Safe Bet: Reimagining Las Vegas
Investors and developers are rebuilding and reinventing Las Vegas as we know it
Blackstone is a fairly conservative firm that doesn’t like to gamble. So there must be a reason that they’d walk into the Bellagio and plunk down $4.3 billion.
That’s precisely what they did when the Blackstone Group approached MGM Grand and offered that titanic sum of money for 95 percent of the Bellagio last month, as reported by Bloomberg.
At the same time, MGM also sold off another chunk of itself for $825 million to billionaire Phil Ruffin, who is taking over the Circus Circus, also in Las Vegas.
And this comes on the heels of what will be the second-biggest casino transaction in history, if Eldorado Resorts and Caesars strike an $8.6 billion merger first reported this past summer. (If successful the new entity will be the largest gaming operator in the country.)
The reasons that these shrewd operators are making these kinds of gambits might have something to do with the fact that it’s still Vegas, baby. But it’s not the Sin City you’re used to.
The last recession hit Las Vegas harder than most other areas and brought development and investment to a standstill. The city’s resurgence since then is regarded as one of the top comeback stories, but it’s because a new Vegas is in the works rather than new-found success as a capital for gambling and adult entertainment. Instead, the reimagination will preserve its status as a world-renowned destination and relegate its former reputation to the past.
“The really good news between then and now is that Las Vegas is an increasingly diverse market,” said Vicky Schiff, a co-founder of Los Angeles-based Mosaic Real Estate Investors and Las Vegas native. “Gaming is obviously a big pull, but there’s more and more distribution[-sector businesses] and entrepreneurship.”
Almost every sector of the city’s economy is outperforming the previous decade. Last year, Las Vegas had the highest year-over-year multifamily rent growth in the nation at 7.8 percent. Retail rents are increasing, and office vacancy is at its lowest point since 2007.
A rebound is borne out in the usual statistics — more investment sales, an expanding pipeline and a growing workforce. But the transformation is epitomized in singular projects like “Area 15.” Development firm Fisher Brothers purchased the property in 2006 with unofficial plans for a gaming center or hotel. But, like the entire city and almost every other project at the time, those plans were stalled due to the financial crisis.
Now, 13 years later, Area 15 is nearly complete, but it’s not a casino or hotel. Instead, it will be a hybrid, with retail, entertainment, event space, and more.
Fisher Brothers is far from the only firm changing direction or repositioning space. Developers and investors are building based on new consumer experiences that were never a focus in the past.
Betting on the Experience Economy
The Nevada Gaming Control Board reported in February that gambling made up less than 35 percent of the total revenue on the Las Vegas Strip. It was the 20th straight fiscal year when gaming made up less than half of all revenue.
That might explain why some of the biggest players are cashing in their chips on casino space.
Marcus Threats, with the national hospitality group for Marcus & Millichap, said the record-breaking merger with Caesars is a great opportunity for Eldorado. To a certain extent, it’s something to marvel at.
“Eldorado didn’t exist in its current form three years ago,” he said. “How does a company that small end up buying Caesars?”
Threats added: “The gaming control board has to sign off on that.”
However, Threats said he was confident the merger will be successful because it was backed by billionaire investor Carl Icahn, the biggest shareholder in Caesars. (Icahn has sold major properties to Eldorado in the past, and he pushed the sale.)
Threats expects more of Eldorado’s casino properties to be sold off moving forward, because the company doesn’t want to keep all of Caesars’ assets in gaming.
He said major deals like the Caesars-Eldorado merger, and MGM’s move to diversify away from casinos to focus on more entertainment investment, underscores Vegas’ flip in focus to entertainment and retail over gambling.
Consider also that Las Vegas was home to zero major league sports teams three years ago. But by this time next year it will have three after the Oakland Raiders become the Las Vegas Raiders at a new 65,000-seat dome stadium next to the city.
“It’s not only the eight games a year,” said Shlomi Ronen, founder of L.A.-based Dekel Capital, who has done several Vegas financing deals. “You now have another live sports and entertainment ventures of scale, where they can host some significant events year-round.”
Area 15 might be most emblematic of the full transformation of Las Vegas. The 200,000-square-foot development is one of several projects taking advantage of changing consumer habits. When complete in February, Area 15 will feature a 126,000-square-foot entertainment complex as well as art exhibitions, dining, nightlife and experiential retail.
But it wasn’t always going to be the one-of-a-kind destination that it’s slated for now.
Fisher Brothers retained the vacant property through the recession. After the economy recovered, the firm returned, but wanted to do something different. Winston Fisher, CEO of Area 15 and partner at Fisher Brothers, told Commercial Observer that he met with Michael Beneville of Beneville Studios about four years ago to come up with new ideas.
“I needed someone who thought differently,” Fisher said.
They took a new approach in curating the space, focused more on placemaking and consumer experiences. Fisher calls this reimagined era as “the next re-invention of Las Vegas.”
“You can’t support the Strip without creativity,” he said. “We’ve been really fortunate to tap into that energy of the experience economy. We are creating a platform for new experiences with each visit. We wanted to create something that can change and adapt as consumer taste changes, with a constant rotation of new content and events.”
Madison Square Garden Company is in the middle of its own entertainment development, called the MSG Sphere — a new arena projected to open in 2021 with approximately 18,000 seats and the world’s largest LED screen. It will host concerts, award shows, corporate events and more.
“The Sphere is a game-changer as to what we know as an entertainment center in Las Vegas,” Threats said.
A recent report from Marcus & Millichap, which analyzed the current retail market, showed that, with the robust tourism trends and the growing resident population, Las Vegas is also driving demand for more retail projects.
That interest has been building for years, but now projects are coming to fruition. Project deliveries jumped by more than 800,000 square feet this year compared with 2018, up to the highest level since 2009. By the end of 2019, it is projected that 1.2 million square feet of retail space will be added to the market.
And even with the additional inventory, vacancy is going down, demonstrating how strong demand has been. Strong pre-leasing has pushed absorption past supply gains to bring vacancy down to 6.9 percent — the lowest rate since early 2008.
Rent is also on a sustained climb. Rates are up 4.6 percent this year to $19.05 per square foot. Retail on the Las Vegas Strip is up 6.2 percent over the year at $18.72 per square foot, and other neighborhood centers climbed 5.3 percent to $21.07 per square foot earlier this year.
Investors along the Strip and the surrounding corridors are targeting older assets to reposition. Properties turned into entertainment and dining destinations are trading well above the market average, and out-of-state investors accounted for almost 75 percent of investment sales volume this year. Deal flow for multi-tenant properties rose 30 percent this year compared to 2018, while prices rose 6 percent to $295 per square foot. Average prices for single-tenant properties jumped 8 percent jump to almost $490 per square foot.
Convention Capital of the Country
It’s not all play and no work. Tourism is rising largely because of the vast convention center space in Las Vegas. Hundreds of thousands of people convene each month, making it the top such destination in the U.S. This year, convention center attendance rose 3.3 percent.
As of September, about 5.2 million people have visited a Las Vegas convention center since the year started, according to government agency LVCVA. More than 6.5 million people visited for that reason in 2018.
Las Vegas has more than 10.5 million square feet of exhibition space for conventions, and more is on the way. The $76 million Expo Center at World Market Center will soon add 315,000 square feet. The Las Vegas Convention Center is set for a $1.4-billion renovation and a $860-million expansion. The massive new The Drew Las Vegas resort, formerly known as the Fontainebleau Las Vegas, by the Witkoff company and Marriott International will come with 550,000 square feet of its own convention space.
There is also the Caesars Forum, a $375-million plan for a 550,000 square-foot conference center, and the Forum Plaza, the first 100,000-square-foot outdoor meeting and event space in the city.
Hospitality is Still King
All the tourists and convention attendees need a place to stay. That’s why hotels and resorts have always been key to the Las Vegas economy, and demand is growing. The city’s revenue per available room is up 1.7 percent compared to last year, according to LVCVA, and more developers want in on the action.
Resorts World Las Vegas, on the site of the old Stardust Resort, is set to bring 3,400 hotel rooms. The Drew Las Vegas resort could add 3,800 hotel rooms in 2022. Both projects are the first megaresorts in Las Vegas since The Cosmopolitan in 2010.
Steven Witkoff, CEO of the firm behind The Drew, said earlier this year that the main factor that convinced his firm to build a new hotel was that no new megaresorts have been added to the market other than The Cosmopolitan in over a decade. He told Commercial Observer that Las Vegas is the only major submarket that has seen no new supply, despite consistently operating at 92 percent occupancy.
DG Development Corporation is working on its dual-branded Hilton hotel development adjacent to the Convention Center. The firm secured a $41.7-million construction loan last year for the project, which is expected to open in 2020 with 250 rooms. The development is part of the larger Las Vegas Global Business District initiative by LVCVA.
Ronen with Dekel Capital said it used to be that the hospitality was predicated just on gambling.
“Over the years, as the business of gambling has changed around the world … It used to be that if you wanted to go gamble, you went to Vegas. That’s not the case anymore, with more gambling options in the U.S. and abroad,” he said. “People are coming for the experience, with some gambling alongside. From that standpoint, Vegas is only improving.”
Big Bets Amid a Growing Economy
Las Vegas’ annual employment growth in the third quarter this year was more than twice the rate of the country’s, according to a report by CBRE. The report on the office market also showed continued rising lease rates, which is currently at $2.17 per square foot and at the highest level since 2011. The office market also shows fewer vacancies, which has been dropping since 2011, as demand outmatches supply and new development.
John Stater said that over the past five years the market for commercial real estate has been expanding outside of the Strip into a well-balanced economy. He said more companies from around the United States and some foreign investors are active in Las Vegas than they have been in the past.
The city is growing through similar sectors that are driving other major cities like Los Angeles and Chicago, like constantly expanding industrial investment from the e-commerce economy, which Stater said has driven the recovery in Las Vegas.
Away from the Strip, recent leases have also been signed by tenants like Floor & Decor, grocers, furniture stores and drugstores. More than 700,000 square feet is underway metro-wide, including a Costco-anchored shopping center set to open next year.
But the success of downtown Las Vegas, as it reduces gambling space in favor of entertainment and retail space, is also helping create a wider economy and new dimensions to the market.
“The operators on the Strip have done a great job catering to new people, and to younger people who don’t want to plunk quarters into slot machines,” he said. “It’s been interesting to see the strip operators staying ahead of that.”
So far this year, 127,900 square feet of new office construction has been completed. That includes the 112,000-square-foot building at the UNLV Tech Park. Planned construction is at 905,000 square feet, including the Uncommons mixed-use development project which recently secured financing to break ground in the spring next year.
The multifamily sector followed a similar track. The housing market was devastated by the recession, and it dropped out again in 2016. But the expanding economy is attracting new workers and employees as a more affordable option. Ex-Californians squeezed out of the Golden State by a historic housing crisis have been the greatest source of in-migration.
Cherry Development broke ground in July on its first residential complex since holding off on previous plans from 2009 because of the recession. The 63-unit apartment at the southwest corner of Casino Center Boulevard and Colorado Avenue is scheduled to open in May 2020.
Similarly, developer Frank Marretti acquired two acres across from UNLV’s campus in 2013. Six years later, construction is complete on the eight-story project called The yoU, with 125 units and retail and office space. The first residents moved in at the end of August, and UNLV is leasing office space and common areas in the building.
Now, CBRE’s multifamily report showed that Las Vegas has the second highest year-over-year rent growth rate in the country at 7.4 percent.
Mosaic, for its part, is sampling some of each of the food groups in the once-monolithic city. It has invested a quarter of a billion dollars in construction debt in recent years, funding a new mixed-use building near the University of Nevada–Las Vegas, an industrial park in North Las Vegas and a creative office building that Schiff describes as the first of its kind in the city.
“We’ve made a pretty big commitment to Vegas,” Schiff said. “There’s a lot of good factors feeding this economy.”
With reporting by Matt Grossman.