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LAS VEGAS — This city has doubled down on luxury with the opening of the $8.5 billion CityCenter megadevelopment, but it could be a long time before there is any payoff.
This story first appeared in the December 23, 2009 issue of WWD. Subscribe Today.
The 18 million-square-foot complex is spread across 67 acres. It includes a lavish 500,000-square-foot luxury shopping mall called the Crystals that launched last week, along with hotels, a casino and condominiums designed by renowned architects such as Daniel Libeskind, David Rockwell, Sir Norman Foster, César Pelli, Art Gensler and Rafael Viñoly and represents more than the largest development on the famed Strip.
It’s an investment — some might say a gamble — for the future as the Vegas market struggles with an almost two-year decline.
And luxury labels such as Louis Vuitton, Versace, Dior, Gucci, Prada, Hermès, Fendi, Tiffany & Co., Van Cleef & Arpels, Cartier, Bulgari, Tom Ford, Bottega Veneta, Bally, Carolina Herrera and Paul Smith have bought in by leasing space at the Crystals.
Many experts say there is no easy or immediate solution to what ails this shopping, entertainment and gaming mecca.
“The country has demonized travel and excess, so Vegas in general and the luxury build-out at CityCenter are going to face a tough time at first; it’s like big corporate holiday parties, nobody is doing them anymore,” said Alexander Goldfarb, associate director at Sandler O’Neill, a New York-based research firm.
“I don’t see how just the CityCenter opening will change the market or save the whole Strip,” he said. “Everyone has dialed back, even high-roller types and the luxury consumers, so Las Vegas needs a lot more to happen and more time to turn things around.”
Las Vegas flew high during the go-go years of the last two decades, growing beyond gambling and big-name entertainers to take its place in the consumer pantheon as one of the globe’s top shopping destinations, with venues such as The Grand Canal Shoppes at The Venetian and The Shoppes at The Palazzo, The Forum Shops at Caesars, Las Vegas’ Fashion Show and glittering boutiques at the Wynn, Encore and other resorts.
However, the higher the arc, the steeper the fall.
No longer is Las Vegas considered impervious to the fluctuations of the national economy. Gaming revenue on the Strip is down, and retail and hotel vacancy rates are up as tourism has taken a beating. Unemployment is in double digits and Las Vegas has the highest home foreclosure rate in the U.S.
“When I decided to go in there, people told me, ‘You are crazy. The Vegas market is so bad.’ They wondered why I would do that,” said publisher Prosper Assouline, who opened his largest bookstore, at 2,200 square feet, in the Crystals last week. “It will be a great time for us because the project is so different and the store is unique. The other places with all the same stores and so many of the same brands over and over again — it’s so unbelievably boring.”
That certainly can’t be said of CityCenter.
A joint venture of MGM Mirage, the world’s second-largest gambling company by revenue, and financially troubled Dubai World, the state-owned holding company, the project is a paean to luxury during an era of diminished consumption. It is a collection of six shimmering, sleek, glass and steel towers.
The ultramodern project features an art collection valued at $40 million, including works by Henry Moore, Frank Stella, Claes Oldenburg and Maya Lin, a slew of celebrity chef-backed restaurants, five nightlife venues run by the Light Group, elaborate water displays from WET, high-roller suites and VIP gaming areas designed by Peter Marino and monorail access to other parts of the Strip.
Upon completion, it will have 6,291 hotel rooms, boosting the Strip’s capacity 8.5 percent.
“Does the world need one more Dior store or does Las Vegas need another Dior store? Maybe not, but that’s why we made this the place you must be in the market; it’s the hub for luxury west of the Hudson,” said Frank Visconti, MGM Mirage president of retail. “Vegas has never had anything like this. CityCenter as a whole is an experience. There is artwork, park areas and the world’s best retailers with a look people have not yet seen here.”
Not everyone thinks if you build it, they will come.
“The only thing that’s going to shore up the Strip is more visitors. Building the rooms and stores doesn’t make them come,” said Richard Kestenbaum, a partner in Triangle Capital LLC. “If this will really draw more visitors, that’s great, but I don’t believe it.”
Retailers with a stake in the project said they are willing to delay gratification, viewing CityCenter and the Crystals as a long-term investment.
“The question isn’t how many stores we have in Las Vegas,” said Philippe Schaus, Vuitton’s international executive vice president. “The question is how many projects are self sufficient. That is a big concern. If the surrounding deteriorates, then we will walk away. Yes, the spending power of the American citizen is very diminished, but we think Las Vegas and this new flagship can compensate for some of this, unlike markets like Oklahoma.”
Tourism declined 4.7 percent in the first nine months of the year after dropping 4.4 percent in 2008. Gaming revenue on the Strip has continued to fall after decreasing 10.6 percent to $6.12 billion last year. Gaming revenue fell 12.5 percent in the first nine months of this year.
Although convention attendance rose in September compared with the same period last year, the number of meetings and conventions in Las Vegas decreased 5.3 percent for the month versus 2008, when attendance dropped 5 percent from the previous year to about 5.9 million.
“Things are hard everywhere,” said Anthony Ledru, Cartier vice president of retail for North America. “But you can’t look at business in a snapshot of two years. We’ve been around for 160 years and we’ve been through a number of these cycles.”
Stacy Van Praagh, Fendi’s president for North America, pointed to the singular nature of the market. “We believe the Las Vegas market can support at least five Fendi stores,” she said. “The market there is a unique animal and calls for a different approach than other areas.”
Real estate analysts said the commercial market in Vegas will be troubled through 2010.
The retail vacancy rate has been rising steadily. It stood at 8.9 percent at the end of the third quarter, versus 5.4 percent for the same period last year and 7.4 percent in the fourth quarter of 2008. As recently as the fourth quarter of 2007, retail vacancies were 4 percent.
The Las Vegas unemployment rate was 12.1 percent in November, down from 13 percent in October and a record 13.9 percent in September. But that’s still far higher than the same period last year, when it was 7.9 percent. CityCenter officials, however, said the project has already created an estimated 12,000 jobs.
Las Vegas’ home foreclosure rate was 5.1 percent in the third quarter, or one in every 20 homes in default, which is seven times the national average, according to RealtyTrac Inc. data. High unemployment, as it has in the rest of the U.S., has left more borrowers unable to make their mortgage payments. A recent study of the market by researchers at First American CoreLogic found that 70 percent of homeowners in the city owed more on their mortgages than their homes were worth.
Despite these difficulties, Las Vegas remains an international attraction. September 2009, the most recent month for which figures are available, marked the first year-over-year increase in the monthly visitor count since May 2008. The Las Vegas Convention and Visitors Authority reported 3.1 million visitors compared with 2.9 million in the same month the previous year, a 4.3 percent boost.
A key question — and one that isn’t likely to be definitively answered soon — is whether the rise in visitors will continue and, if it does, whether tourists will support luxury stores or, lured by low-cost hotel rooms and all-you-can-eat buffets, hunt for bargains.
In the overall economic landscape, “I think the luxury bubble will continue to deflate and only those truly special brands with real brand equity will recover,” said Mark Cohen, a marketing professor at Columbia Business School and former chairman and chief executive officer of Sears Canada Inc. “Though it is likely that the economy is in recovery, and that unemployment will begin to abate in 2010, it is unlikely that retail sales will retrace their prerecessionary levels until 2011.”
Las Vegas casino hotel operators are feeling the pain. Wynn Resorts Holdings saw a $51 million third-quarter decline in net income from the second quarter. General Growth Properties Inc., which owns and manages more than 200 U.S. malls, including Las Vegas’ Fashion Show, The Grand Canal Shoppes at The Venetian and The Shoppes at The Palazzo, said last year it would sell three of its Vegas properties before it filed for bankruptcy this spring. Those properties remain unsold. General Growth said last week that it is examining options such as a public stock offering and entertaining all suitors.
Several developments have stalled. A Las Vegas Sands Corp. condo tower sits unfinished after the casino operator decided to concentrate on finishing other projects. The $5 billion Echelon resort on the Strip was shuttered after parent company Boyd Gaming Corp. and partner Morgans Hotel Group struggled with financing.
The Fontainebleau Las Vegas casino-resort, which filed for bankruptcy in the summer after failing to get lenders to provide about $800 million in construction funding to finish the $2.9 billion property, is 70 percent complete.
Sam Nazarian’s SBE Entertainment Group canceled plans to upgrade and build a new 1,000-room tower at its Sahara Hotel & Casino for lack of financing.
Some analysts believe CityCenter will cannibalize business from their other Las Vegas properties.
“You’re talking about a shrinking audience for Las Vegas overall, and another venue will pull from that smaller pool,” Sandler O’Neill’s Goldfarb said.
A few retailers plan to close Vegas locations as their CityCenter outposts launch. Hermès will shut its Bellagio store once its CityCenter location opens next year. Cartier also closed its store at Caesars Palace, but kept open units at The Forum Shops and the Wynn resort. Dior, with four stores in Las Vegas, will reevaluate its leases as they expire, said Pamela Baxter, president of the U.S. division of Christian Dior.
Several retailers backed out of the development before the opening, including Roberto Coin and Hyde Park Jewelers, citing the challenged economy and uncertainty surrounding the project.
Everything about CityCenter is on a grand scale, from enough fiber optic cable to circle the equator 4.1 times to 42 bars, restaurants and lounges, to its own fire station.
The project was about six years in the making and experienced delays and cutbacks. Condominiums prices initially ranged from about $600,000 for a studio to more than $9 million for a penthouse. The Harmon hotel, for example, which will open next year, was reduced to 28 floors from 49 and condominiums were eliminated.
Dubai World last month asked for a delay until at least May 30 in repaying an estimated $26 billion in debt. It already has received a $10 billion loan from neighboring Abu Dhabi to keep debt payments current.
Executives estimated CityCenter’s operating costs alone are some $3 million a day, making a break-even point on the project a distant prospect. “I think we’ll break even by 2070,” quipped CityCenter ceo Bobby Baldwin, opting not to speculate on an actual date of positive cash flow.
However, Baldwin added, the project “is going to outlast all of us and our kids and their kids.”
Developers hope CityCenter generates more than $200 million in earnings before interest next year, but the project is $1.8 billion in debt. There were initially said to be deals for an estimated $1.3 billion in condominiums, but many have not closed and in October, prices were cut by about one-third, reducing the potential income from the sales to about $800 million.
The same month, Kirk Kerkorian, MGM’s largest investor, said he would explore partnerships and other options for his 37 percent stake in the company, and MGM Mirage said it would take a $955 million hit to its third-quarter earnings to reflect the falling value of CityCenter.
Construction crews were still working last week to finish parts of the Vdara and Aria hotels, and interior retail build-out at the Crystals is under way. About 40 percent of the tenants are open, but officials said the center is 80 percent leased.
Some of the Crystals retailers, such as Vuitton, Tom Ford and Tiffany, opened Dec. 3, and still more doors will open next year, including Hermès, Versace, Ermenegildo Zegna, Miu Miu and Prada.
CityCenter is one of just a handful of construction projects in Las Vegas to move forward because of the fallout from the recession.
Despite all of the challenges, Baldwin, a champion poker player, thinks he ultimately has a winning hand.
“Just about everything that applies to a good poker game applies to business in general,” he said. “People think poker is about the cards — it’s not. It’s about the people. The cards don’t know who is sitting in the chair, it’s about the interaction with people.”