Like a craps player who tosses a winner with every roll of the dice, the Las Vegas economy had been on a long hot streak. But the gaming capital now faces one of its worst economic slumps in two decades. For a city built on neon and the mantra of good times, the slowdown is a rude awakening.

Already saddled with one of the highest residential foreclosure rates in the nation — one foreclosure filing for every 99 households, more than five times the national average, according to research firm RealtyTrac — the city's malaise has spread to commercial development. A number of office, condo and hotel projects have reverted to lenders or stalled in mid-construction.

“This is the worst I have seen it here in 20 years,” says John Restrepo, an economist and owner of Las Vegas-based Restrepo Consulting, which tracks the commercial real estate market. “People are in shock because they are used to the economy bouncing right back, but I don't think we are going to have that quick of a recovery.”

One illustration of the problem: On the famed Las Vegas Strip, the $3 billion Cosmopolitan casino resort and high-rise development lies half-built next to the elegant Bellagio hotel. Deutsche Bank, the project's lender, started foreclosure proceedings in January after developer Ian Bruce Eichner failed to secure new financing. The bank hasn't found a buyer.

The Center for Business and Economic Research at the University of Nevada at Las Vegas (UNLV) says the region is officially in recession — its first since the 1980s. Amid the housing downturn, the local economy stalled this year after fewer tourists arrived to gamble.

“We have had such a long period of economic expansion and growth, I don't think anybody thought we could have a recession like this,” says Keith Schwer, director of the UNLV business center. “With housing, we know it was a case where we overbuilt, over lent and over borrowed. I think it was the same with commercial development.”

This year, Las Vegas anticipates 37.5 million visitors, 4% fewer than last year, and gaming revenue is expected to fall 3.6%, says Schwer. The culprit: high oil prices. Flying or driving to Nevada costs more and visitors have less to spend.

Schwer predicts a recovery won't start until the second half of 2009 when several new resorts open along the Strip, creating tens of thousands of new jobs. That's encouraging for developers, who recorded the region's highest second-quarter retail and office vacancy rates in 20 years.

The metro Las Vegas office vacancy for all classes of space climbed steeply to 16.7% at the end of June compared with 10.9% two years earlier, reports Las Vegas-based research firm Applied Analysis.

During the same period, the retail vacancy rate doubled to 6%, adds Applied Analysis. The value of commercial building permits issued in the second quarter fell to $131 million, a 66% drop from the second-quarter 2007, notes the Associated General Contractors of Las Vegas.

Dealing with job losses

The office market is sagging in part because the professional, business and financial services sector lost 8,000 jobs over the year ending in June. Companies are more cautious about relocating or expanding, explains Brian Gordon, a principal with Applied Analysis.

Although about 4,600 people moved to Las Vegas monthly during May, that's down from more than 6,000 arrivals in April. Developers had counted on rising demand from architects, accountants and other professionals to fill their space.

But it was not to be. In the second quarter, there was a net absorption of negative 414,800 sq. ft. of office space, reports Colliers International.

Office owners have offered incentives such as rent breaks and paid moving expenses to lure tenants. But the problem is expected to worsen as another 3.6 million sq. ft. of office space comes on line over the next year. The space was planned two years ago when credit was plentiful.

In the next 18 to 24 months, as the office market recovers, Gordon expects more lenders to take back properties.

Brad Schnepf, president of Marnell Properties, an office and commercial developer, agrees that recovery could take time. Citing a five-story office building near McCarran International Airport that has been only 60% leased since it opened in 2007, Schnepf says his firm isn't planning any new projects in the near term.

“You would have to be nuts if you were not concerned,” says Schnepf. “We are having a correction in the commercial market, and I think that is going to bring us back to a more healthy growth pattern long term.” Land prices will then stabilize, he says. “We were appreciating at double digits on an annual basis, and you wondered how far that could go.”

While housing lagged — only 8,700 new home permits were issued for the full year ending in May, the fewest annually since the late 1980s — the related home furnishings industry also suffered and several furniture outlets closed. The state's jobless rate reached 6.4% in June compared with the national rate of 5.5% — highest in Nevada since February 1994.

Meanwhile, homeowners have lost alarming amounts of equity. Median home prices dropped more than 20% in the past year. The median price of an existing home declined from $288,000 in February to $215,000 in June.

Forecast for recovery

The 30,000 hotel rooms planned along the Strip by late 2010 — in addition to the existing 136,000 rooms — may spur a recovery by potentially creating 60,000 jobs and driving population growth.

“When you have projects that create tens of thousands of jobs, they are going to have to draw workers from other destinations,” Gordon explains.

But not everyone is convinced that will happen. Airlines are so worried that they have cut back on flights to Las Vegas and asked the Clark County Commission to reconsider the need for a terminal under construction and a planned $114 million Heliport project.

Recovery could take two years and development won't be rapid, but the city's economy will improve, Restrepo asserts. “It is not going to turn into Detroit.”