Northeast Showdown

The Northeast Megalopolis cuts a swath across the United States from Boston to Washington, D.C., and its 49 million residents represent 16 percent of the nation’s population; they’re also packed into less than 2 percent of the nation’s land area. The region, comprised of 18 metropolitan areas, generates about 25 percent of the country’s GDP and 26 percent of total personal income. In other words, it’s fertile territory for casino development.

The Northeast’s first casino opened in Atlantic City on May 26, 1978, and the region has since blossomed to include 24 venues spread across seven states. Until recently, the opening of new casino or racino jurisdictions in the Northeast has been met with a corresponding increase in demand. It was true to the saying, “If you build it, they will come.” But now the trend line for the region’s gaming revenue is beginning to skew downward from its peak of $10.1 billion in 2007; it fell about 7 percent to $9.4 billion in 2009 (see Chart 1).

Market Dynamics
The gaming revenue ramp-up shown in Chart 1 is a reflection of what occurred across the nation in the ’80s and ’90s, as the casino industry grew well beyond Nevada, fueled by an untapped market demand that was stimulated by readily accessible gaming locations, growing affluence among the general population, and a wider social acceptance of casinos. Nowhere was this effect more evident than in Connecticut, where the Mohegan Sun opened in 1996 with no impact on gaming revenues at the nearby Foxwoods. In fact, both casinos thrived, eventually tripling their combined market penetration.

But that was then and this is now, and new or expanding jurisdictions are beginning to displace more gaming revenue than they create. This is a clear sign that the gaming supply in some areas is nearing a saturation point; it is also a sign of the challenges presented by the current economic conditions. An analysis of national gaming revenue data suggests that incremental growth in recent year-over-year gaming revenues in many maturing jurisdictions has been the result of general increases in demographically driven factors—personal income, population, average age composition, etc. It’s also significant to note that the economic bubble that rose from robust consumer spending was largely financed by additional household debt and negative personal savings, the consequences of which are now being felt.

Imminent New Entrants
Pennsylvania is slated to add two additional gaming venues in Philadelphia, and the commonwealth also recently approved table games. Maryland, meanwhile, is moving ahead on five slot-only operations. Charles Town Races & Slots in West Virginia, which essentially serves the Washington, D.C./Baltimore market, and the three Delaware racinos are planning to begin offering table games by mid-2010. And New York is poised to open a slot operation at the Aqueduct Racetrack on Long Island.

As if this wasn’t enough to create a perfect competitive storm, there is also an increasing likelihood that New York may finally see the development of Class III Indian gaming operations in the Catskills and in or around Long Island—if it can get some federal cooperation. Meanwhile, Massachusetts, which is a major supplier of casino demand for Connecticut and Rhode Island properties, is on the brink of allowing some sort of combination of tribal, racino and/or commercial casino projects.

Delaware had hoped that the introduction of sports wagering at its three racinos would further grow gaming revenues, but due to a court ruling that limited sports bets to only parlay wagers on NFL games, this move has not resulted in any significant income. Total handle through December 2009 was about $9 million, with $6 million returned to bettors and the racinos earning about $1 million in fees. The state intends to further challenge the ruling.

Moreover, a state committee recently recommended that no additional gaming venues be developed in the state due to their potential impact on the existing supply, even though an independent study indicated that two additional venues would increase state revenues. Yet developers are still posturing projects in Wilmington and downstate.

Pennsylvania is also seeking to add resort-style casinos to the mix, and projects have been proposed for the areas surrounding Reading and Gettysburg, as well as the western region of the state.

Add it all up and the current regional gaming supply of about 100,000 playing positions could grow by as much as 50 percent over the next few years—and possibly double if Class III casinos are developed in Massachusetts and New York.

Is the market still arable enough to support this level of additional supply, especially in an economic climate that suggests far more conservative leisure spending rates?

There are myriad factors that will affect the general health of the gaming industry in the Northeast in 2010 and beyond, not the least of which is the ailing economy and how hopes for recovery may impact future consumer spending patterns. And while many industry forecasters predict an eventual return to the halcyon days, they also agree that the near future will show relatively stagnant growth stemming from more conservative consumer spending rates—and therefore continuing battles for market share, both intra- and interstate.

A major asset of the Northeast—the one that fueled its historic growth rates—was its largely underserved market of 49 million residents. The current casino spend rate in the region is about $193 per resident, which closely parallels the national average for spending at all casino, racino and Indian gaming installations in 2009. In some gaming jurisdictions that have relatively higher population densities nearby, per resident spending averages are two to three times greater. It would therefore appear that the Northeast Megalopolis has considerably more gaming revenue potential to realize before reaching any sort of saturation point, even within a tepid economy. But a higher rate of spending per capita is contingent on there being readily accessible venues that are proportionately dispersed throughout each of the metro areas—and, ah, there’s the rub.

New York to Boston
Fully 60 percent of the region’s population lives in the northern section of the Northeast Megalopolis, between the New York metro area and Boston. About 31 percent of the currently available gaming positions are also located there. The primary reason that these operations, which include casinos and racinos in Connecticut, New York and Rhode Island, are not generating more than their current gaming revenue market share of about 30 percent is their lack of more convenient proximity to the dense population centers.

The Aqueduct project is the only officially planned new development in this quadrant of the region, and it can be expected to create high levels of new market penetration while having only a somewhat deleterious impact on Yonkers and Connecticut. Moreover, this area appears to have the capacity to absorb even more gaming supply should new Class III Indian casinos ever be realized in the Catskills or on Long Island.

A significant game changer, especially for the venues in Connecticut and Rhode Island, is Massachusetts. Although the issue has been bandied about for years, the latest indication is that the legislature may be favorable to allowing the state’s four racetracks to operate casino games, including one full-scale resort that may or may not include at least one major Class III facility.

The general fertileness of this sector does raise the question of why New Jersey has not been able to muster the political will to allow the installation of slot machines at the Meadowlands Racetrack. The location has better proximity to the area’s 19 million residents than any of the other existing and planned new projects. The added state revenues will more than compensate the loses that are likely to occur in Atlantic City while also limiting out-of-state spending by New Jersey residents.

All told, this sector is likely to stabilize its gaming revenues in 2010, growing as supply is added, which will concomitantly have a negative impact on Monticello, Connecticut and Rhode Island.

The Southern Area
By contrast, the southern area of the Megalopolis, extending from central New Jersey to Baltimore and Washington, D.C., and including Delaware, is awash in both gaming inventory and planned new expansions.
The SugarHouse Casino project in Philadelphia is presently under construction and scheduled to open an interim facility late in 2010. The Foxwoods Philadelphia project has experienced some delays, not the least of which is securing requisite funding, which will be a challenging task given the extent of the competitive environment and the tight financial markets. Foxwoods was recently granted an extension of its opening date to May 2011. Maryland’s five slot-only operations are off to a slow start, mired in political minutia, but are likely to start coming online by late 2010 and into 2011. Meanwhile, they are already jockeying to add table games.

The addition of table games in Delaware, Pennsylvania and Charles Town, W.Va., is more imminent and is bound to have a strong impact on Atlantic City. Through 2009, table games represented about $1.2 billion, or 31 percent, of total win in New Jersey. This ratio varies among other jurisdictions around the country, with a high range average of 47 percent at Las Vegas Strip properties and about 37 percent in Connecticut, with most other states achieving a mid-range average between 15 and 20 percent.

In most cases, the addition of table games tends to deepen market penetration rather than displace slot activity, and therefore these new installations can be expected to attract additional revenues, with a sizable portion coming from Atlantic City. A key factor in exceeding the mid-range average is the ability of a casino to attract “high roller”-type players who typically seek upscale amenities, including luxury hotels, entertainment and fine dining—all of which some of the existing and planned new Philadelphia-area venues seem better positioned to provide, once they get around to adding hotel elements.

The growing competitive landscape in this sector does not bode well for Atlantic City and its casinos, some of which are already struggling with financial viability. Even lower valuations stemming from bankruptcy and reorganization may not be sufficient to support the city’s sizable gaming position inventory. Although it does have the advantage of being the least-taxed jurisdiction in the region, it is nonetheless susceptible on the proximity-to-market front, especially considering the extensive number of day-trippers that have long been the city’s mainstay player base. Any attempt to focus on destination-driven visitors places Atlantic City in more direct competition with other resort areas, as well as requiring additional amenities and activities that, in turn, require extensive investments. In the end, Atlantic City’s “future shock” may be shaped as much by the state of the financial markets as it is by tepid consumer spending and the competitive showdown. Investors, lenders and developers alike must adjust to a casino industry that has to operate under the prevailing paradigms—and erase any “visions of sugar-plums” dancing in their heads.

These conditions are already impacting projects such as Atlantic City’s Revel Casino, as well as Foxwoods Philadelphia and the Maryland slot operations, which are also further hampered by relatively high cost-of-entry fees and gaming tax rates.

Through 2010, some operations in Pennsylvania will still be nascent enough to cause further revenue growth, aided by the newly expanded Philadelphia Park facility and the first full year of operation for Sands Bethlehem. These venues and the eventual opening of SugarHouse, Maryland’s slot operations, and table games in Pennsylvania and Delaware and at Charles Town will further grow overall revenues, but they can also expect a far more contentious redistribution of market share.

It’s a jungle out there!

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