Las Vegas is always transforming itself to attract new customers and keep the city fresh. We've gone from the Rat Pack days to themed resorts to ultra-luxury in the late '90s. But even in those days, the casinos were the big draw. Over time, top chefs, nightclubs, and eventually pool parties were what new customers looked for in Las Vegas, until the point that nearly half of revenue on the Strip is non-gaming. But every party comes to an end, and when I was in Las Vegas last week I got to wondering if the city will soon become a bigger destination for shopping than for gaming or partying in the next decade.
Every resort in Las Vegas has some shopping options. But with Caesars Entertainment's (NASDAQ:CZR) Caesars Palace's addition to the Forum Shops, Las Vegas Sands' (NYSE:LVS) Venetian and Palazzo shopping centers, and MGM Resorts' (NYSE:MGM) CityCenter adding even more mall space with Crystals, the Strip became one big shopping mall.
Most of this mall space targets the same high-end customers, but so far that hasn't been a problem. Shopping Centers Today says that The Forum Shops generated the most sales per square foot of any enclosed mall in 2012 and was in second place overall. With all of this mall success in a place known for gambling, there are a few factors to look for going forward.
Too much of a good thing?
If we've seen anything in Las Vegas it's overbuilding when times are good, which is why Fontainebleau and Las Vegas Plaza (among others) were abandoned mid-construction when the financial crisis hit. With gaming struggling to regain old highs in Las Vegas and shopping booming, we could see malls be overbuilt on the Strip. The good news is that building on the Strip came to a virtual standstill after the financial crisis, and there doesn't seem to be much interest in picking up the shovels anytime soon.
If the mall fad goes out of style, it won't be the major casino companies that are affected, which also takes upside away in some cases. MGM owns just half of CityCenter and Crystals mall, but Las Vegas Sands' malls are owned by General Growth Properties (NYSE:GGP) and The Forum Shops are owned by Simon Property Group (NYSE:SPG).
These mall owners are the two best ways to get exposure to the exploding shopping scene in Las Vegas, but with diverse holdings, they're not very leveraged to Las Vegas.
As I said above, MGM still has exposure to the malls with Crystals, and Wynn Resorts (NASDAQ:WYNN) also owns a fair amount of high-end mall space in Wynn and Encore Las Vegas. But the greater concern for gaming companies may come from the general trend of malls in Las Vegas.
The future of Las Vegas?
The problem is, the giant casinos of Las Vegas weren't built to house guests for pools or clubs or shopping malls -- they're there to house gamblers. MGM and Caesars may now generate half of their revenue off the casino floor, but with little exposure to the malls that are generating an increasing number of revenue from guests, I don't see how this doesn't detract some from the casinos.
With gaming revenue still well off the highs reached in 2007 and growth only in the low single digits, it's easy to see the challenge for casino companies going forward. Maybe more customers are coming to Las Vegas to shop and will stay away from the tables? Maybe it'll take another decade to reach gaming revenue of the mid-2000s and we'll have to hope that expensive food, drinks, and shopping will fill the gap? The challenge is that gaming companies don't have much exposure to much mall space, which may be the future of Las Vegas.
Travis Hoium manages an account that owns shares of Wynn Resorts, Limited. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.
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