Donnelly made the remarks during a recent conference hosted by the National Association of Real Estate Investment Trusts. He predicts 10% to 15% total returns on lodging REITs this year. But he says pockets of regional weakness created by the souring economy will plague lodging REITs during the next six months, when he believes the industry will hit the bottom of its growth trough. He forecasts a rebound for late this year and early next year.

"Despite the near-term weakness we see for lodging, we believe the fundamentals for 2002-2003 could not be better," he says. "It is our view that supply growth is perhaps the single most important determinant of future revenue growth and operating profit in the hotel business."

The supply growth is dropping significantly--from 4.2% in late 1999 to 2.7% at the end of last year, with forecasts for this year 2.5% and next year at 2%. A lack of financing means new construction is falling behind expectations, which may translate into fewer hotels seeking building permits. "This supply environment clearly benefits the owners of existing properties," he says.

So far this year, lodging REITs have gained 5.4%, compared to 1.6% of all REITs, according to Donnelly, who adds that this year's leaders are Boykin Lodging, Equity Inns, Jameson Inns and Winston Hotels. He says even if the economy doesn't rebound later this year as some are predicting, the lodging industry's future looks bright.

Working in the industry's favor are the increasing globalization of the business world, the leisure demands of Baby Boomers, and the fact that hotel rooms are more affordable now based on inflation than they were 10 years ago. "We need only get through this rough patch," he says.