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NEW YORK CITY-Continuing with the theme of opportunity amid economic clouds that was sounded at the start of the Real Estate Media’s RealShare Hotel Investment & Finance Summit, the afternoon’s featured speakers leavened the bad news with encouragement for investors. “Some courageous people are going to buy things, and they’ll be the smartest people in the room right now,” said Jan deRoos, HVS International professor of finance and real estate at Cornell University.

In the “Predicting the Next 12 Months” presentation that concluded the conference, both deRoos and Jan Freitag, VP of global development at Smith Travel Research, made it clear that the current numbers suggest some courage will be needed to make buying decisions.

Similarly, Dr. Sam Chandan, chief economist at Reis Inc., said there were “many questions” facing would-be investors in the hotel sector. Among these are lack of clarity about the depth of the economic downturn and the time frame for the credit markets stabilizing. However, Chandan’s presentation was titled “Finding Opportunity in Economic Uncertainty,” and he said “there’s a big silver lining” for prudent investors who find opportunities where pricing is in line with the fundamentals.

Chandan noted that when capital is plentiful, pricing may exceed what the underlying fundamentals would suggest. Conversely, he said, when credit is constrained there is uncertainty about where cap rates and prices should be. It was a point deRoos echoed later in his presentation: “Nobody really knows what their hotels are worth” from a pricing standpoint.

In line with comments made earlier in the day by Mitesh Shah, senior managing principal and CEO of Noble Investment Group, Chandan said it doesn’t really matter if technically we’re in a recession or not, because consumers have been behaving as though we are. This reluctance to spend is coupled with homeowners’ expectations that residential sale prices won’t be going up this year.

“We’ve seen that the Fed has been creative and dusted off the history books to see what tools are at its disposal,” said Chandan. Despite this, the cost of capital in the debt market is significantly higher than a year ago. The spread between Libor and Treasury is 140 basis points, versus 20 basis point a year ago, he noted. In the current market, “All deals are being priced as though they’re of low quality,” Chandan said. Therefore, he said, “Anybody who comes into this market with a significant amount of equity has a great advantage.”

Noting the changes in the market compared to a year ago and the palpable uncertainty he sensed among conference attendees, deRoos joked, “the smell of fear is different than the smell of greed.” He identified several realities of the present: cap rate expansion, cash flow risk, conservative underwriting and more expensive debt capital. “What this means for everyone in the room is that your holding period just got longer,” he said.

Success, deRoos said, lies in understanding the fundamentals, understanding portfolio dynamics and understanding the capital markets. He noted that 2008 will be a good year to make equity investment and divestment decisions, adding that this will also be a year where picking markets is more important than picking individual properties.

Freitag projected that the industry’s overall occupancy rate will be flat this year: 63%, compared to 63.2% in 2007. He noted that while the first quarter occupancy numbers will look “pretty painful,” the March and April monthly numbers should be taken together for a truer picture. Although supply will continue to outpace demand as thousands of keys are added nationwide, demand growth will be positive this year, increasing by 1.4%.

In the construction pipeline, Freitag noted, the number of keys at the “final planning” stage is way up from a year ago, indicating that developers are more cautious about actually starting construction. Aside from certain markets, the condominium hotel format is “dead” in terms of new development; Freitag pointed out that condo hotel projects totaling 11,500 keys were abandoned in ’07, compared to 2,900 abandoned keys in 2006.

Economic downturn or not, STR predicts a 4.7% growth in room rates in 2008. Freitag noted that while some observers “think we’re on crack” for making this prediction, “we believe that number is achievable if hotel operators listen to their lesson from after 9/11.” In the travel slump following 9/11, operators cut room rates indiscriminately in an unsuccessful attempt to spur occupancy.

Between Chandan’s presentation and “Predicting the Next 12 Months,” there were breakout sessions featuring panels of industry experts. Among these was a session on whether brands can help owners in getting deals done. “We have yet to find that a brand can really help in acquiring capital,” said panelist Ashwin Patel, president of Southwest Hospitality Management. Bill Sipple, VP of development at Carlson Hotels Worldwide, observed that the question of whether brands will kick in equity depended partly on whether the owner was pursuing a franchise model or management contract model.

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