East Coast States Are Going All-In On Casinos. Some Smell A Bad Beat Coming.
The most densely populated area of the United States runs along Interstate 95 from Boston through New York to Washington, D.C. While those at the controls of the world's economic and financial engines have been clustered in the Northeast Corridor, places for them to gamble away their copious earnings have been few and far between.
But in the last few years, casinos have spent billions of dollars in the quest to capture the East Coast gaming dollar, building huge casino resorts in Boston, Philadelphia and Washington, D.C. More are almost certainly on the way as governments have brushed aside the long-held stigma of the moral ills of gambling.
In the mad dash to build, there haven't been many voices asking "how much is too much?" But experts, and even some casino developers, believe if the region isn't there yet, it will be soon.
Since 2006, investors have poured more than $10B into opening and expanding at least 25 casinos along the East Coast, ranging from $30M slot barns to billion-dollar resorts with hotels, dining and entertainment. Just three East Coast states allowed casinos at the turn of the century, but seven more have legalized casinos since 2004.
“I refer to it as the casino arms race. People can’t seem to build them fast enough,” University of Texas Rio Grande Valley casino expert Clyde Barrow said. “It’s an arms race that is leading to the bigger urban casino.”
Gambling has previously been frowned upon and sequestered to places like Las Vegas and Atlantic City, but attitudes have flipped completely in the last two decades.
Everyone interviewed for this story, from gaming analysts to casino chief executives, said legalized gaming has become a solution for states looking for easy job creators and to add funds to their coffers at a time when raising income taxes is a political third rail.
Expansion has largely occurred in the Northeast and Mid-Atlantic regions, but it isn’t limited to northern states; even Georgia is considering a measure that could bring three multibillion-dollar casino resorts to the Peach State.
After decades of prohibiting casinos, state lawmakers saw their residents traveling to spend millions of dollars gambling in other states, and decided they wanted to get in on the action.
“States were crushed for revenues and tax-constrained because nobody wants to pay taxes,” Barrow said. “Casinos were seen as a voluntary tax.”
Casinos in Pennsylvania and Maryland, where gaming laws were changed over a decade ago, continue to report strong revenues. But as more states change their laws and large casinos continue to open, experts think the East Coast could be at risk of casino cannibalization.
With so many states now legalizing or considering legalization of casinos, there is pressure to make multibillion-dollar resorts the new normal, as the market matures and developers have to do something to remain competitive in a market some argue is at risk of saturation.
“Is saturation a long-term threat? Yes,” said The Cordish Cos. Chairman and CEO David Cordish, who has developed casinos in multiple states. “But you have to really drill down to see where.”
The Casino Tipping Point
With so many states in the Northeast rushing to legalize casinos in some form, gaming experts caution there is only so much market share, and overbuilding is leading to casino cannibalization.
“We’re entering a mature phase as you do with any industry,” Barrow said. “You have to build bigger and better just to remain competitive. That means profits go down, the property attracts less investment and the market exhausts itself.”
Upscale casinos with billion-dollar construction costs are becoming the new normal on the East Coast. The promise of jobs and tax revenue is even changing the mindset of the Bible Belt.
Georgia Republican state Rep. Ron Stephens has plans to introduce a bill in the state’s next legislative session that would call for legalizing three casinos across the state, likely near Savannah, along the state’s border with Florida and in Metro Atlanta. Each company looking to win a license would have to commit to creating 10,000 jobs and spending at least $1.2B to build each resort.
The era of mega-resorts is indicative of the novelty of a simple casino floor wearing off and companies needing more than slot machines to woo potential customers, Barrow said. Large casino resorts have higher operating costs, tend to be heavily leveraged with debt and have a much higher labor cost.
While extra elements like retail, spas and five-star restaurants are job creators, they are often where a casino loses money, making the bigger resorts most likely to close in an economic downturn.
“If all you want to do is generate revenue, you’ll do like Pennsylvania and have little slot parlors all over the state, and they’ll generate money,” Barrow said. “Bigger resorts are most vulnerable.”
The entertainment-rich casino formerly known as Revel Atlantic City in New Jersey was arguably doomed before it opened.
The $2.4B project included multiple pools, a spa, nightclubs and 13 restaurants, but it had a stop-and-start construction schedule due to multiple breakdowns in financing before opening its doors in 2012. Business was short-lived, as the casino filed for bankruptcy twice before becoming the third of four Atlantic City casinos to close in 2014.
Some argue it is indicative of there being only so much gaming a region can take. Former Atlantic City Mayor Don Guardian said the industry shouldn’t be seen as a guaranteed fix for state budget issues.
“The leaders who pose casinos as a budget solution should be run out of office,” Guardian said. “They should have been running your town or county better and found the best practices to lower costs and provide services. Trying to look at a thin industry like gaming to solve your problems is ridiculous.”
From Founding Fathers To The Boardwalk Empire
Gambling has been providing governments with revenue since the colonial era, when lotteries were used to finance infrastructure and university projects. Critics from Buckingham Palace and the colonies labeled lotteries immoral, and they were essentially outlawed until New Hampshire began its state lottery in 1964.
Casinos were a different animal.
While anti-gambling sentiment in the Northeast kept legalized lotteries and casinos out for much of the 19th and 20th centuries, gambling halls were commonplace in New Orleans and, during the Gold Rush, San Francisco.
The stock market crash of 1929 brought economic hardship to Nevada, and legalizing and taxing casinos was pitched as a solution to bring revenue to the cash-strapped state. Las Vegas needed just a few decades to turn into the gambling capital of the country.
New Jersey voted in 1976 to legalize casinos in Atlantic City. “The World’s Playground” was a prime resort town for the late 19th and early 20th centuries, and underground gambling and organized crime were rampant during Prohibition, a time and place immortalized in the HBO drama “Boardwalk Empire.”
Tourism declined in the wake of World War II. The jet era made places like Miami more appealing and more convenient for New Yorkers. State leaders decided casinos would be how New Jersey could recoup the loss in tourist dollars.
Following passage of the 1976 referendum, Resorts International opened two years later and was the first legalized major casino on the East Coast. Others soon followed along the famed Atlantic City Boardwalk, and the area quickly became a tourist mecca. But critics say the move did little to improve life for impoverished year-round residents.
While Atlantic City has 39,000 permanent residents, it welcomes 24 million visitors each year. Philadelphia-based LPMG Properties President John Longacre, who is developing several non-gaming mixed-use projects in Atlantic City, says the year-rounders rarely benefit.
“The revenue to the town expected from Atlantic City never came, but it was always dangled like a carrot,” he said.
For several decades, Atlantic City kept a healthy perch as the East Coast counterpart to Las Vegas. Developers like Donald Trump made hefty investments and saw massive returns (as well as major financial pitfalls), but the passage of a key federal law was the beginning of the end of Atlantic City’s stranglehold on East Coast gaming.
The Indian Gaming Regulatory Act of 1988 allowed casinos to open on Indian reservations, leading to the 1992 opening of Foxwoods Casino in Connecticut by the Mashantucket Pequot Tribe. Mohegan Sun followed in 1996.
The leader of the Mashantucket Tribe says those were the trailblazers that freed the industry from its reputation of being affiliated with organized crime.
“Like any new industry, somebody breaks the barrier, and we were one of those on the frontier, not just for Indian country, but for all the U.S.,” Foxwoods Resort Casino interim CEO and Mashantucket Pequot Tribal Council Chairman Rodney Butler said. “The more that you prove it’s a respectable business and can generate profits, the more accepted it became.”
While more than 340 million visitors have been to Foxwoods since it opened in 1993, it has more competition than ever. Casinos have opened in neighboring states New York and Rhode Island, and just up the road in Springfield, Massachusetts, the $960M MGM Springfield opened in August.
Butler isn’t deterred.
“One billion dollars today doesn’t get you as far today as it did 26 years ago,” he said. “Although there are very nice facilities, the feedback you’ll get from people that are used to this market and have been accustomed to Foxwoods is they realize it isn’t the same product.”
More East Coast States Go All In On Casino Projects
Atlantic City and Connecticut’s Indian casinos dominated the East Coast market during the 1990s and early 2000s, until nearby states began jockeying for a piece of the casino pie.
The first major legislative action came in 2004, when Pennsylvania passed a law authorizing slot machines in designated properties like racetracks. Four years later, seven slot casinos were open with a collective price tag of $2.5B.
The momentum continued when voters in November 2008 approved a referendum to allow the development of five slot machine casinos in Maryland.
Colloquially known as “slot barns,” they continued to open in Maryland and Pennsylvania over the next two years, until the states decided to allow more expansive gambling halls. In January 2010, Pennsylvania legalized table games at the state’s casinos.
That September, the $550M SugarHouse casino opened with table games and slots in Philadelphia, making it the largest U.S. city with casino gaming.
Massachusetts followed in November 2011, when Gov. Deval Patrick signed the Expanded Gaming Act, allowing up to three destination resort casinos. Unlike the smaller casino start seen in states to the south, Massachusetts required each casino to have a hotel and include at least $500M in capital investment.
In November 2012, Maryland followed in Pennsylvania’s footsteps by expanding its gaming law to allow table games at its casinos.
That June, Maryland’s first major casino project had opened, Cordish’s $500M Maryland Live! Casino. But despite the facility costing more than five times more than any of its in-state predecessors, it was a slots and video poker facility only for its first few months in business.
The table games law authorized the construction of a sixth casino in Prince George’s County, which borders Washington, D.C., to the east and south.
Prince George’s County Executive Rushern Baker, who lobbied the state legislature to pass the bill, said it initially faced strong opposition from those with moral objections to casinos because of gambling addiction and from representatives of other jurisdictions that had already opened casinos and were afraid of a sixth project cutting into their business.
Cordish said when there has been opposition to his own projects, it tends to come from competing companies and not actual residents.
“The biggest actual opponent of every casino that I know of are other casinos hiding in the guise of some citizens group,” Cordish, who will be a keynote speaker at Bisnow's Lodging and Investment Summit Oct. 23 in Tysons, Virginia, said.
MGM had publicized its interest in building a large Prince George’s County casino on a site in National Harbor owned by Peterson Cos., a prominent local developer. The nation’s largest casino operator looking to make a sizable investment in the state helped turn the tide with lawmakers, who salivated at the revenue it could bring in.
“Once MGM came into the picture it was a big help,” Baker said. “They were tremendous because I was going around saying, ‘We want a billion-dollar facility,’ and people looked at us like we were crazy.”
The $1.4B MGM National Harbor opened in December 2016, the first casino south of Atlantic City and east of the Mississippi to pass the billion-dollar mark. The 23-acre development opened with a 125K SF casino floor, a 308-room hotel, a 3,000-seat theater and high-end retail.
New York state passed a constitutional amendment in 2013 to allow up to seven casinos. Four opened in upstate New York in 2016, including the $1.2B Resorts World Catskills in Monticello.
Rhode Island legalized gambling before 2000, but no casinos opened until 2007 with the $220M Twin River Casino, a redevelopment of a former racetrack. In August, it welcomed its second: the $140M Tiverton Casino.
The MGM Springfield is the first casino open in Massachusetts under the state’s expanded gaming law, and the state hopes its planned resorts bring in revenues seen in states elsewhere in the Northeast.
Philadelphia’s SugarHouse Casino has continued to grow its revenue since 2010, bringing in a record $299M in fiscal year 2017-2018. In 2016, the casino added a $164M expansion, more than doubling in size.
“The success that we had enjoyed allowed us to really put a lot of additional capital into that expansion,” SugarHouse Vice President and General Counsel Evan Davis said.
MGM National Harbor led Maryland casinos with $58M in revenue in August, a 10% increase from the same month last year. MGM added a $48M expansion to its casino floor this summer, which its development partner said was a direct response to the stronger-than-expected demand it experienced.
“Their garages get full and that’s a good thing for them,” Peterson Cos. CEO Jon Peterson said. “A lot of people go there. It exceeds expectations because there’s nothing like it in the Washington area.”
Cordish added a major expansion this summer to its Maryland casino, now branded as the Live! Casino & Hotel, with the construction of a $200M, 17-story hotel. The casino took a hit when the MGM opened less than 50 miles away, but it still increased its year-over-year revenue by 5% in August, bringing in the state’s second-highest total of $47M.
“The competition coming into the market has created volatility,” said Cordish Cos. President of Gaming Rob Norton, who oversees the Live! Casino project. “We continue to grow and expand, and we do that because we’re highly confident in this market and in our ability to compete and generate returns on new investment.”
The opening of new casinos across the East Coast has come largely at the expense of the coastal New Jersey town that once dominated the market.
Five of Atlantic City’s 12 casinos have closed since 2014, including Trump Plaza and Trump Taj Mahal. Some of the city’s casinos are planning to reopen under new brands, but it will be difficult for Atlantic City to regain the prominence it had when it was the only game in town.
Going to a casino used to require planning a lengthy trip, but Peterson said the opening of new casinos across the East Coast has made it a much more accessible experience, something akin to a regional mall or movie theater.
“Atlantic City has probably seen the biggest downturn as a result of all of this [growth] than any other locality,” Peterson said. “It’s a longer drive and you don’t need to drive there to get the same experience that you can get half an hour away.”
Guardian, who served as mayor from 2014 to 2017, thinks Atlantic City’s decline was entirely avoidable had the city done a better job to diversify its economic base beyond casinos. Comparing it to Dubai not relying on oil, Guardian said the city needed to find ways to reinvent itself to make its appeal to travelers sustainable.
“It’s a lesson to not put all your eggs in one basket,” Guardian said. “As gaming suffered, Atlantic City suffered as well and wasn’t prepared for the rainy day.”
More Casinos Are On The Horizon, But Are Profits?
Springfield, Massachusetts, is banking heavily on revitalizing its downtown with MGM Springfield, but the early financial numbers weren’t jaw-dropping. The casino posted $9.5M in revenue its first week in operation, which puts it on track for $430M in revenue for its first year, according to the Massachusetts Gaming Commission. MGM predicted it would bring in $500M annually by its third year in business.
Wynn Resorts is predicting its multibillion-dollar casino in Everett, just outside Boston, will bring in $252M, or 9% of the company’s total earnings, in pre-tax earnings in its first year, assuming the Massachusetts Gaming Commission allows it to keep its license.
While East Coast casino expansion is only a few years old, history has not been kind to rapid, widespread gambling booms.
Barrow calls what is currently happening in the Northeast the third great gaming expansion in U.S. history: the other two being the era of colonial gaming and gambling halls of the Wild West, respectively. He said unchecked expansion led to overregulation.
“Both came to dramatic crashing ends because public officials didn’t know when to stop and pull in the reins, and people got fed up and made it illegal,” Barrow said.
Rather than a return to banned gambling, Barrow sees the market correcting itself through bankruptcy, and, in some respect, it already has.
Coupled with the waves of closures in Atlantic City, two of New York’s casinos are already in financial trouble. The del Lago Resort & Casino in New York’s Finger Lakes region is said to be looking for state assistance. Gov. Andrew Cuomo, who has championed for more casinos in his state, said he would not offer a bailout to the casino.
Foxwoods went through its own era of financial difficulty shortly before the 2008 recession. It borrowed heavily, and when the U.S. went through an economic downturn, the resort defaulted on more than $2B of debt.
Butler said the resort is doing better financially and is now looking to expand into sports betting and online gaming. What Foxwoods went through is normal, he said, and not indicative of problems in the Northeast.
“You can go down the list. Wynn had challenges and so did MGM. Caesars went through bankruptcy,” Butler said. “They’ve all been there for the same reason we were in '07 and '08.”
State leaders could also have a heavy hand in gambling overexpansion.
Illinois allowed riverboat casinos in 1990 before expanding legalization in 2009 to permit video gambling in bars. The state made $882M from the overall $44.4B played at the video gaming machines between 2012 and July 2017, more than the state made off slot machines in its casinos. While revenue continues to grow, it also comes from a lower tax rate compared to taxes applied to gaming from within a casino.
“They’re shooting themselves in the foot, but does the state [of Illinois] care?” Cordish said. “All they’re thinking is they have thousands of constituents who own bars and contribute legitimately and it’s a few more bucks. It is until you reach a tipping point.”
Most states in the Northeast tax casinos on gross gaming revenue from slot machines at 25%, but Pennsylvania and Maryland are outliers with a 55% and 67% tax, respectively. But as more casinos look to open, Barrow anticipates state governments will start to undercut each other with lower tax rates to incentivize gaming companies to open casinos in their state, diminishing the revenue stream to budgets.
Even if it does seem like the market can only handle so many of these massive projects, Barrow said states will still have reason to build more as long as they see residents spending money at out-of-state casinos.
“I can look at the whole Northeast region and develop all kinds of metrics to say the Northeast or New England are saturated and say you shouldn’t build more,” Barrow said. “But there’s still a logic to build in a saturated market if you think you can recapture the revenue lost to a neighboring state.”
Credit agency Moody’s issued a 2015 report that found the eight Northeast casinos in the pipeline, totaling $5B in development costs, would benefit gaming equipment manufacturers more than states. The report warned it would be increasingly difficult for a new entrant to gain market share since existing operators were already working to cut costs as a defense against the growing competition.
Areas like Atlantic City would be hit particularly hard, but the report said even SugarHouse and Maryland! Live would be vulnerable as the Northeast faces casino saturation. Longacre views any threat of saturation as motivation to diversify a region’s economy.
“Every state in this country will permit gaming,” he said. “Areas like Vegas and Atlantic City will have to step up and have 10 times the infrastructure to still be a gaming destination, or they’ll go away.”
