Nevada’s gaming industry is the biggest employer in Nevada and the most important sector in the state’s economy. In fiscal year 2018, the hospitality industry accounted for nearly 38.9 percent of the state’s total tax revenues and supported 450,100 jobs. While economic development agencies continue their efforts to diversify the Nevada economy, gaming will continue to be its economic driver for the foreseeable future.
“Gaming remains absolutely crucial to Nevada,” according to Bo Bernhard, Ph.D., executive director of UNLV’s International Gaming Institute. “Although the Nevada economy has diversified, it has done so most successfully in areas that can easily link to the hospitality-tourism-gaming infrastructure (sports, for instance). This kind of economic diversification, one that strategically builds upon existing economic strengths, is often the most productive.”
In the decade since the Great Recession, Nevada’s gaming and tourism sector has been growing, but with some changes in the distribution between gaming and non-gaming revenues. According to the Nevada Resort Association, casino gaming has become an increasingly smaller share of total revenue at resort properties in comparison to non-gaming amenities such as room, food, beverage and entertainment. Gaming accounted for 42.8 percent of resort properties’ revenue in fiscal year 2018, down from 61.3 percent in 1990. Although gaming revenue has increased annually, non-gaming revenues have grown at a more rapid pace in recent years.
Statewide gaming revenue for the 12 months ending November 30, 2019 was $11.9 billion, with Clark County contributing $10.3 billion (86 percent), and most of that came from the Las Vegas Strip. It’s impossible to discuss gaming in Nevada without recognizing that the Strip generates most of the revenue, but downtown Las Vegas, the Reno/Sparks area and local casinos in all parts of the state seem to be healthy.
Changing the Gaming Model
The Great Recession hit Nevada’s gaming and tourism industry like an economic tsunami. People weren’t traveling as often, and they weren’t spending as much of their vacation budget on gaming.
“The economist in me says that, historically, recessions haven’t affected Nevada much, but the Great Recession had a substantial adverse impact on the resort industry. We’re still seeing its negative effects today,” said Dan Reaser, director of Government Relations and Regulatory Law at Fennemore Craig, a regional law firm serving many gaming and gaming tech clients. “It led to efforts to reduce costs, maximize efficiencies, and use technology to replace employees. Gaming companies had to become more nimble. Casino companies are still a little skittish about taking big risks.”
“Having lots of revenue can often hide mistakes,” said Mark Sterbens, senior VP/ general manager of the Nugget Casino Resort in Sparks, which was purchased by Monarch Gaming in 2016. “The recession made gaming operators take a hard look at what they could afford to spend on advertising, special events, etc. They are now a lot more disciplined in the way they run their businesses, controlling operating costs and making sure staffing is appropriate for the number of people coming in.”
Virginia Valentine, president of the Nevada Resort Association, agreed, noting, “Lessons learned from the recession will make gaming companies more prepared and resilient should we get another softening of the economy. We came out of the recession healthier and stronger.”
Adapting to the Times
One of the biggest changes in the gaming industry over the last two decades is what’s called the integrated resort model. “Originally, a gaming property would have just a casino, a hotel and a buffet,” said Valentine. “Today, revenues are not coming predominantly from gaming. They’re coming from entertainment, retail, dining and experiences. We’re moving toward diversification, and offering amenities, in addition to gaming that you can’t get anywhere else.”
A fairly recent change in the gaming business model is “opco/propco”, according to Jeff Victor, vice president of four related Las Vegas companies: the D Hotel Casino, the Golden Gate Hotel Casino, the Downtown Las Vegas Event Center, and the Circa Resort & Casino (currently under construction in downtown Las Vegas). In opco/propco, one company, possibly a real estate investment trust (REIT), buys a resort’s land and buildings and becomes the propco (property company). They then lease it to another firm, which manages the resort. That firm is the opco (operating company). This formula gives the operating company a large infusion of cash, allowing them to clear up debt and acquire the funds to make improvements and upgrades to the property.
For example, Dreamscape Companies purchased the Rio All-Suite Hotel & Casino from Caesars Entertainment in December 2019. Caesars will continue to operate the Rio for two years, paying Dreamscape annualized lease payments of $45 million. In November 2019, MGM Resorts International sold the Bellagio to Blackstone Real Estate Income Trust for $4.25 billion. MGM Resorts is leasing the property from Blackstone and continues to manage the Bellagio on a day-to-day basis. In January of this year, Blackstone agreed to form a joint venture with MGM’s real estate investment trust to acquire the MGM Grand and Mandalay Bay properties for $4.6 billion.
Sandra Morgan, chairwoman of the Nevada Gaming Control Board, said her agency is keeping close tabs on opco/ propco transactions.
“Regulators want to know whether the buyers are just investors, or do they want to influence day-to-day operations?” she said. “Large companies are concerned about the bottom line, as they should be, but how much decision-making power is given to the management at any individual property? Are all the decisions made at the corporate level?”
Large mergers have also impacted Nevada’s gaming landscape. The most recent is the application for Eldorado Resorts to buy Caesars Entertainment for $17.3 billion, potentially creating the largest gaming company in the U.S. The consolidated company would use the Caesars name, but Eldorado would provide the management team.
Morgan said, “We (the Gaming Control Board) want to make sure that when large mergers happen, no one company has a monopoly over a specific area. We’re tasked with ensuring not only the stability of the gaming industry, but also the welfare of our citizens and visitors.”
Reaser predicted that we’re unlikely to see more consolidations like Caesars/Eldorado. “Instead, the pendulum is swinging from consolidation to diversification of ownership,” he said. One example is Phil Ruffin’s December 2019 purchase of Circus Circus from MGM Resorts International, adding it to his ownership of TI, which he bought from MGM in 2009.
Competition: Pros and Cons
For decades, Nevada held a monopoly on legal casino gaming, which helped build its economy and its reputation as a world-class tourist destination. Then in 1977, New Jersey legalized gaming in Atlantic City and, in 1979, the first casino on tribal land opened. The success of these ventures encouraged gaming to spread to other locations, and now most states allow it in some form. Nevada’s monopoly is long gone.
“There’s always been a concern that other gaming opportunities would be the end of Nevada,” said Morgan. “First it was Atlantic City, then tribal casinos, then riverboats and the Gulf casinos. It’s never been our death knell because we have sophisticated gaming licensees with strong, sound business acumen.”
Bernhard agreed: “Each time the gaming-hospitality product has expanded into new markets, it has helped, not hurt, Nevada businesses. More customers have been exposed to this product, found they liked it, and then come to Nevada.”
Northern Nevada has been more affected by competition than Las Vegas. Reaser said tribal casinos’ impact on the Reno market was much larger than anticipated. “They expected a 5 to 6 percent decrease in gaming revenue, but the actual numbers were greater than 20 percent, and most of that revenue has never come back,” he noted.
The Reno market is continuing to see increased competition, according to Sterbens. Three new casinos on tribal lands in northern California have opened in the last year, and two of them are managed by large, experienced casino operators. “In order to keep up, casinos in our market have to keep reinventing themselves and investing in expensive capital improvements,” he said.
“Tribal gaming did cause some declines in the Reno market from 2005 to 2014, but there’s been great news recently,” said Morgan. Washoe County’s gaming win in 2018 was $858.8 million, a 4.4 percent increase over 2017, and gaming win has increased over the last four consecutive quarters. Morgan said several factors were involved, including an improved economy, more people moving into the area, and increased wages.
Professional Sports Boost Tourism
Professional sports are not new to Nevada, which has had minor league baseball, hockey and soccer teams for many years. However, when the Vegas Golden Knights exploded onto the hockey scene in 2017, it brought a whole new level of excitement to southern Nevada. Now, Nevadans and out-of-state fans alike are anticipating the Raiders move to Las Vegas. The $1.84 billion Allegiant Stadium will open this summer in time for the 2020 NFL season. According to Valentine, the Raiders are exploring establishing a practice facility in northern Nevada, and gaming operators are hoping some of the excitement about the Raiders will spread to their part of the state.
“Las Vegas has become, not just the Entertainment Capital of the World, but the Sports Entertainment Capital of the World,” said Valentine. “Sports is a force multiplier for everything else that goes on here. A sporting event is just one more reason to visit, to come more often or to stay one more day.”
People visiting for a sporting event will not only fill hotel rooms, but will also visit the sports book to bet on their team, enjoy dining and shopping and experience all the other amenities Las Vegas has to offer.
“[Professional sports] will broaden the array of rides at the amusement park that is Las Vegas — something that this city has always been good at,” said Bernhard. “Sports betting, obviously, is on a growth trajectory nationwide, but there is room for real growth in-state as well, as the product gets more sophisticated and bettors engage new types of wagering models.”
A 2018 Supreme Court decision allowed states to legalize sports betting, which is now allowed in 13 states. But, even though it’s possible to legally place a bet at home, gaming experts predict that people will still come to Nevada for the excitement of live action and all the other entertainment options available.
The 44-story, $1 billion Circa Resort & Casino in downtown Las Vegas hopes to take advantage of sports betting. The resort will include a three-story sportsbook with a screen 35 feet high and 100 feet wide when it opens in the fourth quarter. “We are big believers in sports betting,” Victor said. “In 2019 we opened our own sportsbook. We’re not only operating in our own properties, but also expanding into other states.”
The Future Looks Bright
The outlook for Nevada gaming is bright, despite competition from gaming in other locations and online. New projects are planned in both northern and southern Nevada. At the north end of the Strip, Resorts World, with 3,400 rooms, will open in 2021. Construction on the Drew Las Vegas project near the Las Vegas Convention Center (the former Fontainebleau) is expected to restart this year, with opening planned for 2022. With an improving economy, northern Nevada is also predicting healthy numbers in gaming and tourism. “We’re excited about the growth of northern Nevada,” said Sterbens.
Valentine noted that tourism industry numbers are growing faster than gaming figures, but that each depends on the other. “Gaming is what’s allowed us to make the capital investments that bring in tourists and keep people coming back,” she said. “Nobody else has what Nevada has, in either end of the state. Other places have gaming but, even in our rural locales, people don’t come just for gaming. They have their own attractions and events, whether it’s camel racing in Virginia City or Cowboy Poetry in Elko. Gaming and tourism is the largest industry in the state. It creates a lot of jobs and pays a lot of taxes. I hope that continues, and I think it will.”