If you were to rewind the clock 15 years, the conversation surrounding hotel investment in Las Vegas would be very different. Of course, one could say that about many major cities, but perhaps none more so than Sin City, a desert oasis that hung its hat on gaming and gluttony.
“The Great Recession was a perfect storm of rapidly declining leisure and corporate demand, as well as hotel supply growth in Las Vegas, creating a significant supply and demand imbalance,” explains John DeCree, locally based director of global gaming and head of research for CBRE Securities.
Today, the city is on an entirely different footing – an important distinction for investors who may want to recall past performance when considering future opportunities here.
“With significant investments in entertainment like sports stadiums, Formula One Grand Prix and the MSG Sphere, Las Vegas continues to separate itself from other geographies when it comes to tourism and entertainment,” DeCree adds.
Though gaming is still robust – with the Nevada Gaming Control Board noting that gross gaming revenue on the Strip was up 1.1 percent in August, while gaming was at an all-time revenue high for any August in state history – the city is diversifying to attract more types of visitors. It’s brought in the NHL’s Golden Knights (current Stanley Cup winners), the NFL’s Raiders, the WNBA’s Aces (current champions) and possibly the MLB’s Oakland A’s as talks of a new stadium abound.
The city will host the Super Bowl in January, and the much-anticipated Formula One Grand Prix took place in November. MSG Sphere debuted to much fanfare as U2 kicked off opening night on Sept. 29.
A myriad of acquisitions
Andrew P. Woods, director of the Center for Business and Economic Research at the University of Nevada at Las Vegas (UNLV), notes that before the Great Recession, there were plans for 50,000 new hotel rooms on a city-wide inventory of 150,000 rooms. Today, that number stands at 151,771, according to the Las Vegas Convention and Visitors Authority (LVCVA).
One of the impending additions to that inventory is the Fontainebleau Las Vegas, a 3,644-room luxury resort and casino that will premiere on the north portion of the Strip in December. If that name sounds familiar, it’s because the concept has struggled to see the light of day since late 2009. Back then, the Fontainebleau was almost finished but ended up in bankruptcy during the Great Recession. It went through multiple ownership changes, before finally ending up in the hands of its original owner, Fontainebleau Development, which has partnered with Koch Real Estate Investments on the current iteration. The partnership was able to secure $1.8 billion in funding, illustrating how much investor sentiment has changed in Las Vegas over the past 15 years.
Jake Francis, president of Koch Real Estate Investments, noted in a recent press release that he never would have imagined the company investing in a Las Vegas resort when it was created in 2008. But times, places and opportunities change.
“A lot of people make short-term decisions; we make decisions with a long-term point of view,” Francis said in the statement.
Others are also making long-term bets on the city and, specifically, on the Strip. This includes Realty Income Corporation, which announced it was purchasing a 22 percent stake in Blackstone-owned Bellagio for $950 million in August.
"Realty Income seeks to invest in high-quality real estate at scale in partnership with operators who are leaders in their respective industries," said Sumit Roy, the company’s president and CEO, in a statement.
This interest acquisition represents Realty Income’s second investment in the gaming industry.
Dreamscape Companies raised $850 million in February to fund, among other things, the renovation of the Rio Hotel & Casino Las Vegas, which it purchased in a sale-leaseback with Caesars Entertainment in late 2019.
Viney Singal, CEO of Capro Real Estate Partners, sees the sale-leaseback – or opco/propco – model, as a strategic play.
“Acquiring the real estate is a terrific investment,” he says. “The lease structure is very favorable to investors.”
The existing Bellagio triple-net lease structure with MGM, for example, includes 2 percent annual rent escalators for the next six years.
The problem with this structure, DeCree notes, is that it’s a little too popular, making investor opportunities scarce.
“This opco/propco model has existed for several years now for Las Vegas casino resorts,” he says. “The flurry of recent activity has been dominated by a very small group of very large investors, including publicly traded REITs entirely focused on the casino segment.”
Singal, who has worked in real estate investment banking for more than 20 years as founder and CEO of locally based Valtus Capital Group, sees the same challenge. It isn’t slowing him down, though. Instead, it’s caused Singal to ensure he has a seat at the table through the March launch of Capro. The real estate private equity firm is being led with $100 million of new cash equity capital, with a target of $500 million worth of assets under management for its first fund.
“We are actively looking at Las Vegas hotel/casino investments and will do acquisition of operating assets, as well as development,” Singal says. “We expect the best opportunities to be on the Strip, including extending to the Strip north and south, and in local markets or Downtown Las Vegas.”
Elongating the winning streak
Las Vegas’ recent diversification is one of the reasons Singal feels confident about investing here.
“Las Vegas has done a wonderful job, again, of reinventing itself,” he says. “The shift to sports-entertainment has been a huge winner. This helps to drive tourism throughout the week and makes most weekends a ‘huge’ weekend.”
Las Vegas visitor volume hasn’t fully achieved its 2019 numbers, but it’s on the way there. The city welcomed nearly 39 million in 2022, per the LVCVA, which is still off its 2019 numbers of 42.5 million. Weekend occupancy rates stood at a healthy 89.3 percent last year, while room tax collections hit a record high of nearly $330 million. Pre-pandemic, this number sat at $296,6000.
“After the pandemic restrictions were eased, consumers we ready to spend their savings,” Woods says. “[They exercised their] spending power on experiences, travel, food and entertainment.”
This also explains why air passenger volume in the region was at an all-time high, with more than 52.6 million people flying in and out of the city.
Woods adds that Las Vegas has also become an expert adapter since the Great Recession, and it has taught its visitors to adapt with it.
“The leisure and hospitality industry has been able to adapt to different economic conditions, become more efficient with new technologies and processes [and creating] consumer habits that [include] less face-to-face interaction,” he says. “Having a product that is in high demand, but one where you can control costs, has been good for investor confidence. Consumers, so far, have been okay with paying higher room rates on busy weekends, and shifting behavior has allowed the industry to find other ways to control their expenses.”
Still, the threat of another black swan event that halts tourism is something hotel investors have to consider. The city will likely continue to adapt and diversify, but planning for the unexpected is a must-do in a place known for huge wins and losses.
“Having more reasons to come to Las Vegas – be it personal, work, a sporting event or to get away from the day to day – has helped the industry rebound and continue growing,” Woods says. “But no industry is recession proof. Every dog has its day.”