Commercial Real Estate Finance

What happens in Vegas, stays in Vegas.

Or so they say. The “What Happens in Vegas” motto, a creation of the Las Vegas Convention and Visitors Authority, has proven one of the more culturally significant commercial slogans of recent years (it’s up there, in terms of popularity, with “Got Milk?” and “I Just Saved a Bunch of Money on My Car Insurance…”). Vegas’s slogan has spawned a movie and countless parodies, not to mention successfully rebranding the casino town from its family-friendly 90s incarnation to an image that better suits it–the sort of Sin City that inspired The Hangover.

Unfortunately, a big part of what happens in Vegas–construction jobs, economic growth, gambling and tourism revenue–has not been staying in Vegas.

For decades, Americans have been complaining that its manufacturing, call center, and many high-tech jobs have been “moving to China” (China, in American rhetoric, seems to be the catch-all nation when complaining about American jobs going overseas, as if all our jobs are now in China. This isn’t true: some U.S. jobs have gone to India and Vietnam and Malaysia…)

Anyway, people fretting over American outsourcing can add one more industry to their list of things “outsourced-to-China”: Casino resorts.

See that image above? Sure, you say. That’s the Venetian, the opulent mega-casino and resort in Las Vegas.

Actually, that’s a picture of the Venetian in Macau.

A quick geography lesson: Macau is a Chinese territory on the South China Sea, with a special political status similar to that of its neighbor, Hong Kong. Macau is the only place in China where it’s legal to gamble, which makes it a hugely desirable target for international and local investors.

As the BBC reports:

Macau eclipsed Vegas in terms of gambling revenues back in 2006. Now the island rakes in an incredible five times the city’s total pot, over $30bn (£23bn) a year, compared to the $6bn (£4.5bn) earned in Vegas.

Ouch! Unlike other aspects of the economic shift from the U.S. to emerging markets, the simultaneous growth of Macau and relative stagnancy of Las Vegas are not directly correlated. Las Vegas isn’t suffering from lowered real estate costs, a depressed construction market, and underwhelming performance simply because its eastern counterpart is thriving.

In recent years, and despite its continuing popularity among tourists and gamblers, Las Vegas’s economy has been battered on all fronts: the recession pummeled consumer confidence and luxury-related spending; home prices sank, new residential construction all but vanished, commercial vacancies grew, and to top it all off,  other states are trying to cash in on Vegas’s lifeblood with legalized gambling, creating new competition all over the map.

So. Will all those public companies and private equity groups that have invested in hospitality, gaming, and related real estate on the Strip now outsource their capital to Macau? Well, here’s thing:

 Caesars, the largest owner of U.S. casinos, was shut out a decade ago when the Chinese government opened the Macau market to foreign companies. Six operators, including U.S.-based Las Vegas Sands Corp., MGM Resorts International (MGM ) and Wynn Resorts (WYNN ) now hold concessions. Caesars’ attempts to break in have failed as the market swelled to $33 billion last year. ’… I’ve talked to everyone,” [Caesars CEO] Loveman said. “I don’t think you’re going to see another American casino operator have a very bright future in Macau.’ (Bloomberg)

It looks like the government restrictions that once made gambling so profitable for casino and real estate investors in Las Vegas are now benefiting those in Macau–but U.S. big shots like Caesars are being left out in the cold. Which just means they’ll  be looking more closely at projects in U.S. markets.

In America, gambling is here to stay, but I’m less confident about the relationship between casinos and hospitality real estate. Not to say these sectors will disband entirely, but I don’t see too many more Venetians being developed any time soon.

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