Hard Times in the City of Sin

LAS VEGAS, Nov. 2, 2009 — -- The bar on the 64th floor of the Mandalay Bay Hotel offers what could arguably be the best view of Las Vegas at night. A mile-long strip of brightly colored neon lights and gigantic, floodlit casinos glitters through the bar's floor-to-ceiling windows. Still, as you survey the otherwise dazzling city of nocturnal light, you can see conspicuous patches of darkness dotting the landscape.

One of these black craters is the construction site for the Fontainebleau Hotel casino and the 4,000 rooms it is supposed to offer. When the investors ran out of money, 70 percent of the project had already been completed. If you look diagonally across the street, you can see the site of what is supposed to be the Echelon complex. Only eight of its planned 57 stories were completed before the construction cranes pulled out.

There is even a dark, gaping hole next to the Trump Tower. A twin had been planned for the site, but it will most likely never be built. Las Vegas, the global symbol of gambling and glitz, is hurting.

Over the last two decades, no other American city grew as quickly as Las Vegas. In 1980, it had 460,000 inhabitants; now it has 2 million.

Nowhere else was the boom wilder, consumption more excessive and the delusions of grandeur more extreme. New houses and apartment complexes shot up by the tens of thousands. Dozens of new casino hotels were built, many of which boasted 2,000, 3,000 or even 4,000 rooms. Celebrity chefs came to the city to open satellites of their famous restaurants, while junk shops gave way to stores offering exclusive fashion labels.

During that era, the strip was crowded until even 4 a.m., mainly with drunk, carefree Americans who could hardly believe they could walk around outside with a beer in their hand, that they could still smoke in public establishments and that there were swimming pools where women could go topless.

In a country notorious for its puritanical bent, Las Vegas is an anything-and-everything-goes kind of place. But now, the recession has blasted open one of its deepest craters here in this city surrounded by the Mojave Desert. Las Vegas now has the country's highest rate of home foreclosures, and more than 70 percent of homeowners here owe more on their mortgages than their houses or condos are worth. Since 2006, the average home price has dropped by a half.

Unemployment, on the other hand, has risen -- from about only 3 percent to over 13 percent. The city's luxury hotels have seen tens of thousands of reservations cancelled. Major casino operators are deeply in debt. In the spring, one of them, the MGM, barely escaped from having to declare bankruptcy.

In the meantime, economists are already warning that the collapse of the US residential real estate market could be followed by a similar disaster in commercial real estate. And if that bubble bursts, it will hit Las Vegas first.

For more than two decades, banks, investment funds and financials firms attracted by the chance to make hefty profits and a seemingly limitless boom pumped billions of dollars into the city. They supplied the financing for casinos, shopping centers and entertainment venues. One of Las Vegas's biggest investors was Deutsche Bank.

Germany's largest bank is seen as one of the three major players in the local construction industry and in the financing of casinos and hotel complexes worth billions. Indeed, the Frankfurt-based banking giant is mentioned as an investor in connection with many major projects in the city.

To almost everyone -- and especially the Germans -- Las Vegas seemed recession-proof. But now, since the summer of 2008, gambling revenues have dropped by more than 10 percent (see graphic) after having plunged to as much as 25 percent in the months immediately following the bankruptcy of Lehman Brothers.

The city's future is now uncertain. There are still plans on the table to add 40,000 new hotel rooms to the 140,000 ones that already exist by 2012. The pending development projects are valued at $20 billion (€13.6 billion). But now people are wondering who needs all the additional rooms anymore and who will provide the financing for them. Even the city's wealthiest residents, who have consistently topped the lists of America's richest people, must now keep a close eye on the assets they have left.

For example, Sheldon Adelson, the owner of the Las Vegas Sands Corporation, whose assets include the luxury Venetian Resort, has seen his company's stock value plummet from $149 to $1.38 a share. Kirk Kerkorian, who has been one of the most important investors in Las Vegas since 1955, has been forced to sell many of his holdings in industrial companies, such as the automaker Ford. MGM Mirage, the city's largest casino operator, is almost $14 billion in debt and has only staved off bankruptcy with difficulty.

The banks, which once fueled the city's growth with attractive loans, are now much less willing to part with their money. "Ownership structure on the Strip five years from now is going to look different from now," says Rich Moriarty, director of the Union Gaming Group, which advises financial investors, hedge funds and banks on investing in Las Vegas.