The Cosmopolitan’s debut in December likely marked the end of a two-decade run of multibillion-dollar luxury developments on the Las Vegas Strip that began in 1989 with the opening of the Mirage. As the battle for customers rages amongst the five-star resorts—Wynn, Encore, Palazzo, Venetian, Aria, Bellagio, Mandalay Bay and now the Cosmopolitan—news of Sahara’s closing comes as little surprise as the lower-end properties are fighting just to stay in business.

After the bubble burst in late 2007, Las Vegas saw plunges in visitor volume, gaming revenue, occupancy and average daily rate in 2008 and 2009 for the first time since the Las Vegas Convention and Visitors Authority began tracking the numbers in 1970. Visitor volume (up 2.7%) and gaming revenue (0.8% in Clark County) turned positive last year, but after three consecutive strong months in early fall, what could be an alarming trend emerged:

Gaming revenue fell on the Strip in November, December and this January despite visitor volume increases. People came to Las Vegas, but they didn’t spend as much on gambling.

The Cosmopolitan’s 2,995 new high-end rooms compounded the challenge already caused by the recession and CityCenter’s 6,000 rooms that opened the year before.

“If there was a recovery underway, it was dampened by the fact that there was a great deal of capacity added at exactly the wrong moment,” said Steve Wynn, CEO of Wynn Resorts, during a conference call after his company’s fourth-quarter earnings were released in February.

Mike Leven, president and CEO of Las Vegas Sands Corp., says without the new supply, he believes room rates would be up 10% to 20% instead of flat. “The properties in the middle get hurt with the waterfall of rate reductions and the lower end gets hurt dramatically,” he says.

If rates at the top fell to $100 and less a night, which they did at times, the lower-end properties “closed their restaurants, cut staff and were renting rooms for $30 and less,” says David Schwartz, director of the Center for Gaming Research at the University of Nevada Las Vegas. “And at that point, they’re really just a dorm.”

It helps explains why Riviera Holdings Corp, owner of the Riviera Hotel & Casino, filed for bankruptcy last July and why Sam Nazarian, CEO of sbe Entertainment Group, said “the aging Sahara was no longer economically viable” when he announced the iconic Rat-Pack favorite would close on May 16.

Although Deutsche Bank persevered with its $3.9-billion development, two others were halted in 2008. Echelon and the Fontainebleau both sit unfinished on the north end of the Strip with no plans to restart.

“No one with any brains would want to expand the market now,” says Schwartz.

Jeremy Aguero, the principal analyst for Applied Analysis, a Las Vegas research and consulting firm, says if the last two decades were about building bigger and better resorts, the next decade will be about finding ways to fill those rooms.

The Cosmopolitan turned to Marriott’s Autograph Collection for help, and Sands wasn’t far behind with a similar arrangement with its Palazzo and Venetian resorts and IHG’s InterContinental brand. Wynn Resorts formed a marketing alliance with out-of-town casino company Pinnacle Entertainment and MGM Resorts revamped its loyalty program and partnered with Nazarian’s sbe Entertainment.

Despite the challenges and sluggish results to end 2010, Leven, Wynn and Jim Murren, CEO of MGM, have all expressed optimism for the market’s recovery. No one believes it will get back to 2006 pre-recession levels overnight, but slow and steady improvements are expected.

“Look, even in the worst time in modern U.S. history from an economic standpoint, Las Vegas drew more than 37 million people who spent more than $29.8 billion (total visitor spend),” Aguero says of last year. “It’s a very viable market, but it has some things that need worked out. Supply and debt issues will take some time, but we’re seeing signs of improvement.”

Caesars Entertainment recently announced a partnership with Nobu Hospitality to develop the first Nobu Hotel in Caesars Palace’s Centurion Tower, along with a Nobu Restaurant and Lounge. In a recent Securities and Exchange Commission filing, Caesars also said it was seeking financing for the completion of its stalled Octavius Tower construction and the development of Project Linq, a 190,000-square-foot corridor of retail, dining and entertainment between the Imperial Palace and Flamingo.

Even if gaming spend continues to decrease despite visitor volume increases, Las Vegas is positioning itself as far more than just a gaming destination with new offerings like CityCenter, Cosmopolitan and potentially Caesars’ new additions.

“Those newer high-end properties replace the older properties and people that can afford to pay those premium rates spend more in the entire system and help make Las Vegas what it is,” Leven says. “There’s no place like it in the world. There are a lot of places to gamble now, but not like in Las Vegas, and not with the entertainment, meetings and dining we have.”