This summer brought promise that the next phase of megaresorts in Las Vegas were just over the horizon. Crown Resorts spent $280 million to buy the site of the former New Frontier casino, and Genting Group was supposed to start construction in May on the abandoned Echelon Palace site it acquired from Boyd Gaming in March 2013.
Since then, these resorts have run into a few roadblocks. Gaming revenue hasn't grown as developers hoped, and interest rates could be on the rise. Wall Street's appetite to supply financing for multibillion-dollar projects may also be diminished since CityCenter has struggled to make a profit, and Caesars Entertainment is careening toward bankruptcy.
What could be holding back the next building boom
For gaming companies to consider increasing supply, they have to be confident the Las Vegas Strip will see future growth, especially in relation to the opportunities they have in Asia with Japan, South Korea, and the Philippines looking into or actively expanding gaming. The Las Vegas market is far more developed, and in the past 12 months, growth that was once steady has come into question.
You can see below that 2013 was the fourth consecutive year for gaming growth in the Strip, but through November 2014, the trend has gone negative. The investment opportunity no longer looks as good as it did just a few months ago.
Considering the fact that Caesars Entertainment is likely heading toward bankruptcy, and the Strip's newest resorts CityCenter and Cosmopolitan aren't profitable, this may not be the best time to increase supply in the market.
But there are also reasons to break ground now.
The case for building now
Developers may not be excited about building in a lagging Las Vegas market, but there are two good reasons Crown and Genting should begin construction soon. First, the economy appears to be growing nicely, and unemployment has reached pre-recession levels. That should drive more visitors to Las Vegas and increase both gaming and non-gaming revenue.
If you look at the gaming figures closely, it's actually baccarat that has accounted for most of the gaming weakness in recent months, which could be driven by a corruption crackdown in China. Baccarat is a popular game for Chinese gamblers, and this is likely a spillover from the gaming decline we've seen in Macau in the last six months.
The other reason to begin building now is that the north end of the Las Vegas Strip houses some of the most profitable resorts in the region. Wynn Resorts Las Vegas property is by far the most profitable in Las Vegas, with $528.2 million in EBITDA, a proxy for cash flow, in the last 12 months. Las Vegas Sands' The Venetian is third with $324.2 million in EBITDA.
Resorts on the south side of the Strip like Luxor, Excalibur, and New York-New York are struggling by comparison. If Genting and Packer begin building now, they could complete resorts in the 2017-2018 timeframe and draw even more visitors to the north side of the Strip.
It would be a risky bet, but I'd rather be investing on the north side, which is filled with high-end hotels, than the south end, where hotel rooms are cheaper and the clientele doesn't spend as much per stay.
When will Las Vegas building begin again?
The resorts from Genting Group and Crown Resorts may be slower to start than expected, but I think they'll begin building before the end of 2015. While the two companies are establishing a presence in Asia, they have yet to crack the U.S. gambling hub -- they will want to take advantage of an improving economy and low interest rates to enter the Las Vegas market. That could drive even greater investment as they try to expand their footprints around the world.
What we know for sure is that the north end of the Las Vegas Strip is in for a facelift when the construction begins.
Travis Hoium owns shares of Wynn Resorts, Limited. The Motley Fool is short Caesars Entertainment. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.