The Biggest Bet in Vegas

MGM Mirage's 67-acre CityCenter is the ultimate test of Sin City's bigger-is-better business model

MGM Mirage Chairman and CEO Murren is set to add 4,800 new hotel rooms Stephen Voss

By Christopher Palmeri

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Every Friday morning, James J. Murren heads to the Las Vegas Strip in his chauffeur-driven SUV to check on the status of his dream project. "Look at that," says the chairman and CEO of MGM Mirage (MGM), pausing inside the Aria Resort & Casino. "The marble, the vaulted ceiling—it looks like the Vatican."

Not everyone shares Murren's enthusiasm. Aria is one of four hotels in MGM's CityCenter resort, which will start opening its doors to the public in December. The $8.5 billion development is the debut that every casino manager in Vegas dreads. It will add 4,800 new hotel rooms to one of the country's most saturated markets, not to mention 2,400 condo units and a Cirque du Soleil tribute to Elvis Presley. With luxury rooms in Vegas already approaching roadside motel prices, many worry that the tsunami of fresh supply will drown the city's nascent recovery. And the biggest victim of CityCenter's launch may prove to be MGM itself, which dominates the Vegas landscape with nine other casinos and is staggering under $12 billion in debt.

CityCenter isn't just another real estate development in danger of flopping. It's the largest privately funded construction project in the U.S. and could prove to be a barometer of the health of the overall economy. It's also the ultimate test of a business model that has guided Sin City for decades: that building bigger and flashier resorts will bring ever more visitors and keep Vegas competitive with rival destinations. Even Murren, 47, predicts that "there won't be another property built like this for a long time."

Although advertised as a high-end destination, CityCenter has rooms starting at $129 a night, about $40 less than the lowest rates at competing properties such as the Wynn and the Venetian (LVS). "They'll end up cannibalizing themselves," predicts David Baron, a casino analyst at Baron Funds, a major shareholder of rival Wynn Resorts. (WYNN) Vegas tourism is down 6% this year while the convention business has dropped by almost a third. Meanwhile, average room rates are down 25% and casino revenues continue to drop. Matthew Jacob, a gaming analyst with Majestic Research, predicts CityCenter will "prolong the recovery" for practically every operator.

Murren argues that CityCenter's unique attractions could draw a new breed of visitors. Some of the world's top architects are involved in the project, including Daniel Libeskind, César Pelli, and David Rockwell. Sculptures by Henry Moore and Maya Lin line its air-conditioned walkways. As an environmentally friendly touch, MGM will whisk high rollers around in natural-gas-powered limos.

A SCRAMBLE FOR FUNDS

For Murren, who once dreamed of becoming an architect, the project is the culmination of a life goal. After working for 14 years mostly as a casino analyst at what is now Deutsche Bank Securities, Murren joined MGM in 1998. In 2004, as president, he came upon the chance to develop 67 acres on the Strip that contained a parking lot, vacant land, and the low-rent Boardwalk Hotel. Murren wanted to create a development that connected parks, residential towers, and shopping so that guests could feel like they were going someplace new even if they weren't leaving the property. "There are 2 million people in Las Vegas," he says, "and there's been no urban planning."

Kirk Kerkorian, MGM's largest shareholder, was enthusiastic when Murren presented his plans. But then the financial crisis hit. After the banks cut off lending, MGM's 50/50 partner in CityCenter, the Dubai World investment firm, sued to limit its contributions. MGM'S stock fell from more than $16 to less than $2 in the first three months of 2009 as occupancy rates crashed and investors grew pessimistic about the company's fortunes.

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