For businesses, economy brings sobering realities

Meltdown has forced many to learn smarter practices

Sam Morris

Vacant retail space is evident across the Las Vegas Valley. An expert says lessons retailers can take from the recession are don’t overexpand and do manage supply carefully.

By Brian Wargo (contact)

Monday, Jan. 4, 2010 | 2 a.m.

More stories about business and the economy

Having endured the brutal recession of 2009, Las Vegas businesses have learned a thing or two.

"I would assume the biggest lesson businesses learned overall is how to manage their debt loads to revenue," said John Restrepo, principal of Restrepo Consulting Group. "We need to overcome this idea that you can take on debt because revenue will keep growing at a set percentage. You can't take on too much debt because you never know when the downturn will come that depletes your cash that you need to carry you through the lean times."

Companies have learned how to manage hiring practices and determine how many people they need to do certain jobs, Restrepo said. When the economy recovers, many businesses will operate with leaner staffs because of the lessons they learned.

"It is not good for the employment rate, but it makes sense from a business standpoint," Restrepo said.

Here, then, some lessons learned from the recession:

Gaming

Headlines from the Vegas gaming industry

Any major development must be fully financed beforehand, said Grant Govertsen, an analyst with Union Gaming Group. Look no further than MGM Mirage, which struggled to finish CityCenter because it didn't initially have the money to complete the project.

"I think if they could do it over again, they would lock in the financing prior to the development," Govertsen said of MGM Mirage executives. "We had such a unique economic circumstance.

"Will it happen again? Maybe, but going forward developers are going to be much more careful."

The lesson has come home that Las Vegas is not as recession-resistant as some people thought it was, Govertsen said. In a recessionary environment when wallets are tighter, cash flow will fall. This round it dropped 40 percent to 50 percent from the peak in 2007, he said.

Regional gambling markets such as the riverboats have performed better than the Strip, Govertsen said, because during a recession, day trips made more sense than longer ones that required spending for hotels, food and air travel.

"There, gambling trumps destination in this environment," Govertsen said. "The demand is there, but the choice of venue might change."

Real estate

Real Estate in Crisis

The real estate industry has relearned the lesson of supply and demand because of all the overbuilding in the valley, Restrepo said.

"There is going to be more attention paid before they start a project. Whether it is residential or commercial, you (need to) do your due diligence of what the future market conditions may be," Restrepo said.

"They viewed what was happening as a permanent up cycle and didn't think they needed a market analysis."

Kyle Nagy, principal of CommCap Advisors, a commercial mortgage-banking firm, said his industry has learned the importance of lending to longtime developers rather than people who entered the business during the boom with no development background.

Loans were based land appraisals, and developers no longer had to put in additional money for construction, Nagy said. The skill of the developer should have been the basis for the loan because, as lenders later learned, many people shouldn't have been developing in the first place, he said.

Lending to those without a development background led to poorly designed projects and people without the financial strength to weather a downturn, Nagy said. It's been a hard lesson to learn about not lending to up-and-comers, some of whom even planned commercial projects without having the residential base around it.

"They are not always the best borrowers," Nagy said. "They don't know how to adjust to a changing market. It is easy to be a developer when everything is going smoothly."

Retail

Pamela Joy Ring, president of the Ring Retail Advisory, said retailers have learned the importance of not putting themselves in debt and not overexpanding for the sake of market share.

"You cannibalize your brand for the sake of trying to increase your revenue," Ring said.

The recession has taught retailers the importance of managing their supplies. Retailers have a long lead time and for the 2008 holiday shopping season, they planned inventories with easy credit and excessive amounts of inventory.

Retailers were challenged to move that merchandise, and this year they didn't buy as much and let consumers know they were only ordering limited quantities.

As for mom-and-pop retailers, Ring said it's true that the strong survive. Those who were smart managing their balance sheets and understanding their customers have kept going. They learned great service is vital and how important it is to collaborate with other retailers in their shopping centers.

"There is no silver bullet," Ring said. "It just goes back to watching your balance sheets and marketing to your customers."

Construction

Steve Holloway, Associated General Contractors executive director, said the companies that have survived have learned that it's important to keep a lot of cash in the bank.

That cash is needed to underwrite any bonds on performance, but there is a tendency to spend it on operations and for keeping people employed for longer periods than they otherwise might, Holloway said. Companies have lost projects because they couldn't afford the bonds.

Contractors have learned it doesn't pay to overextend themselves and expand more than they should, Holloway said. Some general contractors, for example, decided to create a subsidiary where they did their own framing - but they have had to shut down that operation.

With the slowdown in construction in Las Vegas, companies are turning to other markets, including Salt Lake City.

"You just learn to tighten up and reduce your cost and learn to chase the work," he said.

Discussion: 32 comments so far…

By perry161492

1/4/10 at 3:43 a.m.

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basically use up las vegas spit it out and moved on to next city
By stratboy

1/4/10 at 4:01 a.m.

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Isn't that what the construction industry is all about?
By BorisR

1/4/10 at 4:24 a.m.

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our country can only dream of so much retail space and wide open parking lots with FREE PARKING. If you drive somewhere and want to go shopping the problems start with finding a parking spot which of course is not free. In Las Vegas, there are millions of free parking spaces, and empty stores for rent. It's unbelievable if you think about....

From Switzerland
By davidcurtis

1/4/10 at 4:28 a.m.

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maybe we can invent some business models that don't suck?
By BorisR

1/4/10 at 4:41 a.m.

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Las Vegas has one or two master-sized advantages and should take advantage of that:
a) sun keeps shining almost all year through. Why not building gigantic solar power plants and selling the energy to California and other cities that need that power? This would be the energy solution and definetely a source to generate funds, create jobs, and do something for a better future. Lake Mead water level is going down, so the dam cannot generate unlimited power with limited water coming down the pipes...

b) It still looks like the center capital of gaming. And there's so much space available. Get your traffic system under way, improve public transportation, invest in infrastructure, not only in roads but also in parks, facilities such as schools etc.

And it will work. Vegas will survive.

From Switzerland
By Calthompian

1/4/10 at 4:41 a.m.

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It brings attention to local government. There has never been any constraints put on builders and developers in this county. If you have a piece of ground, a set of plans, and financing, you are approved to build. No body thinks twice about having 72 fast food restaurants in 2 square miles, or 15 shoe stores in the same area. How about 4 gas stations at every intersection?
By Calthompian

1/4/10 at 4:52 a.m.

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Our present system stinks. Overstuffed payrolls indicate little or no thought to fiscal responsibility.
Selling energy to California is a good idea Boris. What our politicians will do is form a committee to study the feasibility of appointing a committee to study the possibility of appointing an engineering company to study the overall ramifications of the sale and marketing of electric power.
Then in 2030 they will order the panels to convert sunshine into power.
By BorisR

1/4/10 at 5:06 a.m.

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So much sun can generate enough electric power needed to feed the cities!! With the new generation of solar panels, efficency rates have gone up multifold and with additional technical know-how and enhancement it's even possible to send that power into other regions of the country, with only little loss.
Yes, it's a huge investment, but it's money being invested in a new future. And it would create jobs your president keeps talking about all the time.
Instead of simply making wars in other nations and bumping up the warfare industry, this for a change would be something good. From the past we learned that all these stupid wars never lead to peace but created other wars. The Jemen war plan will only cost money the tax payers have to finance. Stupid idea, meaningless, but some people will collect big time money !!!
By environprotector

1/4/10 at 5:10 a.m.

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These are out of town carpetbaggers investment development companies that don't give a damn about the fiscal health of ANYONE who lives here.
By BorisR

1/4/10 at 5:16 a.m.

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nothing costs nothing. the cost of the future is investment in the future. if you don't do maintenance on your car, within 2 to 3 years it wouldn't run anymore. if you don't invest in the future of Las Vegas, then there will be no more Las Vegas some day.
By stevem

1/4/10 at 6:26 a.m.

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clark county will never, ever become a solar power area.

why?

while solar is great...it takes MASSIVE amounts of land to get enough power generated to get economies of scale that would keep enough people employed for it to be even a drop in the bucket towards diversifying the economy.

virtually all of last remaining large parcels of land in clark county are...you guessed it...zoned retail or casino. and who pays the bills of all our commissioners and judges?

that's right, casino and real estate developers.

there will never be enough land available for someone to put it enough solar panels to make it worth their while.

vegas, at least on the local level, is done. it's all been built, and everyone's going to the gulf coast to do it all over again.
By GrandmaCrabby

1/4/10 at 6:41 a.m.

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The 15th largest county in the United States doesn't have enough land?
By gmag39

1/4/10 at 7:06 a.m.

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2010:
Flat out greed, gluttonous excess, clueless business practices, marginal management, OUT.
Having and sticking to a fiscally sound business plan, erring on the side of caution, planning as though there IS a tomorrow and you will need money for operating expenses; IN.
By RHG

1/4/10 at 7:54 a.m.

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Our present system stinks. Overstuffed payrolls indicate little or no thought to fiscal responsibility.
Selling energy to California is a good idea Boris. What our politicians will do is form a committee to study the feasibility of appointing a committee to study the possibility of appointing an engineering company to study the overall ramifications of the sale and marketing of electric power.
Then in 2030 they will order the panels to convert sunshine into power.
_____________

You forgot, the "environmentalists" will then show up and sue to stop construction in order to "save" a lizard or plant.
By stevem

1/4/10 at 7:56 a.m.

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not about how MUCH land there is.

that's not what i said.

it's about who owns that land, who gets to decide what gets built on that land.

it's hard to slip some carbon offsets into a judge's pocket...a few casino chips is much easier.
By Noindex

1/4/10 at 8:08 a.m.

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Solar power is not yet cost effective without huge government subsidies.

The technology just isn't there yet to make it a viable power option.
By doubledown_deadender

1/4/10 at 8:27 a.m.

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These big box retail stores sold junk to the sheeple for 2 decades - BB & Beyond, Mervyns, Pier-1, Ross, WMart, Target, Kmart, JC Penny - all selling substandard junk made in sweat factories in China and Central America. This is no different than buying oil from the Middle East - the transfer of wealth one paper--thin T shirt at a time....one tank of gas at a time. Take away Boeing, Caterpillar (a few others) and America makes nothing worthy of export demand.

The corporations have the perfect customer....credit card dependent sheep living beyond their means. They also had the perfect Senate and past Presidents (starting with Jimmy Carter) who paved the way for the complete off shoring and dismantling of our manufacturing industry.
By Sinatra711

1/4/10 at 8:38 a.m.

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I think the answer is to attract Venture Capitalist funded projects by offering a subsidy if they start up their business in Vegas. There is plenty of VC money in California and new businesses are being started every day. We have plenty of commercial space for them here. Online, Technology, Medical Devices, Pharma, and Biotech are a few industries that come to mind.

Who knows, 1 out of 1,000 could be the next Zappos. At least we'll have diversification of businesses here. Also, if we can attract them away from California, it is only a few hundred miles away and we don't have State Income Tax. Lots of incentives to start up here vs. Cali.

S711
By mikegino

1/4/10 at 8:42 a.m.

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Grandmother: Nevada can't compete with Arizona and SoCal (Imperial County).

But don't worry, I've heard that "Shovel Ready Harry Reid" has a plan!
By TheKash

1/4/10 at 9:08 a.m.

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Put a toll booth on water flowing past Hoover Dam (and charge for all water which flows out of Lake Mead into the Colorado River). Cash on delivery - no credit. Since this is downstream of the Las Vegas water supply intakes, this will create no local problem, and will generate enough revenue to solve all of Nevada's problems.

If no one wants to pay, then simply close the water gates and watch the level of Lake Mead rise to where it should be.
By DMCVegas

1/4/10 at 9:13 a.m.

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Solar Power isn't going to happen any time soon. Not because the technology isn't viable. You have to remember that "Solar Power" doesn't simply mean photo cells focused solely upon converting light photons directly into electricity. It can also mean collecting the heat radiation from sunlight and using it to power Steam Turbines though any one number of various means that have been developed.

Solar Power isn't going to work in Nevada because no one will allow it to be built. Everyone has this "Not in My Backyard!" mentality, and doesn't want to risk having to catch a glimpse of a power plant. Never mind that it's cleaner, could lower our power bills in the long term, and we could sell surplus power to other states. People won't allow it because it's not "aesthetically pleasing" to them.

Radon from coal plants causing cancer? Fossil fuel refineries tearing up the environment and helping generate petro-dollars to fund terrorism? People don't mind any of this because the power plants and refineries that cause these problems are tucked away where they never have to see them.
By Patrick_R_Gibbons

1/4/10 at 9:14 a.m.

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"Meltdown has forced many to learn smarter practices"

True in the private sector, not in government.
By GrandmaCrabby

1/4/10 at 9:41 a.m.

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Clark County covers an area the size of New Jersey. Most of the county is wide open space. To say that there's no land for solar power is absurd. Who exactly is gearing up to blanket the vast rural areas of the county with casinos and real estate developments?
By stevem

1/4/10 at 9:59 a.m.

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grandma...you're obviously a moron.

i just said that it's not how MUCH land there is, it's that it will be nearly impossible to ever get enough of it purchased and zoned for solar to ever be a real economic opportunity that would benefit clark county.

and guess what will happen the millisecond someone announced plans for a 1,000 acre solar farm in mesquite...that's right, the desert tortoise people will be trying to block it.

my example is there is one of the last LARGE plots of land in the vegas valley right there at i-15 / st. rose parkway and guess what...it's zoned for a casino. do you really...REALLY think that's ever NOT going to be a casino or strip mall there?

the cost for a company to buy that land, then to get it re-zoned, then to build and install the solar panels is far more than they'd ever, ever, ever make in profit.

if we were going to have solar in vegas...we'd HAVE solar in vegas.
By BorisR

1/4/10 at 10:48 a.m.

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if it's true what this lady from the Water Authority said, then there will be a serious water shortage in less than 10 years from now in Las Vegas. As a result, Hoover Dam will no longer produce enough electric power and this rises a lot of questions in me: Where will the water come from for so many citizen? How will they produce electric power needed for all the glimmer and the lights? And c) Will Vegas continue to exist without alternatives?

I don't think that doing nothing and hoping for a miracle is the solution. It will be interesting to watch the new ideas by the smart people come up ....and how long it will take till the population is convinced about it.
By doubledown_deadender

1/4/10 at 11:08 a.m.

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TheKash - "Since this is downstream of the Las Vegas water supply intakes, this will create no local problem, and will generate enough revenue to solve all of Nevada's problems."

Ok"City of Las Vegas can charge a water tariff - then send 98% of it $$ - to Colorado and Wyoming - the source/owner (98%) of all that precious water.
By In2wishin

1/4/10 at 11:47 a.m.

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I'm glad to see the solar energy development issue finally taking off. I posted support for Nevada solar a month or so agom and completely agree with our "Swiss Consultant" on the absolute wisdom of looking at this from a positive, constructive viewpoint. (Nay sayers are good critics, need to be listened to, but we go forwawrd and answer all the "cannots" with "cans"--Washington didn't let leaky boats and the icy Potomac (or was it the Delaware?) stop him from conquering the British mercenaries.
The entire Southwest is facing a drought pattern for an unknown number of years, according to climate experts. Like Boris says,
the sun keeps shining on Nevada.
When it comes down to do we evacuate Las Vegas or change things to build clean solar energy electric generating plants (with tortoise "pass throughs", if you will), then which way do go. the highway or the survival way?
By davidwayneosedach

1/4/10 at 12:14 p.m.

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And for us botton feeder consumers and rent payers: have at least 6 months salary in the bank! The more - the better!
By environprotector

1/4/10 at 12:27 p.m.

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Solar, wind, and summer monsoon rainwater all need to be harnessed !
By GrandmaCrabby

1/4/10 at 1:20 p.m.

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stevem, once again you missed the point completely. There is so MUCH land in Clark County, with the vast majority of it in wide open rural areas, that purchasing it and getting it zoned for solar is not an issue.

You actually visualize an area the size of New Jersey completely covered with casinos and housing developments? People are beating down the doors of financial institutions looking for financing for this vast expansion? Bankers are foaming with joy at the thought of financing this vast expansion? What drugs are you taking?

Of all the arguments against solar, yours is the most meaningless. Then again, your next intelligent post will be your first.
By Sinatra711

1/4/10 at 2:35 p.m.

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Screw Solar, build Nuclear. Cheaper, smaller footprint, more power, lower cost to end users (that's us).

As far as the water.....don't worry, plenty of water upstream. We'll tap it as Las Vegas is way more important than those cities & towns upstream.

S711
By Noindex

1/4/10 at 3:30 p.m.

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Ironically, another draw back to solar power is it requires a lot of water for the steam to be generated.