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As the financing freeze spreads across the globe, hotel development has come to a virtual halt. Even areas that were once considered immune from the global credit crisis, such as the Middle East, are beginning to witness a diminished pipeline.

In its Q3 ’08 report on Europe, the Middle East and Africa, Portsmouth, NH-based Lodging Econometrics counted a total construction pipeline of 1,656 projects with 358,067 rooms, a drop of 6% and 4%, respectively, from what it terms a cyclical peak in the second quarter of last year. Of those three separate regions, the Middle East registered the smallest drop-off, a 3% decline in both projects (556 down to 541) and rooms (164,259 down to 159,690) between the second and third quarters of 2008. (The total pipeline calculation includes projects under construction, those scheduled to start in the next 12 months and deals in the early planning stages.)

Yet LE president Patrick Ford says the region will soon witness the impact of the credit crunch, albeit later than other parts of the world. “The Middle East is the last area of the world to feel the banking crisis,” he says. “For a long period of time, the banking community in the Middle East was thought to be self-contained. But recently, there has been a pullout by a lot of international bank funds and as a result, the Middle East now has the same lending difficulties that other parts of the world have.”

Similarly, the total pipeline for Latin America, which includes Central and South America, the Caribbean and Mexico, had decreased between the second and third quarters of 2008, going from 670 projects and 121,431 rooms to 640 projects and 113,505 keys. Likewise, the Asia Pacific region witnessed a decline in the total number of projects in Q3 ’08 of 8% to 1,990. The room count dropped 11% to 466,456.

“The slowdown [in construction] is happening everywhere,” Ford says. “There is no area that is escaping it. It started in the US, and the only question is whether a region is one or two quarters behind.”

Between the second and third quarters, the total construction pipeline in the US saw its first quarterly decline in five years, according to LE. The number of projects shrank by 4% to 5,652, while the unit tally dropped 6% to 740,272. In Canada, the Q3 ’08 total pipeline stood at 231 hotels with an aggregate 29,517 rooms, the lowest level in seven quarters and a decline of 9% from the previous quarter.

John Bralower, president of the hospitality group at Carlton Advisory Services Inc. in New York City, is not surprised by the deceleration in new development worldwide. “Excluding projects that were already in the pipeline and basically fully funded, or close to fully funded, construction volume has slowed dramatically throughout the world,” he says. ‘To get a new construction project financed you’d have to have something really extraordinary in the way of sponsor strength and project. Also, a lot of the development over the past few years on the hotel side was driven by a link to residential and that has slowed down worldwide as well.”

In terms of product type, Ford says the drop-off is most pronounced in the luxury and upper upscale segments. “Those are the ones that just cannot locate any kind of financing,” he states.

Yet there are exceptions, Bralower finds. Some Caribbean countries will provide government funds, and certain deals can still get financed. “It depends on the specifics of the project,” he says. “In major cities, if a great site becomes available, you could still do a five-star luxury hotel. It depends on the cost, and the project has to make sense—more sense now than it used to. It varies depending on the location and the sponsor. But across the board, there is a slowdown.”

What has changed dramatically is the amount of leverage a developer can obtain, Bralower says. “It’s no longer 90% first mortgage financing,” he says. “The construction deals that are getting done now probably look more like 50% to 60%, possibly with some recourse, which there never used to be. Recourse was a word I hadn’t even used in the past 10 years.” Bralower says that new ground-up construction is scarce. Instead, his firm is working on projects that have already broken ground where there is a need for extra capital.

This diminished construction pipeline, however, could be a mixed blessing for the hotel business, Bralower says. “One of the things that has always hurt the hotel industry is overbuilding, and obviously pipelines have become restrained all over, including New York City.”

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