Have You Tried 22? I said 22

IF YOU KNOW, YOU KNOW.

If you don’t, prepare for spoilers, and spoilers are permitted in explaining a scene from an 79-year-old movie. It is from Casablanca, perhaps the greatest movie ever made. The scene features two young refugees that have escaped Nazi Europe and are gambling their savings on roulette to attempt to win funds to afford an exit visa to come to America. They are losing.

Humphrey Bogart’s Rick whispers an instruction to bet on 22, and the refugee places the last of his resources on the number. To nobody’s surprise, 22 hits. “Leave it there” murmurs Bogart in his distinctive drawl. Again, still to nobody’s surprise, 22 hits once more. The couple now have funds to escape Casablanca and begin their life in the new world.

For those of us that have studied finance, at some point we will all have modeled risk. Within the discipline, the random event scenario is known as a Monte Carlo Simulation, so named after the famous roulette wheels that are associated with the principality, and the random nature of the outcome.

It appears that in 2020/2021, Covid has given us a random event to skewer all our assumptions and rethink our decisions. Yes, Covid is unique with effects more pronounced. However, unlike roulette, the following action is not a random outcome, and in Las Vegas there is a pattern to what happens after crises that has emerged over decades.

ESTABLISHING THE PATTERN

Since the 1950s there have been many periods of economic turmoil, with many leading to technical recessions. Early in the evolution of the city there were three recessionary periods. The first came between 1953 and 1960, the time which coincided with the early growth of Las Vegas. In 1955, Life Magazine asked readers to consider if Las Vegas’ boom had overextended. The question was fair as in the past half-decade, openings had included The Desert Inn, Sands, Sahara, Dunes, Riviera, Moulin Rouge and Royal Nevada, while the Hacienda, Fremont, Mint and Tropicana were all under construction. The Royal Nevada didn’t make it.

The 1960s saw a long period of economic growth which further consolidated the viability of Las Vegas’ casinos, with Caesars Palace, Circus Circus and Kirk Kerkorian’s debut, The International, all opening. Towards the end of the decade, the US entered an 11-month recession triggered by rising inflation – GDP fell 0.6%. Worse was to follow in 1973, when the Middle Eastern conflict led to the Oil Crisis, which caused a deeper economic shock; this time a 16-month recession saw GDP fall 3% and unemployment hit 9%.

The twin crises over this period led to ownership changes in several properties, also enabled by the loosening of licensing restrictions. But despite the economic chaos, visitation grew by 72%, from 6.7 million visitors in 1970 to 11.6 million in 1979. I have written previously in this magazine about the triple-peril that faced Las Vegas in the early 1980s (fire, economy and competition in Atlantic City) and how the city recovered quickly to break new records (and a 52% increase in visitation over the decade).

Even the eight-month recession following the Gulf War in 1991, with a GDP decline of 1.5% and 7% unemployment rate, couldn’t stop Las Vegas; the 1990s saw visitation grow from 21 million to nearly 34 million over the decade, with almost 50,000 new hotel rooms in the city, including the opening of many of the megaresorts that define today’s Strip.

The new millennium opened with a double whammy; the dot-com crash and the 9/11 attacks on New York. 2001 saw the first drop in annual visitation for nearly 20 years, (from 35.8 million to 35 million) as the nation’s airlines were grounded. Despite the national shock, Las Vegas’ recovery was swift and visitors returned to the city in record numbers. By 2007, the mythical 40 million target was in sight, (with 39.2 million visitors). Yet, as we know, the Great Recession was to have devastating consequences for Las Vegas.

Financial stress was seen across the market, with construction halted and room rates plummeting. The nadir was 2009, as visitation fell by 10% to 36.3 million in 2009. Again, we were asked if Vegas was finished; but with a little hindsight, the reporting of Las Vegas’ demise was a little premature.

Between 2007 and 2011, over 18,000 new rooms were added to the market (from 132,000 to 150,000). Occupancy fell from 90.4% to 83.8% in that timeframe, explained by the 1.4 million fewer convention delegates (as corporate travel was curtailed) and the increase in inventory. As America recovered, though, so did Las Vegas – and then some. In 2014 the barrier was broken, 41.1 million people visited, rising to 42.3 million the following year. In 2016, the 6.2 million record for convention delegates that was set in 2006 was finally bettered. Room inventory was at 88.9% in 2019, with many resorts reporting occupancy at over 95%, seven days a week. Strip gaming inventory incrementally increased annually to a 37% increase between 2000-2019 ($4.8bn to $6.5bn). All was good, and then Covid came to town.

CLOSING TIME/OPENING TIME

In late 2019, I was asked for my thoughts on what lay ahead for the upcoming year. I wrote, “With so much of the global economy precariously balanced, any one of a hundred unrelated events could have a direct negative effect on Las Vegas. The tipping point for many disasters is not far away.”

Not even in the wildest of Monte Carlo simulations did we foresee an enforced closure of all of Las Vegas’ casinos, bars and restaurants. Early 2020 was rough for Las Vegas. We all know the story of empty streets, shuttered restaurants and furloughed workers; but we also know that despite early hiccups, as operators adapted to the new conditions, Las Vegas’ performance proved predictable.

Occupancy rates are rising, rates are creeping up, conventions are cautiously returning, artists are performing to packed venues and in the casino, according to the LVCVA mid-year report, average gaming budgets increased from 2019 levels by $62 to $653. In fact, the news is better than that, with Nevada monthly gaming revenue currently pacing with the best recorded, McCarran was the busiest non-hub airport in the land – and that was with very limited international travel.

TAKING BOGART’S ADVICE

If the history of Las Vegas tells us one thing, a random crisis hits when we least expect it. If history tells us another, sentiment towards Las Vegas is overly pessimistic, as after every crisis, it bounces back – better. This year has seen the beginning of that rebound. Next year will be bigger. Expect more development, investment and new owners coming to market. Palms will reopen, Rio will have a new operating team, and entertainment behemoth Resorts World will be fully operational.

Sports will be massive, perhaps with some new teams relocating to the city further driving visitation, international tourists will be free to travel and meet that pent-up desire to escape their restrictions. And fed up of meeting on flat screens, conventions will return in force.

We may have hit the bottom, but the inside money is on the post-Covid Las Vegas recovery to hit record levels in ’22. I said ’22.

Oliver Lovat FRICS leads the Denstone Group, which offers strategic consultancy on customer-facing, asset-backed investments. He is visiting faculty at Bayes Business School at City, University of London.

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