Las Vegas Suffers a Recession Hangover

Bankers aren't the only ones fleeing town, and Vegas' problems go beyond the image of glitz and innuendos crafted for boom times

Las Vegas used to suggest playfully that visitors can forget any overindulgence they experienced while in town. Now city officials are urging business executives to remember why they wanted to come in the first place.

In an open letter published in The Wall Street Journal on Feb. 23, Las Vegas fired the first salvo in a new ad campaign that urges business executives to recall the city's nearly 10 million square feet of meeting space, its thousands of hotel rooms, and the 22,000 conventions staged there every year. It's a far cry from the glitz and innuendos that made Sin City America's playground—and a target for politicians everywhere. But will it be enough to revive the city's sagging fortunes?

That's not an academic question. Vegas is suffering more than most U.S. cities, across a broad front. Home prices have been cut in half since their June 2006 peak, according to the Greater Las Vegas Association of Realtors. Unemployment hit 9.1% in December, well above 7.2% nationally. The city's economy is narrowly focused on gaming, leisure, and consumer spending. So as vacationers pull back, Las Vegas is naturally in the crosshairs.

City officials had hoped that business meetings might pick up some of the slack. Those conventions and smaller meetings accounted for 46,000 jobs last year, nearly 15% of the city's employment base, and had an economic impact of $8.5 billion when all spending was accounted for. But now that a trip to Vegas has become synonymous with wasteful spending in the eyes of many investors and taxpayers—and with more and more businesses worrying about their public image as they queue up for public assistance—corporate visits are suffering as well.

"Pick a topic and Vegas is not doing well," says Mike Helmar, director of industry services for Moody's (MCO)

A Place to Misbehave

Reinventing Vegas won't be easy. Spurred by advertising, including the popular "What Happens Here, Stays Here" slogan, Vegas cemented its reputation as a place to misbehave—and to reward boom-time performance. Visitors flocked to the city (39 million in 2007 alone, an 11% increase from 2002), rooms filled up (occupancy hit 90% in 2007, up from 84%), and gaming revenue surged (to $10.8 billion from $7.6 billion, a 42% gain). That growth was reflected in the Vegas area's gross metro product, which grew at a 10% clip from 2001 to 2006, according to the most recent data. It was as if the disastrous earlier attempt to position Vegas as a family-friendly hot spot never happened.

"What Happens Here, Stays Here" reached 70% awareness in January 2005, according to an internal memo from R&R Partners, the agency that created the ad. But in hindsight, that branding effort might have been too successful. In this environment, being viewed as America's playground may be dragging the city down.

Financial-services firms in particular have been avoiding Sin City. Goldman Sachs (GS) and Wells Fargo (WFC) moved meetings from Vegas to San Francisco after comments from President Barack Obama grouped trips to the Strip with banker bonuses. "…You are not going to be able to give out these big bonuses until you pay taxpayers back," Obama said at a Feb. 9 town hall meeting in Elkhart, Ind. "You can't take a trip to Las Vegas or go down to the Super Bowl on the taxpayers' dime."

"Companies are moving to cities that are perceived better but are more expensive for no reason other than Las Vegas is viewed as overindulgent or frivolous," says Andrew Pascal, president of the Wynn Resorts' (WYNN) Las Vegas casino resort. Other cancellations include State Farm, Bank of America (BAC), and the Automotive Market Research Council's annual convention. Vegas was even singled out in the stimulus bill, when a proposal was dropped to spend $50 million on a mob museum after it was met with Republican scorn.

Cracking Down on Frivolity

Perception is only part of the problem. Politicians have stopped picking on Vegas—President Obama didn't mention the city in the same breath as banker bonuses during his Feb. 24 speech. But the government seems intent on cracking down on what it considers frivolous meetings, especially for those companies that receive help through the federal Troubled Asset Relief Program, or TARP. Last week, Northern Trust (NTRS) was on the receiving end of a complaint from Congress for hosting a charitable event that featured tchotchkes from Tiffany (TIF) and performances by Sheryl Crow and Chicago. The event was held near Los Angeles.

"Vegas was just the beginning. They've sent a message to all companies, not just TARP companies: 'We don't want you doing this,'" says Geoffrey Freeman, senior vice-president of public affairs at the U.S. Travel Assn.

But even if the heat dies down and Las Vegas succeeds in fashioning a more sober image, it still has to deal with an implacable foe: what used to be the American economy. As easy as it is to blame perception and politics for its troubles, companies were avoiding Las Vegas long before Obama opened his mouth. The number of conventions held in the city in December 2008 was down 16.7% from a year earlier. The number of midweek guests—primarily made up of business travelers, convention-goers, and the like—fell 11.3% during the same period.

Hotels Are Hurting

Once considered recession-proof, Las Vegas' hotels and casinos have seen the bottom drop out. On Mar. 3, MGM Grand (MGM), owner of 10 Vegas hotels, said it would likely breach the terms of its loan during 2009. Station Casinos and Harrah's Entertainment, suffering under crushing debt loads, are trying to restructure. Even Wynn Resorts, one of the few Vegas players with shares trading in the double digits, has seen its stock price plummet 85% from its 52-week high. On Mar. 6, the Las Vegas Convention and Visitors Authority announced it would delay an $850 million convention center renovation that was scheduled to begin in 2009

"They depend on the rest of the economy to bring in tourists for gaming," says Helmar of Moody's "They really have a recessionary problem."

The country's deep economic fears, it turns out, stay in Las Vegas, too.

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