differences between 2008 and now are:
• Room supply was growing in 2008, but by the end of 2011 the market will have anniversaried all of the supply additions for the foreseeable future
• Convention visitation was decelerating in late 2007/early 2008 (albeit still only down a few percent from the prior year), but convention/meeting demand is currently accelerating
• Aggressive U.S. monetary policy
We recognize that the above analysis is somewhat limited because (as we have pointed out numerous times) there is no one economic indicator that has a 1:1 correlation with Strip gaming revenue. The other issues are that we do not know the magic level for the stock market that will cause affluent consumers to spend less in Las Vegas, or how the market will react to constantly changing economic news. A couple key points to watch in the S&P 500 are 1,257, the price at the beginning of 2011; 1,132, the price at the beginning of 2010; and 1,363, the price marking the 2011 peak.
Weighing all of the data, if the S&P 500 were to remain below 1,200-1,250 through September, we would anticipate mass market gaming revenue declines in the fourth quarter.
Jacob Oberman is the director of gaming research and analysis and Brent Pirosch is director of gaming consulting services for Las Vegas branch of CB Richard Ellis. They can be reached at www.cbre.com.