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Hotels Most Vulnerable to Recession Scenario

Is the U.S. economy in recession? That question is a matter of debate based on the responses of two prominent real estate experts during a recent Webinar on the outlook for the economy and real estate. The event sponsored by the Urban Land Institute attracted over a thousand participants.

Arthur Margon, a principal with Rosen Consulting in New York, believes the question is not whether the U.S. economy is currently in a recession, but whether it will be a shallow and brief one.

The good news, according to Margon, is that the commercial real estate property fundamentals remain healthy for the most part. The industry does not face excess supply, a problem that exacerbated the recession of the early 1990s.

The hotel market is vulnerable, Margon adds, particularly properties located outside the more expensive metropolitan downtown districts.

At the end of 2007, there were 5,438 projects in the U.S. hotel pipeline, with a total of 718,387 hotel rooms waiting to be added to the existing supply, according to research firm Lodging Econometrics of Portsmouth, N.H. The hotel research firm expects net supply in the hotel industry to grow by 2.5% in 2008.

Margon, however, is most concerned about lifestyle and entertainment-oriented retail properties as consumers are likely to cut back spending on more discretionary items in case of a recession. Margon is also concerned about condominium properties, which are being impacted by the housing downturn and facing excess supply in some markets. The office and industrial sectors are more likely to be impacted by demand.

Peter Linneman, a real estate professor at the University of Pennsylvania’s Wharton School, describes the current turmoil in the economy as more of a slowdown than a recession. Job losses, for one, are not at recessionary levels except on Wall Street — and that is a recent trend. However, a new report released by Challenger, Gray & Christmas, said that planned job cuts for March dropped 26% to 53,579, down from 72,091 in February. Of the job cuts in March, 4,663 were in the financial sector.

Starting in January, consumers and businesses have hesitated to make economic decisions, making for a systemic “wait and see” attitude, due to political and economic uncertainty.

Linneman is concerned that the government will “pass stupid laws” to get through this phase of uncertainty. The bottom line for investors, he says, “[is] in case of a capital strike, don’t cross the picket line if you don’t have to. Don’t sell your assets if you don’t have to. Don’t finance your assets if you don’t have to.”

A recession for the U.S. economy has been expected for over two years now, Linneman noted, and he does see the possibility of a recession later this year or more likely in 2009 after a new leadership takes over in the White House.

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