the latest report by Lodging Econometrics

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The total construction pipeline peaked at 5,883 projects with785,547 guestrooms in mid-2008, including a record-high 242,229 nowbeing built. Early planning totals are also at historic highs, andprojects scheduled to start in the coming year are also at recordlevels.

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"If there was no lending crisis or economic slowdown, developerswould have kept on going," Patrick Ford, president of Portsmouth,NH-based Lodging Econometrics, tells GlobeSt.com. He notes that thenation's hotel industry achieved record profits and strongoperating results last year, which unfortunately was the same timethat the credit crisis began.

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Because of the customary lag-time involved in starting hotelprojects, usually two to three quarters, the crest of the hoteldevelopment wave wasn't visible until the midpoint of 2008,according to Ford. He attributes the anticipated hotel developmentslowdown to a domino-like sequence that started with housingtroubles, followed by tightened lending, then by the nationaleconomic slowdown.

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"This is a big anomaly" for the nation's hotel industry, hesays, pointing out that the hotel sector has turned negative onlytwice before in the last 25 years, during the 1980s recession andin the aftermath of Sept. 11, 2001. "These things cannot beforeseen by the development community."

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Hotel financing experts agree with Ford that lendingrestrictions will reduce the flow of development or evencancellation of projects, especially in cities where new roomsaren't a pressing need. "Whatever is on the books to be developed,a lot of those deals are going to fall to the wayside," says ScottStephens, principal with Hospitality Real Estate Counselors inTampa, FL.

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But while hotel developers are dependent upon banks forfinancing, banks in turn need solid development projects to keepmoney turning within communities, Ford explains. Regional andcommunity banks have been the key drivers behind smaller and moreabundant hotel projects, with 100 to 200 rooms each, accounting for44% of the total pipeline, he says.

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However, balance-sheet troubles began to surface among thosebanks in the second quarter, further thinning the availability offinancing, he says. Highly credentialed investor groups withexceptional hotel projects, that can invest larger equity in theirprojects, can still secure financing, but Ford contends that thosedevelopers won't proceed unless they have a leverage position wellunder the dollar-for-dollar equity some lenders now demand.

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Cutbacks in spending on corporate travel and off-site meetingsare creating a leveling off in demand for new hotels that Fordbelieves would not have occurred otherwise. Other countries are nowmirroring the American slowdown, being affected by a falloff ininbound tourism from overseas, he says.

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How much of a slowdown will occur in years to come is difficultto predict. Ford suggests that franchise agreements for new hotelsto start in the next 12 months will likely be extended asdevelopers await resolution to the lending crisis, he says, addingthat even a zero-growth pattern would still be seen asfavorable.

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Lodging Econometrics Q2 pipeline report forecasts a total of1,218 hotels totaling 135,373 rooms opening in 2008, a gross growthrate of 2.9%, with 1,508 hotels with 165,425 rooms opening in 2009,representing 3.4% growth. The net change for new supply will likelybe half a percentage point or less, the report stated. "We're inone of the most unusual periods that we as adults have ever beenin," Ford says. "All the banks are closed."

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