Room rates in Las Vegas through early August are still strong, but they’re trending lower, raising questions about the Strip starting to feel the pinch of high gas prices and inflation.
Federal Reserve Chairman Jerome Powell last week called recession “certainly a possibility” as the Fed raises interest rates to combat inflation, and analysts said gaming companies have a plan to deal with a recession if it occurs. That would involve cutting costs, starting with layoffs.
As a destination market to which visitors have to travel, a recession leaves Las Vegas vulnerable.
“This isn’t Kellogg or Hershey,” said Mike PeQueen, managing director and partner at financial services firm HighTower Las Vegas. “This is a choice. We put ourselves out to the world with this great offering, but at some point, the family budget doesn’t support it. The middle market comes to Vegas during the summer. August is back-to-school month and families have a host of expenses. They have to be prepared for those. Middle-income couples have a lot of things tugging at their wallets.”
Earlier this month, Deutsche Bank reported May foot traffic on the Strip falling 8% year over year and a 4% decline in vehicle traffic crossing the southern Nevada/California border in April compared to April 2021. In contrast, air- passenger numbers remain strong, approaching pre-pandemic levels, with hotel occupancy doing the same.
Las Vegas will get a look at how this all affected gaming revenues in May when the Gaming Control Board on Thursday releases its revenue numbers and the Las Vegas Convention and Visitors Authority releases visitation numbers. The state’s gaming revenues have topped $1 billion for 14 consecutive months.
Circa Resort & Casino owner Derek Stevens, who owns two other casinos in downtown Las Vegas, raised some alarms Thursday when he told the Nevada Gaming Commission that his properties are starting to see some impacts from inflation, with people withdrawing less money from ATMs and spending less. He said room occupancy, however, has remained strong.
While Las Vegas reported record room rates through April, based on statistics from the LVCVA, a report from Truist Securities Research analyst Barry Jonas said their room-rate surveys for the Strip show continued “week-over-week deceleration, though rates remain strong year-over-year.” He said it’s unclear if the week-over-week weakness is “inflation starting to hit consumer demand or operators fine-tuning rates.”
The survey tracks leisure rates for 28 casinos across the Strip. In July, room rates at MGM Resorts International and Caesars Entertainment declined 4% and 2%, respectively. That’s down 22% and 2%, respectively, from highs, Jonas said.
In August, room rates fell 5% and 7%, respectively, and were down 13% and 7% from their peaks, Jonas said. June rates were down 26% and 13%, respectively, from prior peaks.
Based on the latest declines in Strip room rates and fears raised by Stevens, gaming industry consultants and analysts are offering their perspectives and on what might happen next. Brendan Bussmann, managing partner for B Global, cited an adjustment in room rates not only in Las Vegas, but across the country, as people have adjusted their travel plans based on current economic conditions.
“With Vegas as one of the top destinations, that becomes a little more apparent of the critical mass we see here,” Bussmann said. “It doesn’t mean people don’t want to come, but we’re having to adjust rates based on demand and what’s available. People are feeling economic pressures they haven’t felt in 40 years and even more. High gas prices and supply-chain issues help propel it up further. Airline challenges are also forcing that and the geopolitical landscape has a lot of uncertainty. It all brings to mind: ‘Other than that, Mrs. Lincoln, how did you enjoy the play?’”
PeQueen said no casino executive will admit to having a contingency plan for visitor-head-count reductions; rather, they model a host of scenarios, from pessimistic to optimistic.
“Every chief financial officer of a gaming company is outwardly confident and inwardly frightened,” PeQueen said. “Higher interest rates, inflation, and a potential recession are an awful lot to deal with and that’s everybody has to take it very seriously and have a plan.”
The next month or two will be telling, PeQueen said. How many people come to Las Vegas for the Fourth of July weekend will be important. Watching room rates, airline fares, and gas prices is crucial.
“That’s the game. That will determine traffic to the shows and fine restaurants,” PeQueen said. “It’s very early, but plenty of reasons to be heavily concerned and have a plan.”
Consumer confidence remains low, shaped by energy prices and the feeling that they’re not doing so well, Pequeen said. If they’re not going for a convention or business meeting, Las Vegas is the “ultimate discretionary purchase.”
“The elephant in the room is what tourists will do as a result of higher energy prices,” PeQueen said. “I don’t think that many people in America have been affected too negatively by higher interest rates. Higher energy prices are a gruesome challenge for the resort industry. We get such a big chunk of our visitors driving across the desert, particularly from California in the summer. Will they make one fewer trip or stay fewer days, give up a show, gamble less or shop less? Will they dine at cheaper options? The profile of the visitor coming will be more frugal. I don’t see how they can’t be, when they’re paying more for gasoline or airfare and getting here takes more out of the budget. How can they spend more on the ground? Casinos will feel that in earnings probably in the third and fourth quarters.”
Josh Swissman, founder of The Strategy Organization, said when people spend less money, visitors staying on the Strip might cut out going downtown and perhaps that’s a reflection of what Derek Stevens’ properties are experiencing.
Downtown gaming revenue of $67.3 million in April declined 11.3% from $76 million in April 2021. It was up, however, 9% compared to 2019, according to Deutsche Bank.
“They may want to stay closer to their hotel room and not spend as much on Uber or taxis,” Swissman said.
Casino executives Swissman has spoken to on the Strip don’t express quite as much urgency.
“Where we are at this moment, I don’t see any drastic changes coming,” Swissman said. “If we’re still in this position at the end of this year and beginning of next, it might be a different conversation. But every indicator I’ve been privy to from the industry is that’s the approach.”
Swissman said casinos, however, are likely starting to discuss a potential recession. He wouldn’t say they’re worried, just that they’re “keeping their eye on it. They’re starting to price around it. You’ll likely see some marketing, promotions, and clever packaging. That’s how the industry typically has reacted and will react, at least through the summer.”
In May, Circa promoted a $300 package in which guests get two nights (Sun.-Thurs.), a $100 food and beverage credit, a daybed at Stadium Swim, and $50 Legacy Club credit.
If there is a recession, people will still travel and take vacations, Swissman said. What will happen, however, is that people will trade down how they’re spending their money.
“If you stayed at a luxury resort before, you may stay at a mid-tier resort,” Swissman said. “If you stayed at a mid-tier resort, you may stay at a more value-based resort. If you spent a bunch of money for plane tickets, you may take a road trip instead, even though gas is higher. It’s still more economical for a group of people to travel.”
Room rates in Las Vegas compared to other metropolitan areas around the country are still “dramatically cheaper across the board,” Swissman noted.
“Vegas presents a nice value for people compared to other destinations around the country,” Swissman said. “For all of those reasons, you’ll see some decent travel volume to Vegas throughout the summer, even if you don’t see a ton of relief from inflation or gas prices.”
As for the decline in room rates, Swissman said that casinos are “using Economics 101 and the supply-demand curve,” reducing pricing to deal with reduced demand and keep hotel rooms full.
“If you see downward movement in pricing, that means there typically is a decrease in booking pace,” Swissman said. “It’s only a warning sign if it becomes systemic and if you get to a point where you can’t adjust the price any lower to continue to stimulate demand. But we’re nowhere near that.”
Convention bookings continue to grow in Las Vegas, a positive sign for the fall. International travel is expected to pick up with fewer restrictions to enter the U.S.
“Some of those tailwinds should offset some of what you might see from domestic travelers and domestic casino activity,” Swissman said.
That was echoed by Bussmann, who said conventions and international visitors will lessen any hit Las Vegas would face by a slowdown. As for casino executives, he said they’re like other business owners who are evaluating their flow and seeing what’s happening in real time, thanks to available technology.
“It’s a matter of what the trends are showing in the short and long term,” Bussmann said. “Let’s take the next few weeks as we move into earnings’ season in July and what trends they’re seeing. I think $1 billion (a month) in gaming revenue is the new standard. Will we slow down? Potentially. Will we see a retreat off that? I hope not. As we talk about all the cautionary and geopolitical headwinds, at some point, one of those could curtail things completely.”
Not every analyst, however, is as concerned.
Andrew Klebanow, a principal with C3 Gaming, said history has demonstrated “time and again that Las Vegas is neither recession proof nor immune to world events.” The unfinished Fontainebleau and the Saint Regis Tower at the Venetian are reminders of how devastating a protracted recession, such as the one in 2008, can be on ambitious development projects.
“The question now is, is the current economic climate having an effect on Las Vegas? Observationally, the answer is no,” Klebanow said. “Passenger volume into Reid International is approaching pre-pandemic levels. Strip hotels are enjoying high (revenue per available room). Everywhere one looks, tourists are spending money. Filling up one’s gas tank may cost $30 more, but that hasn’t stopped pandemic-weary people from visiting Las Vegas. While some predict that demand may soften in July, the reason may be that it is July, when daytime temperatures often exceed 110 degrees, and not because of broader economic factors.”
Klebanow said the regional casino markets also appear sound. This is a period when industry analysts can get “clean post-pandemic comparisons,” starting with March 2021 versus March 2022. Both March and April saw strong year-over-year growth, with some isolated markets showing only modest declines. The May numbers are looking good, he said.
“New Jersey’s brick-and-mortar casino revenue in May was essentially flat over the prior-year period, as was Detroit,” Klebanow said. “Pennsylvania experienced an 8.4 percent increase, but much of that could be attributed to increases in supply. Gas prices may be high, but to date, that hasn’t deterred many Americans from driving to their favorite casinos and trying their luck. It should be an interesting summer.”
