Lodging Econometrics Q4 2008 Global Quarterly Report

. March 31, 2009

MARCH 31, 2009 - Except for a few countries, Construction Pipeline totals worldwide peaked for the cycle by Q2 2008. Sensing an economic slowdown and an impending financial crisis ahead, developers hurried to announce their projects into the Pipeline and, if financing was already secured, rushed to get construction underway.

Since Q3 2008, worldwide economic growth has declined precipitously and a corrosive banking crisis has emerged, creating a collapse in confidence and severely hampering business and leisure travel. Lodging operating performance for Open and Operating (O&O) hotels has been seriously impacted. Moderate at first, the rate of ccupancy declines have now quickened. Room rates are eroding as well. In many countries, the declines are steep. Consequently, RevPAR is off substantially, falling at rates not experienced in years.

Amidst these growing concerns, developer sentiment is falling. Pipeline project counts have tumbled from Q2 2008 peaks. Many projects already in the Pipeline have been unable to migrate forward towards construction as financing has all but dried up. The exceptions are some smaller projects that are able access local lending. Cancellations and Postponements have skyrocketed. Operating performance of current O&O hotels is also affecting project feasibility. New Project Annotnouncements into the Pipeline have fallen rapidly to new cyclical lows. Finally, a record number of projects exited the Pipeline in 2008 as New Hotel Openings. They should continue strong in both 2009 and 2010.

There has been unprecedented governmental intervention worldwide to both help recapitalize financial institutions in order to bolster lending, stimulate connotsumer spending and prevent essential industries from failing. All interventions are designed to arrest and slow the dramatic rate of economic decline visible most everywhere, so that a bottom can be reached.

The International Monetary Fund is calling for a worldwide contraction in economic output of between 0.5 and 1.0% in 2009, the first drop in 60 years. Most eyes are on the U.S., as it is at the epicenter of the global slowdown and is likely to be the bellwether signaling future improvements. Meanwhile, there is considnoterable political speculation about whether global programs are too expansive or whether they are in fact not expansive enough. The big question is when will the improvements be visible. For now, there is still some uncertainty about 2010.

With the world deleveraging, it has become a demand-starved recession as business and consumer balance sheets reset, goods and services are repriced, and real estate values descend. A new lodging real estate cycle will begin when the current mortgage crisis clears, lodging real estate revalues, and an improved lending environment is established.

Transaction activity will be the first to revive as it will be less expensive to buy than to build. Distressed assets will be plentinotful and represent a significant buying opportunity for investor groups. Many newly constructed hotels and those that underwent renovation and repositioning programs are likely to be in search of refinancing and, perhaps new, monied partners.

Significant assets in key markets will be available, as will portfolios of midsized branded hotels. M&A opportunities should be meannotingful, as the leadership roster of global and regional companies, brands and investor groups will likely be reordered. Once in a lifetime acquisition opportunities will emerge, as a new group of investment funds assemble and enter the industry to take advantage of the next economic upswing. If history is a guide, the period of opportunity could last for 2-3 years.

Lodging Econometrics (LE) of Portsmouth, NH is the global authority for hotel real estate. LE conducts Supply Side research for all markets, developers and brands and companies in: U.S., Canada, Mexico, Central America and the Caribbean, Europe, Asia, Middle East, South America, and Africa.

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