If Wall Street’s rollercoaster ride of the past few weeks didn’t give everyone in the Las Vegas business community pause for concern, we don’t know what will. The terrifying question that was barely audible on our city’s streets was: Could things really get worse? Before everyone overreacts, the answer, we believe, is no.
The neon metropolis—once immune to national economic trends, continuing to grow, build and thrive despite what happened elsewhere—now faces tough times. The faltering and fragile economy is discussed at water coolers and luncheons across the valley, as nervous executives gauge colleagues and competitors for signs of business improvement or deterioration. Southern Nevada’s dramatic building boom, which once defined the trends of the Southwest region, today underscores its collapse.
So, yes, Las Vegas’ runaway growth and business euphoria have evaporated like a desert mirage, leaving a challenging course ahead. The cocksure swagger that fueled the region’s speculative development frenzy no longer exists. Many of those growth projects were underwritten with loans secured by overvalued land and little cash down. The ensuing real estate implosion and credit crisis have since seen those same projects stall, sell or undergo foreclosure, saddling Southern Nevada with heavy debt and high unemployment, insufficient revenue and underwater mortgages.
But winning when the odds are stacked against us is what lies at the core of Las Vegas’ DNA. We know how to win. And we’ll win this time, too.
The stats are undeniably hard, though: Near 14 percent unemployment. One in seven Nevada homes is vacant. We’re even running out of drinking water. Few businesses seem to want to relocate to our desert oasis, and low-tax incentives (which aren’t helping stuff state coffers to fund much-needed programs in health care, education and other vital needs that attract businesses, too) aren’t doing the trick. Any metropolitan area, no matter how resilient, would find the task before Las Vegas daunting, if not impossible. But not us. As we emerge from the so-called Great Recession—and make no mistake, we will—Las Vegas will demonstrate the genuine strength of its business community. Every company in Southern Nevada wants to employ more people and thrive. We’ll return to our pre-recession prosperity, and this time, almost assuredly, with a more diversified economy that will be resistant to future economic downturns. Sometimes, the best innovations come from tough times. The boom wasn’t going to last forever, but we can come out the other side better for it. An example of that was just reported by Caesars Entertainment.
Now, a little perspective.
Las Vegas remains the nation’s foreclosure capital, a racy title it could do without, as one in every 99 homes received a foreclosure notice in July, according to Irvine, CA-based residential data tracking firm RealtyTrac. Nearly two-thirds of existing valley homes sold for a loss to the owner between April and June, Seattle-based real estate listing company Zillow says. And even more losses are likely to follow. Local homeowners will have to wait an estimated nine years to recoup just half of their pre-recession value, says New York-based Moody’s Analytics, and it will take two decades—or more—before those prices fully return. And patience isn’t part of Las Vegas’ makeup. Most people simply can’t afford to wait that long. More than 85 percent of valley homeowners owe more money than their home is worth, Zillow says, a fact that resulted in a sea of for-sale signs across Las Vegas.
“For most families, a home is the biggest asset they own,” says John Restrepo, principal of RCG Economics, a Las Vegas-based research firm. “As a result, losing their home can financially wipe them out and ruin their credit.”
There were 22,242 residences available for purchase in July, reports the Greater Las Vegas Association of Realtors, which equals about a four-year supply of homes based on sales in 2010. An oversupply of listings has pushed prices down to 1999 levels. Many cash-strapped families have already sapped financial nest eggs as a recession stop-gap to keep milk in their refrigerators and food on their tables. Job losses give homeowners few alternatives, as recession-racked companies lay off, cut back and consolidate solely to stay afloat. Doing more with less—rather than planning new, over-the-top resorts and spend, spend, spend—is the region’s new business mantra.
Certainly not helping matters, Southern Nevada joblessness reached 13.8 percent in June, up 1.4 percent from the previous month, says the Nevada Department of Employment, Training and Rehabilitation. (Nevada has been relying on borrowed federal money since last year to pay unemployment benefits.) And the jobless number is likely to worsen because many people have simply stopped looking for work. Las Vegas shed another 4,000 jobs in June, as employees were increasingly asked to shoulder more duties for the same pay.
“A lot of the unemployment comes from too many construction workers,” said Robert Lang, a UNLV sociology professor and director of Brookings Mountain West and The Lincy Institute. “We had 20-year boom run with a corresponding amount of construction and housing.”
Indeed, construction was once an economic superhero responsible for 150,000 jobs statewide, says Las Vegas-based business advisory firm Applied Analysis. In 2006, the industry generated $14.7 billion of economic activity, which included almost 22 percent of state and local taxable retail sales, Applied Analysis says. Construction was the state’s fastest-growing and second-largest employer behind hospitality. Today, however, construction accounts for fewer than 5 percent of Southern Nevada’s workforce.
“Recent weakness evident at the national level may be trickling into the Silver State. All things considered, Nevada’s job market is essentially flat,” said DETR Chief Economist Bill Anderson. “Construction continues to hold back overall job growth. In June, building-related employment stood 5,400 below a year ago.”
The high cost of unemployment coupled with diminished real estate values has starved government coffers, resulting in budget deficits and cutbacks. Clark County, for example, bridged a $100 million budget shortfall this year by tapping reserves and shedding
208 jobs. Henderson similarly made up for its $19 million deficit with the help of a voluntary severance program that trimmed 200 employees since 2008. North Las Vegas, however, is in more dire circumstances, and faces a possible takeover by the state. North Las Vegas has struggled to cut $8.6 million from its current budget without firing firefighters or police officers, as per a court mandate. The city has already emptied its piggy bank, transferring monies from other funds, to balance the books for the past few years. If North Las Vegas can’t find the money to pay its bills, the city could ultimately vanish like a magic act, ceasing to exist as an independent entity altogether.
From Bad to Worse
Despite glum statistics, Southern Nevada has seemingly been making slow, if somewhat uneven, economic progress. Visitation and room rates, for instance, have steadily increased during the past year and a half, the Las Vegas Convention and Visitors Authority says. Local visitation increased 7 percent in June, while the number of people coming to town is up 5.1 percent for the first half of 2011.
That is a welcome relief for the valley’s glut of hotel rooms, many of which were built during better times. Citywide occupancy reached nearly 89 percent in June, a 6.4 percent improvement over last year, as room rates climbed to $101 a night, or 13 percent more than 2010, the LVCVA said. Airport traffic, convention attendance and gaming winnings are all up. And that’s certainly nothing to sneeze at.
But even though more people are coming, the type of visitor Vegas attracts has drastically changed.
“The demographic of visitors coming to the city is different,” Restrepo says. “They’re budget-conscious vacationers who are bringing coolers into the hotel room, as opposed to high-end, luxury-oriented tourists. Visitors consequently are spending less while they’re here, or spending as much as in years past, but coming less often. Entertainment is very much a discretionary expense.”
Even so, businesses are latching onto any patches of good news, stitching them together as a quilt of hopeful optimism. The recovery recently took a detour, however, when the country’s credit rating was downgraded August 5, sparking worldwide panic, political finger-pointing and stock market upheaval. New York-based Standard & Poor’s credit ratings arm lowered the nation’s ability to pay back its debt to AA+, from AAA—a first in US history—causing widespread anxiety and hand wringing. Nevada, too, had its credit rating downgraded this year. The stock market reacted with worry, plunging to its lowest point since 2008, as the Standard & Poor’s 500-stock index zigzagged up and down by more than 4 percent during a wild week of trading. Wall Street last saw something like this three years ago when the financial crisis intensified, which has pundits seeing a terrifying recession déjà-vu. Is the worst yet to come?
On August 9, the Federal Reserve made the rare promise of holding short-term interest rates near zero percent through at least the middle of 2013. Interest rates had already been hovering near zero since December 2008—in the midst of the most epic portion of the financial crisis—but the Fed wasn’t specific about how long the rate would stay put. The move was meant to encourage more consumer spending and borrowing, while dismissing fears of future inflation. But forecasters see the situation differently. They say the Fed is acknowledging that significant job and wage growth won’t occur for a couple of years. They say the economy is going to bump along the bottom through the end of Obama’s first term.
Looking For Solutions
“There is no magic bullet for fixing the economy,” Restrepo says. “Unfortunately, there is no quick, easy solution. But the rising tide of employment carries all boats.”
While job creation and wage growth are surefire recipes for economic resurrection, it remains unclear where the work will come from. UNLV’s Center for Business and Economic Research expects a meager 1 percent or fewer job growth through 2013, which won’t do much for the 130,000 Southern Nevadans out of work at the end of July. Analysts fear that businesses have permanently adjusted to streamlined, recession-style behavior, operating with fewer people and less overhead. Indeed, businesses may not hire back the same number of staff once the economy improves, opting instead to rely on more equipment. Many offices already use automated telephone answering systems, directing callers to an extension, in lieu of receptionists who require wages, health care and coffee breaks.
“Productivity has gone up as firms buy technology that allows people to do more with less,” says Schlottmann, who is also a UNLV economics professor. “We are doing the same amount of work with fewer people.”
Still, a handful of industries hold untapped potential for kick-starting Southern Nevada’s economic engine, including motion pictures, television and commercials, which added $100 million to the state’s wallet in 2010. Much of the production spending goes to local suppliers and services that provide equipment and lighting, hotel rooms and meals, says Mike Skaggs, executive director of the Nevada Economic Development Commission. “We have increasingly invested our time and energy toward TV, with reality programs, game shows and documentaries,” Skaggs says. “The film industry has become a very competitive business over the last three years, as states have ramped-up incentives.”
Nevada, too, has upped incentives, but it’s doubling down on small businesses. The state has a $13.8 million financing program geared toward supporting small business loans to aid entrepreneurial expansion. Nevada has also frozen all new regulations, which are now under review with an eye toward repealing outdated mandates that, they say, weigh down small businesses. And that’s something they’ll stand behind.
“The economy’s rebound will likely be driven by small businesses,” said Terry Johnson, director of Nevada’s Department of Business & Industry. “Small businesses have an ability to innovate and operate more cost effectively. Both business and government are doing more with less, and small business seems poised to solve those needs from outside the organization.”
And better organization is needed for Southern Nevada’s health care system. Retirees are attracted to Las Vegas’ warm climate, low taxes, cheap housing and recreational activities, but nearly a quarter of medical services are exported out-of-state, says Brookings Mountain West. If grandpa needs a new hip, he’s more likely to head to the Scripps Center in San Diego rather than Sunrise Hospital on Maryland Parkway.
Road to Somewhere
While no one thing can fix everything, transportation and infrastructure certainly come close. Investment in roads, rail and aviation traditionally yield strong redevelopment results in metropolitan areas. Advocates see transportation as a conduit for bigger and better things.
“Nevada needs $5 billion in infrastructure improvements critical to our quality of life and economic future,” says Sean Stewart, executive director of the Nevada Contractors Association, a nonprofit industry trade group. “The Federal Highway Administration estimates that every $1 billion invested in the nation’s highways supports 27,823 jobs.”
But there may be little political appetite for additional spending, with widespread voter discontent over service cuts and deficits. Besides, the federal stimulus bill was largely viewed as a flop. Nevada only received $1.5 billion from the American Recovery and Reinvestment Act, most of which went toward Medicaid and unemployment, creating scant new jobs. Only $201 million went for road and highway construction, with less than half ending up in Clark County. The money barely made a dent in the Nevada Department of Transportation’s $8 billion funding shortfall. The funds allowed municipalities to fill potholes, but do little else. Nevada received the second lowest sum of all states per capita. Despite this, money is slowly trickling in for an interstate connection between Las Vegas and Phoenix. They’re the country’s two biggest cities without a major link. The proposed Interstate 11 project would change that, creating a new multimodal corridor with high-speed passenger rail and roadways, transit systems and utilities. Port expansions and a growing movement of goods throughout the western US threaten to overload the outdated road network, thereby making Interstate 11 a vital undertaking.
“It’s a critical ten-year project requiring environmental work and studies to get us there. That is a multiyear vision, but that is what we need,” says Tom Skancke, president of The Skancke Co. and a transportation consultant to the LVCVA. “The only really proven formula for stimulating the economy is infrastructure investment. We could put 100,000 people to work.”
The $6 billion dollar DesertXpress high-speed passenger train could potentially create 35,000 jobs, backers insist, while diverting 3 million automobile trips annually along a 186-mile stretch of I-15. Southern Nevada hasn’t had passenger train service since Amtrack shuttered its Desert Wind route in 1997. And it really could use one. DesertXpress would follow the I-15 alignment between Victorville, CA, and Las Vegas, using existing right-of-way either along the median or roadside. Electric-powered trains would travel up to 150 miles per hour using off-the-shelf steel wheel technology, with one-way trips lasting only 1 hour and 24 minutes. The project could transform Las Vegas into a future bedroom community for commuter crazy Los Angeles, and improve traffic flow from Southern California, a vital market for Las Vegas businesses. As it stands, Southern California makes up 26 percent of all local visitors, the LVCVA says, averaging ten trips a year—way more than any other demographic.
“We’re losing frustrated tourists who spend 8 hours on a return trip from Las Vegas when the road goes from six to four lanes,” Lang says. “A high-speed train could bypass all of that and help restore our tourism economy.”
Las Vegas’ visitor flow will also likely improve from McCarran International Airport’s Terminal 3, which is under construction. The $2.4 billion dollar project will add 14 passenger gates geared toward international air carriers, thereby expediting foreign travel with self-contained security checkpoints and baggage claims. It will give McCarran 117 total gates when it’s completed in mid-2012. The even better news? International arrivals and departures were up 4.7 percent last year, despite a nearly 2 percent slip in overall traffic in 2010, McCarran officials say. Yet, it still remains unclear whether the Las Vegas economy will remain grounded or take flight once again.
“The prospects for overall recovery remain bright, but the timing of that scenario remains somewhat uncertain,” says Brian Gordon, a principal at Applied Analysis. “Local residents and businesses may reasonably expect a slow and steady expansion cycle that will span years before ever reaching back to the historical peak. We expect overall economic health to be dictated by macro conditions, but micro factors will guide different economic sectors forward for different reasons.”
After all the noise and all the fear, what, then, is the bottom line for this city’s business recovery? Slow and steady will win the race. Las Vegas, so used to instant gratification, has to adjust expectations just a little bit. But isn’t winning when the odds are against us what Las Vegas is ultimately all about?