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Portsmouth, NH-based Lodging Econometrics’ end-of-year data and construction forecast shows a record-number of projects, 718,000 rooms in the construction pipeline, but the company believes that within the past weeks the obvious worsening of the residential mortgage meltdown and its spread to commercial sectors will cause a bulk of projects to founder and make financing scarce for major projects. In the report, the company points out numerous other negative issues facing hotel development: a declining economy and potential recession is creating a softening in demand, room rates, RevPar and operating profits.

Lodging Econometrics president Patrick Ford tells GlobeSt.com that the hospitality market is “virtually shifting under our feet.” With warnings of danger in securitized sub-prime mortgages and adjustable rate mortgages beginning in 2006 and exploding in 2007, there has been a very long lag for these issues to affect the hospitality industry, he says.

Ironically, this same period was a heyday for the hospitality industry nationally, Ford says. The lodging industry posted record-breaking occupancy, RevPar and room profit in 2006 and 2007. “Lodging at an operational level didn’t feel any impact (from the economic slowdown) until November, December and early January, when we began to see a little bit of impact on demand and occupancies,” Ford says.

“The whole credit crisis emerged at lightening speed, so quickly and its impact so enormous, we now think it could be a long-term subject, the (mortgage) credit crisis, since last spring is just now having an impact on lodging, just in the past eight or 10 weeks….I can’t look forward and estimate and project what will happen. Is it a slow down or a recession?” he says. “That’s what’s moving under our feet as we speak,”

Ford says the last lodging real estate bottoming out was in 2003. “Over the years we predicted that stimulus in the hospitality development would last until 2010, (but) about a year ago we changed our mind and saw an end in 2009, a soft landing,” he says.

Now the lending pipeline for lodging properties “is closed down,” Ford says. “The selectivity by lenders is horrible” with proven developers needing 35% to 40% for a large project to even be considered, he says. “No one is thinking large projects this year,” Ford says.

Projects in the pipeline that “haven’t started locating financing yet” will find out that they’ve missed the boat, except in the sector of limited-service, small hotels in the 200-room range. The limited service smaller hotels are the play during this credit crunch.

“Why the (construction) pipeline is at record levels is that developers are internally optimistic and have been announcing projects with the idea they’ll have time to source the financing, or that the financing crisis will clear up right now,” Ford says. Those account for thousands of units in the so-called record-breaking pipeline that won’t see one shovel of dirt turned, he says.

His company reported that Q4 2007 showed a 36% increase in pipeline totals, with 1,565 projects totaling 223,997 rooms, compared to Q4 2006′s 1,237 projects totaling 166,733 rooms. The balance of the 718,000 rooms in the pipeline is either under construction, scheduled to start within the next 12 months, or in early planning. In 2007, 985 hotels opened with a combined 100,507 rooms. Lodging Econometrics predicts 1,208 hotel openings totaling 133,269 rooms in 2008, and 1,456 new projects opening with 166,236 rooms in 2009.

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