A Roll of the Dice
More than 33 million people visit "America's Favorite Playground" each year to take advantage of the many attractions Atlantic City has to offer. But ever since the terrorist attacks in nearby New York City on Sept. 11, the city has been in a bit of an upheaval.
That's because the entertainment industry has taken a hit, with many people opting to stay closer to home. In addition, New York is working on legislation that would allow gambling in six sites around the state as a way to pay for the cleanup of the devastation that occurred on Sept. 11. This has casinos in Atlantic City worried that customers will no longer travel to New Jersey if they can gamble in their own backyards.
The final problem is that lenders are wary about the downturn in the market, so they've raised interest rates, and casinos can't afford the new rates for previously planned construction projects. Many casinos are putting their projects on hold for at least six months, hoping the interest rates will fall, people will travel, and that pending legislation in New York will fail. Needless to say, Atlantic City is holding its breath right now.
New Legislation Could Mean TroubleThe economy was already soft when terrorists slammed airplanes into the World Trade Center Towers last September. However, many casinos in Atlantic City were still hoping to entice people to its resorts and casinos by building multimillion-dollar additions and/or attractions. Engineering firms were busily designing new shopping venues, glitzy restaurants, and state-of-the-art casinos.
After the attacks, it became obvious that New York state would need billions of dollars to rebuild much of lower Manhattan. The state immediately looked to gambling as a way to help dig New York City out of the rubble. And that's just what happened. Last November, New York state Governor George Pataki signed into law one of the biggest bills in state history. The bill will allow the Seneca Nation of Indians to operate casinos and could lead to a temporary Niagara Falls casino opening as soon as April of this year.
During the signing of the bill Pataki commented, "We know that casinos in Niagara Falls, Ontario, attract more than $300 million a year from the people of western New York, and we get not one nickel of investment or tax revenue back. That now will change." But that could also change the climate in Atlantic City, as the city relies on drive-in "regulars" from New York, Pennsylvania, and other states within a 200-mile radius.
Now everyone is nervous - including Donald Trump, who owns the Plaza and Taj Mahal casinos in Atlantic City. Last November, he withheld $73.1 million in interest payments to bondholders, fearing that casinos in New York could disrupt "business as usual" in Atlantic City.
Other casinos, which had numerous additions in the works, have put much of their construction on hold. "It could take a year to five years, if ever, to get these casinos open in New York, but Atlantic City is obviously concerned that the competition is going to have an effect on the growth in Atlantic City as a result of people staying in New York rather than traveling to Atlantic City. There's uncertainty on the construction end about whether casinos want to do these billion dollar projects," says Albert Patroni, president and coo, Concord Atlantic Engineers Inc. (CAE), West Atlantic City, NJ. The company has been involved in gaming-resort engineering in Atlantic City since 1977 and usually has a hand in almost every major construction project in the city.
Some Things on HoldPatroni has definitely felt the effects of Sept. 11, as his company was working on casino and resort projects that totaled approximately $630 million. While CAE is still working on the designs for many of these construction projects, the actual start of construction in many cases has been delayed until at least the second quarter of 2002.
"The market is very cautious," said Patroni. "[Casinos] work on a relatively small margin, and they're all doing okay, but there's not a whole lot of room to play. Some of them have basically changed their construction scopes, some of them have slowed down the design, some have delayed construction. There has been a potpourri of reaction to Sept. 11 and the potential of greater competition."
In addition, the cost of construction has gone up considerably, as lenders are concerned about the viability of the casino industry as a result of September 11th. For example, Las Vegas took a significant dip in its revenue following the attacks, because air travelers stopped flying. Unlike Atlantic City, Las Vegas depends on visitors arriving via airplane rather than car. As a result, there's been a significant loss of revenue and a lot of uncertainty in the area of development.
Lenders took note and are now wondering whether or not destinations like Atlantic City and Las Vegas can survive. That uncertainty has caused lenders to raise their interest rates, so the casinos that were planning to rely on relatively low interest rates are finding now they can't borrow money - or if they can, the interest rates are much higher than prior to Sept. 11.
City Will Have to ChangeBut Patroni isn't too concerned. In fact, he believes everything will be back to normal soon. "The American public likes moving around, spending money, and enjoying themselves as long as they have that disposable income. I think once the scare is over, and I'm going to guess it's sometime during the summer when the season hits again, the public will be right back at it."
He also predicts that construction in the casino industry will resume as well. The reason for that is the competition is brutal, and everyone is fighting for the same customers in a 200-mile radius. Casinos need to continue to differentiate themselves from one another, creating different dynamics in their buildings as a way to attract customers.
"People have significant investments in Atlantic City, anywhere from $300 million to a billion dollars. They can't afford to sit on their hands, because to do nothing means they're losing their customers out the front door. They will continue to remarket themselves, reposition themselves, find ways to get the 500-mile-plus customer here, and keep them here. Although they're very concerned about spending that money today," says Patroni.
In order to "keep" customers longer, Atlantic City will also have to reposition itself as a family-friendly destination, much as Las Vegas has. Some casinos have projects in the works that focus on family-oriented accommodations, entertainment, and shopping. In addition, Atlantic City has the ocean and beaches where families can frolic - things that other gambling destinations typically don't have.
Right now, Atlantic City relies on the same customers who come back a few days a week to spend their money, hang out, and then go home at night. "Atlantic City is going to have to find creative ways to draw the customers, get them on the airline, fly them here with the families, keep them here, and make it a true destination resort. Failure to do that will mean they're going to lose the business to these other gaming jurisdictions. The threat in New York is particularly significant," notes Patroni.
Big Project Still Moving ForwardOne project that was already underway when the events of Sept. 11 occurred is The Borgata. This brand-new $1.03 billion casino/hotel/shopping destination is scheduled to open during the summer of 2003. When it opens, The Borgata will be the first new resort in Atlantic City in 13 years and the largest hotel in the market. Plans for the 40-story development include 2,010 guest rooms, approximately 120,000 sq ft of gaming space, several specialty restaurants and distinct boutiques, a European-style spa, and an array of entertainment venues.
CAE's sister company, Concord Engineering Group, is in the thick of The Borgata project, as it is involved in designing the Marina Thermal Facility (MTF), a 30,000-sq-ft independent structure located near The Borgata site. The plant, which is owned by South Jersey Industries and is being developed by DCO Energy, is intended to be a staged combined heat and power thermal plant that will eventually supply a total of 20,000 tons of chilled water, 300 MMBtu of hot water, and 8 MW of emergency generated power.
The distribution piping system, consisting of hot water and chilled water supply and return, will terminate in The Borgata at metered energy transfer heat exchangers that will separate the MTF systems from The Borgata chilled water and low temperature hot water distribution systems. Normal power for the plant will be supplied from three independent feeds from an adjacent 69 kV substation stepped down to 12.47 kV.
The plant is being developed to serve the Renaissance Pointe area of Atlantic City, which is the new area of casino development in Atlantic City. The initial phase of the project will support The Borgata and will be installed with a capacity of 10,000 tons of electric high-efficiency chillers and 200 MMBTU high-temperature hot water boilers.
Because of the potential for additional development in Renaissance Pointe, a thermal plant has the potential to be more cost effective than individual owner-operated thermal and power plants. It's also not usually within the core business activities of most facility owners to have a separate thermal plant operator be able to optimize equipment efficiency, fuel and electric procurement, and consolidate operations and maintenance activities.
The project has been interesting for Mike Fischette, P.E., principal of Concord Engineering Group. "The primary considerations for the present MTF design configurations were space [e.g., optimizing the plant to provide the maximum thermal energy per sq ft], reliability, part load efficiency, first cost, and simplification of operation. Electric and gas costs over the projected load profiles for The Borgata were a key concern for plant operating cost. As New Jersey completes its phase in of an open market electric system, hedges against high market prices had to be considered in the plant design; consequently, on-site generation is a consideration for a future phase of the plant."
With The Borgata project continuing to move along, as well as other projects in the pipeline, Patroni isn't too concerned about the future of his company. "Our business has been very successful, and I haven't really seen any changes in our customers except for the fact that they're a little more tentative. But it really has not impacted our company and particularly because our company is diverse. In addition to our casino customer base, we support commercial projects, municipal projects, schools, and the like. We have a pretty rounded-out portfolio," he notes.
We'll keep our fingers crossed that Atlantic City rebounds soon. ES