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."