Monday, May 16, 2011

Analyzing The Economic Island of Las Vegas

What Happens in the US Ends Here

After a super steep five year decline Las Vegas may be showing signs of stabilizing following the deepest economic downturn since gaming started in the State in the 1940’s.

In the US’ most discretionary economy, the economic charts of the past few years all look like cliffs.

Gaming and tourism continue to be Southern Nevada’s primary economic engine. After peaking at $10.9 billion in 2007, Nevada’s gaming revenue dropped along with the general economic downturn to $8.9 billion in 2010. As the US economy improves gaming’s performance is expected to increase gradually, this time organically. There are no domestic economy-saving bubbles on the horizon.

Both visitor volume and gaming revenue ticked up slightly in 2010 over 2009. Traffic at McCarran Airport has also increased in March 2011 over the March 2009 and anecdotal reports indicate that convention bookings continue to firm up in 2011 (reversing the post crash trend that shamed business excess). Clark County’s population grew to a record 2.03 million in 2010.

All this is set against the global threat of Asian gaming development that is set to dwarf Las Vegas’ gaming volume and test the ultimate allure of Las Vegas as international gaming destination. The ante is always upped in the gaming business.

Even though unemployment in Nevada has dropped to 13.2 percent it is still the highest in the nation and sharply higher than the 3.8 percent unemployment rate of 10 years ago; in metropolitan Las Vegas, the unemployment rate is currently 13.3 percent. The gradual decline in the unemployment rate has come from the workers leaving the workforce or the State not from net employment growth.

While job losses increased overall (dropping from the 2007 peak), the Leisure & Hospitality sector, accounting nearly one third of Las Vegas employment base, now has nearly 260,000 employed, up by roughly 60,000 from the post crash floor established in 2009 and 2010.

No More Real Estate Driver

For the past four years Nevada led the nation in the rate of housing foreclosures. Last year, one in every nine housing units in Las Vegas received a foreclosure filing, and an estimated 25 percent of those were strategic defaults. Housing prices are forecast to drop an additional 10-20% percent in the next two years. Given the depressed state of housing, Las Vegas’ construction industry, once a significant growth driver accounting for over 10% of total employment, has dropped to 5% of the total employment base and is not expected to return to historical levels in the long term. The growth rate of hotel room inventory is expected to level off for a while too.

The Biggest Ever CRE Live Auction Format

Auction.com and loan sale advisor Archetype Advisors are auctioning $1 billion of Nevada commercial non-performing loans and REO properties this week in Las Vegas.

The simultaneous online and live auction format (like its residential counterpart) will market retail, multifamily, land, and industrial assets (mostly loans) with collateral located throughout Nevada but concentrated in the Las Vegas area. Over 50 commercial assets will be sold individually.

This is billed to be largest commercial real estate and note auction to-date, according to Auction.com.

The Super-sized Bet

In a place where no one dares to think small, hundreds of investors will be parsing inconclusive data that describes the Las Vegas economy. The jury is out. Has the bottom been reached in Las Vegas or will there be another leg down? When will sustainable economic equilibrium be reached? What will post crash growth look like?

If there ever was a place to make a long bet on the US economy, Las Vegas is it.