We won't see the words NO and VACANCY anywhere on the Strip in 2010. Hotel supply growth has been on a tear since late 2007 while demand has cracked. And we're not done yet.
The chart below shows that Las Vegas Strip visitation levels are back to 2004 levels, on a TTM basis. Over the same period, room inventory increased 10%. The supply/demand situation is about to get much worse. With visitation still potentially falling, room inventory will jump another 9% by the end of 2010. Is the CityCenter/Fontainebleau/Cosmopolitan triumvirate enough of a draw to drive a 9% increase in visitation?
While visitation to Las Vegas may have gotten "less bad", it will need to improve materially to offset the new supply that is on the way. CityCenter is opening in December 2009 with 5,900 rooms, followed by Fontainebleau and Cosmopolitan, both likely to open sometime in 2010, adding another 6,800 combined. CityCenter is billed as being "destined to be one of the great urban places of the world", according to its website. It will need to live up to that billing and more to attract the 1.1 million incremental visitors necessary (assuming two guests per room) to offset the new supply. Unlike The Mirage and Bellagio before it, CityCenter is more of a residential product that may lack the "wow" factor to drive significant incremental visitation to Las Vegas.
High-end properties will be hit hardest by the new supply. The cumulative supply additions represent a 57% increase in the current number of high-end rooms on the Strip. It is difficult to imagine that the market will be able to absorb this increase in the current economy with, at best, a "tepid" recovery on the way in 2010. We believe that the incremental rooms will generate little new demand and will end up diluting the market for the existing Strip players particularly impacting WYNN, LVS, and MGM.
As a reminder, RevPAR is already on a big time decline. YTD RevPAR is down around 30%. The only question now is whether 2010 or 2011 will be the RevPAR trough, because it doesn't look like it will be 2009.