The sharp drop wasn't a reflection of California's economic performance or its tourism industry, both of which boomed last year. Instead, says Atlas president Alan Reay, the slowdown was caused by dramatically tighter underwriting standards imposed by lenders.

"Lenders became very conservative," Reay says. Even those willing to finance new lodging projects often required developers to put up 40% or 50% of a project's cost, compared to as little as 20% or 30% just one year earlier, he adds.

The report says Northern California saw the biggest drop in hotel construction, with only 39 being built last year compared to 69 a year earlier. In Southern California, 25 hotels were built compared to 32 in '99.

Though construction will likely remain fairly low this year too, Reay says there's a silver lining for hotel owners and operators. Demand for new rooms is outpacing supply by a 4-to-1 margin, he says, which means room-rental rates and sale prices should keep climbing.