In Business Q and A

Jeremy Aguero, principal analyst of Applied Analysis

June 03, 2005 - Southern Nevada's white-hot economy affects every Las Vegas resident, but few can explain how it works.

But that's the role of Jeremy Aguero, principal analyst of Applied Analysis, which was formed in 1997.

A former analyst with Coopers & Lybrand (now PriceWaterhouseCoopers), Aguero, a UNLV graduate, also served on the Governor's Task Force on Tax Policy. He also teamed with the late Shannon Bybee, a former casino boss and gaming regulator.

Aguero worked with Bybee, then executive director of the UNLV International Gaming Institute, to prepare an analysis of the hospitality industry's impact on the state of Nevada that was presented to the Federal Gaming Impact Study Commission.

Aguero recently discussed the state of Southern Nevada's economy with In Business Las Vegas.

Question: What is the business model for Applied Analysis?

Answer: Applied Analysis is an economic research firm. We're a consultant, which means that business people from both the private sector and the public sector come and ask us questions about how the economy might influence their business or their development or how some public policy change might impact the fiscal system of the state or the local government or regional service demand. Our business is probably 60 percent private sector, 40 percent public sector. Over time, it has become more broad-based. The questions are becoming more diverse. In some ways, we've become problem solvers or research analysts.

Are there plans to expand? What will the company look
like in five years?

Our company is about three times as big as it was two years ago and our plan is to continue to expand. As a matter of fact, we're moving into new office space in the Charleston and (Beltway) 215 area. That'll be in either September or October. We're going to have more office space and we'll be adding employees. It's been difficult though. I'll be honest with you, it's difficult to find people that do what we do. I guess that's always a challenge for any business.

How many employees do you have now?

Nine.

And you'll be expanding to ...?

If we could find the right kind of people, we'd probably double that. But that will take some time. We want to make sure the people we get are the right fit. My business partner came through Arthur Andersen and I worked for Coopers & Lybrand for awhile. We're really trying to foster a personable atmosphere here.

What are Las Vegas' greatest economic assets?

It's greatest economic asset, bar none, has got to be the gaming industry. When you look at how many people it employs, the fact that it brings in 38 (million), approaching 39 million visitors a year. When you look at that kind of tax contribution, that type of pure investment in terms of an economic unit or asset. The gaming industry has been at the forefront.

Is there a big danger in relying too much on gaming?

You bet there is. History has shown it, academic research has shown it, that narrow economies tend to be more cyclical, that narrow economies tend to be vulnerable. The reality has been that we've been the exception to that rule. How long will we continue to be the exception to the rule? Hopefully, another 50 to 100 years, we'd love to see that go on. We seem to be doing it right. We're diversifying at a relatively modest clip. Unfortunately, recently, we've been diversifying in the construction industry which poses its own type of danger. Do those dangers exist? You bet they do. In reality, modern economies today really view diversity as multiple specializations. We will not abandon the specialization of the gaming industry. The question is what are we going to specialize in next?

What are Las Vegas's greatest economic vulnerabilities?

I think it's got to be the ability to grow or attempting to grow. If population growth were to wane for one reason or another, we'd be even more vulnerable to terrorism and to economic downturns. The reality is that we export gaming by importing people. The gaming industry, the tourism industry, the convention industry have been resilient. We have every expectation that we'll continue that in the future. But you're going to talk about avoiding vulnerability, we have to get new population with spending potential and visitor population with spending potential.

How sustainable is our historic growth?

The reality is that the growth that we've seen over the last 12 to 24 months simply cannot be sustained. Over the last 12 months, since 2004, population grew just over 5 percent, visitor volume just over 5 percent, taxable retail sales grew by double digits, approaching 16 to 17 percent for several months. Not only that, but we've had double digit over double-digit growth. The reality is household income just isn't increasing at the same clip as what we're spending.

What is your outlook on the Southern Nevada economy?

I think for the balance of 2005, we're looking for continued strength. As a matter of fact, the number of projects in the construction pipeline, the amount of development activity we're seeing, the stronger increased income, population growth, while somewhat slower, remains strong and positive. The gaming industry is showing excellent numbers. We're looking for a very strong 2005. In 2006, we're looking for a little bit of a slowing. Not slowing to negative growth by any stretch of the imagination, but slowing from coming off the highs that we saw during 2004 before the peaking period in 2005 and more of a normalization period.

And how does that compare with national prospects?

We're the big winners in the national economic lottery, right? From a population growth standpoint, we're the net gainers in population growth and spending growth. Retirees are finding a nice place to live. Visitors are coming in here and buying up huge amounts of real estate, even putting pressure on prices. In terms of the national economy, we're not suffering from this really negative exponent associated with the decline in industrial manufacturing, what the folks in the Midwest are dealing with. We're not suffering from a sort of a real change in the economy or a build-out problem like some of the problems the Northeast have seen. We have our own sets of problems, but it has been pro-development here, the economy is running on all cylinders.

What is the impact on Las Vegas of the rising cost of housing?
Is that part of the slowing-down process?

Sure it is. It's sort of a double-edged sword though. What's the short-term implication of these rises is the incredible wealth. If you just look from 2004 to 2005, year over year, Southern Nevada's single-family residential homeowners have seen about a $17 billion increase in wealth in terms of their homes going up in value. A tremendous amount of wealth! Probably more than they've seen in the last 10 years in one year. Now granted, not all of it's accessible, a lot of it is on paper. And the reality is that you're not going to leave the market, it's sort of hard to be able to extract and put it in your pocket or save it. That having been said, people are extracting a lot of that and using it. Over the long run, you've got two problems. One is that with the reality of housing prices going up, where are people going to live? Where are young families going to live? Where are college graduates going to live? Where are people coming from out of state going to find an affordable housing alternative?

One of the major reasons people move to Southern Nevada over the last two decades is because of the affordability. We sort of lost that during the last 18 months. The second problem that we have to be a little bit concerned about is the fact that now that people have found this new wealth, how will they manage it? It's certainly a problem we want to have. We'd probably rather have people have wealth and mismanage it than people to not have wealth at all. But there certainly are a fair share of folks in Southern Nevada that have perhaps gotten into houses that are a bit more than they can afford that have taken out lines of credit. With income only going up 4.4 percent, we're spending more than we're bringing in. That has the potential of increasing the number of bankruptcies and increase the number of portfolios in trouble and create some financial problems.

What's your take on the proliferation of condos?
Is it good or bad for the gaming industry? Why?

I don't think it's either good or bad for the gaming industry. It serves a number of purposes. Right now were tracking between 100 and 110 high-rise and midrise towers with about 40,000 units in those towers. That's about $20 billion worth of investment which is OK by our standards. It certainly means a lot more coming into our economy. These high-rise towers are not towers being consumed by residents. Very few of them are. As a matter of fact, in the towers that are used today, somewhere between 50 and 65 percent of them are occupied by nonresident consumers. For the properties that are taking reservations today, that number is approaching 70 percent. We're building a lot of resort residential. Folks come in, buy a property, pay very substantial amounts of property tax, but demand is relatively limited in terms of services. Not only that, it brings a new dynamic into the market. Maybe somebody who was only going to come three times a year and stay at a property, now they're going to come four or five times a year. The hallmark of Southern Nevada's economy has been our ability to reinvent ourselves at every pass. That's what you're seeing again. Do we believe by any stretch of the imagination that all of the 55 projects that we're tracking today are going to be in play? Absolutely not. But the reality of it is that we're going to see a number of those projects come on line and I think it's going to change the economic landscape and the competitive landscape for Southern Nevada. Does that mean that industry isn't up to the challenge? I doubt it. At every turn, they've turned adversity into advantage and I see no reason for that to change now.

What's the impact on the city of the airline industry woes?

The airline industry has had a rough go, but in some cases, that bodes well for Southern Nevada, right? Some of the troubles that the airline industry has faced, it's like a lull in pricing, more competitive activity between the airlines and even some market-share shifting into markets like Southern Nevada which have been relatively profitable for a number of the airline carriers. Certainly capacity (at McCarran International Airport) is going to be an issue. We know that at least sometime in the future, depending on who you talk to, we going to reach that capacity sometime around 2015. We have to be somewhat concerned about that. The health of the airline industry couldn't be more important. Some of those airlines go though bankruptcies and destabilize. Let me put it this way: A healthy airline industry will bode extremely well for a healthy Southern Nevada economy. We need them to go well, to be profitable. And probably more than anything else, we need for them to remain competitive. Continued >>

Jeremy Aguero. Photo by M. Minard.

What is the impact on the city of the
top-end resort competition?

Generally speaking the anticipation for that type of expansion is always good for business. We've always been able to build to the higher end and sort of expand the market. There's just been success upon success. The reality is that you can't look at anything that Steve Wynn has done and say the guy doesn't have some kind of Midas touch. The question is at least some of the commentary with regard to Wynn (Las Vegas) has been mixed thus far. That's certainly something we're concerned about.

Is the consumer base different? Are we talking about attracting and providing services to a different market? Perhaps there's a customary benefit that maybe doesn't reach the average consumer and so people are kind of skittish about the project? Is it the fact that people like to take pot shots at a guy who has just been so successful that he's an easy target? I don't know. We certainly looked at the stock price and how rapidly it declined over the last month, which isn't that unusual for an opening property. We're watching Wynn extremely closely.

What's behind the recent drop in gaming
company stocks?

Some profit-taking. The reality is that the gaming industry has been remarkably successful, outpacing the S&P 500, outpacing the Dow and outpacing just about every other industry that's out there. So there was a long anticipation that profit-taking was going to occur within the gaming industry. In addition to that, I think there is some skepticism out there. I think there is some concern about overvaluation in some cases.

There are some companies that have remarkable market capitalization compared to what their revenues are and revenue potential is. And the big question's got to be the potential for expansion. When the economy is somewhat sluggish, the ability for the gaming industry to expand tends to be greater. In reverse, when the economy speeds up and is stronger, gaming industry expansion seems to be more moderate. At least that's been the trend over the past 10 to 15 years. The expansions now are mostly abroad. How well is Macau going to perform? At the outset, every night was New Year's Eve in Macau. The extent that that can remain and it can stay remarkably profitable is going to be interesting. In addition to that, it's not the first quarter that we want to be concerned about with Wynn. A lot of credit goes out and all the promotional type things. We're going to be watching the second quarter really close.

Conventional wisdom suggests most of
Las Vegas's Strip development will occur
on the north end of the Strip. Do you concur?

Gosh, I sort of do concur with that, even though I expect to see a lot of south-end development, although much more in the area of high-end condominium development. Now certainly there are some areas that are strong for development, depending on how you look at what that proximity is -- where does north begin and south end? The CityCenter project, development potential for Station's new project at Tropicana and the freeway (Interstate 15), certainly there is more developable land around Mandalay Bay. All have huge potential for very successful projects. That having been said, the reality is that the north Strip is prime for a number or reasons, not the least of which is that there is an underutility for a lot of the property down there.

Some say tribal casinos are hurting rural Nevada. Others say it isn't a major factor. Who's right?

I think tribal casinos impact rural Nevada and Northern Nevada. I don't consider Reno to be, by any stretch, rural. But I think you've seen a real impact. To say otherwise sort of puts a blind eye toward reality. Talking to some of the folks up there, much of Reno's traffic has become really a locals market. It's kind of a changing dynamic. Nonetheless, I think there is some impact from tribal gaming.

Is Macau likely to be the big capital generator proponents say it is, or will this be a passing fancy?

I don't know how you look at a market the size of Macau and suggest that it could ever be a passing fancy. The reality is that it may be first generation. It may be a decade behind Southern Nevada, it may be a decade behind Mississippi. But nonetheless, the reality is the depth of the consumer market and the depth of the primary trade market are so robust, it's almost hard to imagine how a savvy operator could fail to capitalize in that market.

Who has the inside track on developing a casino resort in Singapore?

I don't think I know who has the inside track, but I can tell you just from our standpoint that there's a lot of folks that are very excited about getting in there.

What is the impact on the city of convention competition?

Just look over time at the expansion of convention facilities. Look at the new ones coming on line. Look when the Sands came on line. Look at when the LVCVA expanded its facility. Look at the Mandalay Bay. The addition of convention facilities and the inflow of additional convention travel is a remarkable success again, on top of remarkable success. Utilities for different facilities not only compete with one another, but they're diversified from one another, not only cannibalizing the existing market, but expanding a new one. Southern Nevada has become the premier convention destination in the world. Granted we offer a lot of amenities that are directed toward conventions, but this is a market that 20 years ago people sort of discharged.

The common joke was that the only dime a conventioneer was going to put into a slot machine was one that they found on the floor. But the reality is we found a way to differentiate the myth altogether. Wynn is probably the best example. Certainly we're watching how successful its been. Many of the facilities on the Las Vegas Strip were built on the model that 60 percent of your revenue is going to come from gaming. That's just not the case anymore. Substantially less is going to come from gaming and you look at Wynn -- a smaller casino relative to the size of the facility with substantially more retail development and a substantial amount of convention space, built to the new financial model. Now, the question is can they make it work.

Is Nevada's education system an economic advantage or disadvantage? Why?

I don't know that I'm the right guy to answer that. I'm such a believer in education. I think that our teachers should be paid 200 times more than they are and education is the solution to every problem that we have: crime, poverty, health and human services, the economy. The reality is that we have some changing demographics. Should we spend a little bit less in other areas? We have a lot of capital construction requirements. The reality is it is what you make of it. I think there are a lot of folks out that are taking advantage of our education system and are doing some incredibly wonderful things. On the other polar extreme, I think there is a growing population that thinks education is less important. It's a very scary thing. I'm not worried about your kid. I'm not worried about my kid. I know where your dedication lies and I know where my dedication l ies with educational achievement. What I am concerned about is the fact there are some folks that are letting it slide on the long term. The No. 1 indicator for the educational attainment of a child is educational attainment of a parent. If we start down that very slippery slope of believing that education is not important in the long-term vitality of our economy, that may be something that would lead to larger problems.

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Article ©: R. Velotta, In Business Las Vegas