Improving the odds: CityCenter rides out dicey beginning

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CityCenter timeline

November 2004: CityCenter project announced

April 2006: CityCenter breaks ground

2008: Build-out of the Harmon boutique hotel/residential building is halted because of construction defects (Clark County approved the building's demolition last year)

December 2009: CityCenter opens with the debut of the 4,004-room Aria Resort & Casino, the 1,495-room Vdara Hotel & Spa, the 392-room Mandarin Oriental Las Vegas and the 500,000-square-foot Shops at Crystals

2009: Las Vegas attracts 36.4 million visitors, down 3% from a year earlier

July 2010: 669-unit Veer Towers luxury residential complex at CityCenter is completed

December 2012: 427 of the 669 residences at Veer Towers are sold in bulk to a joint venture between New York-based Ladder Capital and Florida-based Pordes Residential for $119 million

2012: Las Vegas attracts an annual record 39.7 million visitors

In a city known for big bets, the one MGM Resorts and Dubai World made on Las Vegas in 2009 was clearly the biggest. And almost five years after CityCenter, the joint venture's $9 billion, mixed-use district, opened as the largest privately funded development in U.S. history, that bet appears to be paying off.

Buoyed by a Las Vegas tourism contingent that could be on its way to breaking the 40-million-visitor threshold for the first time in the city's history, CityCenter, with its inventory of almost 5,900 hotel rooms and its half-million square feet of retail space, appears to be more than holding its own on the Las Vegas Strip and watching its early challenges disappear in its rearview mirror.

In fact, there is some evidence that CityCenter's three hotels -- the 4,004-room Aria Resort & Casino, the 1,495-room Vdara Hotel & Spa and the 392-room Mandarin Oriental Las Vegas -- are pulling market share from the rest of the Strip. (Click here or on the hotel images to view more photos from CityCenter's hotel properties.) 

Last year, Las Vegas' visitor count was down about 58,000 from its 2012 record high of 39.7 million visitors, while revenue per available room (RevPAR) on the Strip was up 2.2%. Meanwhile, the Aria and Vdara outpaced those totals, boosting their RevPAR last year by 4% and 5.3%, respectively. (MGM Resorts doesn't report Mandarin Oriental metrics.)

This year, the Aria's first-quarter occupancy rate hit 92%, while the Vdara's was about 90%, about even with year-to-date occupancy rates along the Strip, according to the Las Vegas Convention & Visitors Authority (LVCVA). In fact, CityCenter appears to be gaining currency among both travelers and travel professionals for both its variety of higher-end accommodations and its less chaotic vibe relative to the nearby Strip.

"When CityCenter first came around, it had a lot of room to grow, so saying it's the most improved may be a backhanded compliment," said Brian Harris, owner of Aspen, Colo.-based Destination Site Selection. "But I like that there's three different products. It allows you to spread people around."

CityCenter mapGina Gabbard, vice president of leisure sales at Tzell Travel Group, called CityCenter "a gorgeous oasis in the heart of Vegas." She added, "And our clients can easily retreat from the Strip into their hotels. Mandarin Oriental, for instance, particularly appeals to a nongaming client." (Click here or on the image for a larger view of a graphic spotlighting all CityCenter hotels.)  

Financially, the project continues to be somewhat weighed down by its debt load and high cost base (and associated amortization and depreciation expenses). But CityCenter narrowed its first-quarter net loss by 70% from a year earlier, to $20.2 million, while increasing its pre-interest cash flow by almost 10%, to $95 million.

That represents significant improvement for an enterprise with development costs so huge that they almost doomed the project at the outset. Announced in late 2004 for a 67-acre site north of MGM Resorts' Monte Carlo and just south of what would become the Cosmopolitan, CityCenter broke ground in spring 2006 with plans for the Shops at Crystals retail center, the Aria, the Mandarin Oriental and the two-building Veer Towers luxury-residential complex.

Additionally, the Vdara was envisioned as a luxury residential project, while an additional boutique hotel-condo tower called the Harmon was planned for the project's northeast corner.

Aria Resort & CasinoMGM Resorts envisioned the project as a departure from the rest of the Strip because it was designed as a self-contained, mixed-use project that wasn't thematic and had less of a gaming emphasis than most of its competitors.

"Las Vegas hotels had always been planned from the middle of the casino out," said Alan Feldman, executive vice president of government relations and industry affairs at MGM Resorts. "And prior to that, almost everything else had been based on a theme or somewhat theatrical perspective. This was a different approach."

By 2008, the recession had set in, causing both tourism and residential property values to plummet, while work stopped on the Harmon because of construction defects. Nevada's Clark County last year approved the building's demolition. Feldman declined to say what, if anything, would be built at the site once the Harmon is torn down. He declined to comment further, citing a lawsuit between MGM Resorts and the construction company that built the tower.

By the time CityCenter opened with the retail space, the Vdara, the two-tower Aria and the Mandarin Oriental in late 2009 (Veer Towers were completed the following year), Las Vegas' hotel inventory, already the country's largest, had increased by almost 20,000 rooms in the previous five years, to about 150,000 rooms -- about 25% more than the No. 2 U.S. hotel market, Orlando.

Meanwhile, Las Vegas' tourism count fell 3% that year, to 36.4 million visitors.

"Everything was going great," recalled Tony Dennis, vice president of residential sales at CityCenter. "Then, the world changed around us."

Vdara Hotel & SpaFeldman remembered that"for a few moments, we had to stare down some of our advisers who were saying, 'You ought to put a fence around the place. Don't finish and save the money.' That clearly wasn't the right answer."

What appears to have been the right answer was bringing down room rates to fill inventory while getting much of CityCenter's residential property off the market. CityCenter used the Vdara for both of those purposes, offering its rooms as a less expensive hotel alternative to Aria and Mandarin Oriental.

"Vdara was intended to be an old condo-hotel model," Feldman said. "That clearly has seen its final days."

The Vdara's 2010 RevPAR of $101 was 28% less than Aria's, but it has since risen more than 40%.

In late 2012, CityCenter sold 427 of the 669 residences at Veer Towers to a joint venture between New York-based Ladder Capital and Florida-based Pordes Residential for $119 million.

Dennis said that today, there are still about two dozen residential units for sale among the 225 units at the Mandarin Oriental, with prices ranging from $1.1 million for a 1,500-square-foot, one-bedroom unit to $3.5 million for a 4,000-square-foot penthouse. He added that CityCenter targets empty-nesters from California looking for either a second home or a new residence with lower taxes.

Additionally, CityCenter's gaming de-emphasis may also be taking hold. For example, Harris noted that convention groups from industries such as medical and pharmaceutical tend to avoid casino hotels because of perception issues, making the Vdara an attractive alternative near the Strip.

"A 200-person meeting fits perfectly at Vdara," Harris said. "It doesn't say 'resort and casino.'"

Mandarin Oriental Las VegasThe rising tide of Las Vegas tourism has also helped. The LVCVA reported that last year, the city's 39.7 million visitors drove a hotel-occupancy rate of 87.1%, up from 37.3 million visitors and 83.5% occupancy in 2010, CityCenter's first full year of operations.

More instructively, average room rates during that period rose 17%, to $110.72 from $94.91, while the area added only about 1,700 rooms.

Meanwhile, the tourism increase has also helped sales at CityCenter's retail center, which Harris characterized as "quiet" at times. Featuring outlets such as a 31,000-square-foot Louis Vuitton store and a 21,000-square-foot Prada store, the Shops at Crystals generated $61.2 million in revenue for CityCenter last year, up 15% from a year earlier.

That rising demand has helped push up CityCenter's bottom line. Granted, the development took a $443 million net loss in 2012 and has taken almost $1 billion in net losses during the past two years combined. Still, more than $717 million of that loss was from noncash depreciation and amortization charges, while CityCenter racked up more than $500 million in interest expenses.

Factoring that out, CityCenter's cash flow rose almost 50% last year, to $307.6 million. For the first quarter, cash flow not including interest charges was up 58%, to $95 million, while Aria's and Vdara's RevPAR figures were up 13% and 20%, respectively.

Mai Meyaart, vice president of Travel Leaders Group's worldwide hotel program, estimated that room nights booked through Travel Leaders at the three hotels will be up about 60% this year.

Feldman, too, cited big increases. "CityCenter in general has had a string of record quarters," he said. "We always knew there was going to be a pickup."

Vegas being Vegas, though, there's always the threat of another hotel-building boom that could dilute the tourism gains among existing properties. On Aug. 23, SBE Entertainment will open its 1,613-room SLS Las Vegas, a $415 million update to the old Sahara site on the northern end of the Strip.

Shops at CrystalsMeanwhile, Malaysia-based resort operator Genting earlier this year took over the Echelon Resorts site that Boyd Gaming had abandoned in 2008 and announced plans for Resorts World Las Vegas, which is slated to have 3,500 hotel rooms, 175,000 square feet of gaming space and several restaurants and shops. That project's first phase is slated to come online in 2017.

That said, CityCenter's higher-end emphasis might buffer its hotels from market-share erosion, especially as a larger contingent of wealthier, status-conscious Chinese travelers visit U.S. cities such as Las Vegas during the next few years.

"International travelers stay longer and spend more money locally than domestic passengers, and will continue to increase in importance," HVS said in a report published last month.

Additionally, Las Vegas operators, including MGM Resorts, are girding themselves for the anticipated new inventory by investing in more attractions along the Strip.

Caesars Entertainment opened the first phase of its $550 million Linq Promenade retail-entertainment district on New Year's Eve. Caesars also said earlier this month that it would invest $223 million upgrading the Quad Resort & Casino adjacent to the new project and reopen it as the Linq Hotel & Casino in October.

Meanwhile, MGM is making its own bet on further visitor trips to the Strip, opening an outdoor retail-entertainment plaza connecting Monte Carlo and New York-New York earlier this year and collaborating with Anschutz Entertainment Group on a 20,000-seat arena slated to open behind New York-New York in 2016.

Such activity is also boosting investment interest in existing properties. Hilton Worldwide majority owner Blackstone Group in May agreed to pay Deutsche Bank $1.73 billion for the 2,995-room Cosmopolitan across the street from CityCenter.

Such new and improved attractions are likely to push visitor numbers well past Las Vegas' record 2012 totals because they're different enough from existing hotels to draw a new contingent, said both MGM Resorts' Feldman and the LVCVA's senior director of leisure sales, Art Jimenez.

Jimenez noted that visitor counts jumped by more than 1 million in 2010, and he attributed some of that gain to the wealthier travelers lured by CityCenter's hotel and retail offerings.

"They couldn't have opened at a better time," Jimenez said. "We hadn't seen a [visitor] increase like that before or since."

Feldman added: "As long as the new inventory that comes in is additive and brings in a different perspective from what's already here, it should do well. SBE is an exciting developer, and we hope they're successful. Genting's plan, at least on paper, also looks very dynamic."

Either way, Jeremy Aguero, principal analyst at Las Vegas-based economic research firm Applied Analysis, said that such increased activity from both tourists and investors should give CityCenter's owners confidence for future success, however hard-won.

"They opened during the worst economic downturn Las Vegas has seen in its history," Aguero said. "The fact that it's open and with the same owners is a testament to its staying power. Is it a perfect business model? No. But they've changed a number of things to make it more productive."

Follow Danny King on Twitter @dktravelweekly. 

This article has been updated to reflect that the SLS Las Vegas Hotel & Casino has 1,613 room and will open Aug. 23; an earlier version of this article contained an incorrect room count and opening date.

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