What happens in Vegas is hurting Vegas

(breakingviews.com) -- Las Vegas is haunted by its own image. The U.S. gaming capital's "What happens here, stays here" motto helped cement its naughty reputation during the boom.

But that marketing message has become a burden. Budget-minded tourists and conventioneers are eschewing Sin City's self-conscious extravagance, battering its economy.

The city's marketers briefly tried to respond to the downturn in early 2008 by adding another -- somewhat equally off-color -- message: "Your Vegas is Showing". Another, "Vegas Right Now" also failed to draw tourists to the famed Strip.

Visitor volume fell by 6% in the year to June even as hotel room inventory continued to grow. This has brought room rates down a whopping 25.5%. The fall-off in tourism has hurt shops, shows and casinos, where gambling revenue has tumbled 15% from a year ago.

There has also been a 16% drop in the number of conventions -- one of Las Vegas' economic mainstays -- as recession-pummeled companies have scrambled to cut costs. And government agencies have been told to hold their meetings in less expensive and conspicuous locales, prompting protests from Nevada and Florida senators.

The casino giants are not immune. MGM (MGM, Fortune 500) and Las Vegas Sands (LVS) recently posted second-quarter losses, and Station Casinos filed for bankruptcy. Private equity owned Harrah's has restructured its debt twice in an attempt to stay afloat.

This has all led to cutbacks in tourist industry employment, which in turn has decimated the city's housing market. Las Vegas has a foreclosure rate more than 7.5 times the national average. Lenders seized one in every 47 housing units in July. And condo prices are less than half what they were a year ago.

And yet, hotel developers continue to plough ahead. The Hard Rock Hotel recently added a 490-room tower. The Mandarin Oriental chain plans to set up shop in December. Some 7,000 new hotel rooms are slated for completion in 2010.

These companies are still betting that tourists will regain their enthusiasm for excess. But in this era of newfound frugality, glitzy seems more, well, unseemly. Sin City may have to reverse course, and start trying to sell its virtues.