Recession Proof? Don't Bet on It

For decades the industries of gambling and drinking have been thought of as recession proof. Its no wonder, given that one industry often fuels the other. Yet, this historic collapse of the credit markets, and subsequent (and seemingly endless) recession, have challenged their recession-proof aura. Last week, reports came out that Las Vegas Strip casinos have lost 9.7% of their income in 2008. That number doesn't seem that bad considering the Dow Jones has dropped more than 4 times that percentage over the same period of time. But consider this: That is the first significant drop in gaming income in over 50 years.

For the fiscal year so far (July 1, 2008 through Dec. 31, 2008), Strip gaming win is off 15.8%, Downtown gaming win is off 12.44% and Clark county as a whole is off 14.55%. The state Gaming Control Board last month issued its report on the previous fiscal year (July 1, 2007-June 30, 2008), during which the casino industry’s net income tumbled 68% statewide, 57% on the Las Vegas Strip and 54% Downtown. And the increase in gambling problem hotlines isn't the only reason for such a dramatic decline.

Most Vegas strip casinos, and casinos in general for that matter, operate as hotels. Hotels, as a real estate sector, are the first to show the effects of a sagging economy because income is generated on a day to day basis, rather than monthly as in the multi-family sector, or annually for most other sectors. When people stop spending money, hotel bookings are typically the first to see the drop-off.

Last week, the Las Vegas Convention and Visitor Authority issued its monthly report, showing a 1,000-point decline in hotel occupancy to 76.7% in December 2008 from 87.4% in December 2007. The LVCVA also reported a 14.2% decline in the average daily room rate to $96.39 from $112.36 in December 2007 and an 11% decline in visitor volume to 2.7 million from 3 million in December 2007. The number of hotel rooms in the market jumped by 5.7% during the year, to 140,529 from 132,947.

Add to this the political pressure on corporations to scale back corporate trips and frivolous client entertainment spending, and this further impacts the health of destination-based hospitality.

As a result, billionaire real estate magnates and casino developers alike have been halting projects faster than the ball stops on a roulette wheel.

In January, Harrah’s Entertainment delayed the opening of its new tower at Caesars and MGM Mirage delayed and cut 21 floors of condominiums from its now 25-story Harmon Hotel, one of several towers that are part of its 18 million-square-foot Citycenter development.

In November, Las Vegas Sands Corp. halted construction on high-rise condo tower in front of its new Palazzo resort and offered up 181.8 million common shares to raise $2.14 billion in new capital and avoid defaulting on its credit agreements. Boyd Gaming was the first to react to the softening market, halting construction of its multi-billion-dollar Echelon integrated casino resort development on the Strip in July.

And just three days ago, Trump Entertainment, owner of three casinos in Atlantic City, filed for Chapter 11 Bankruptcy...again.

However you look at it, if your proposed income is based on a vice, now isn't the time to roll the dice.