Sep. 24, 2002 - Private investment in hotel and motel construction in the United States hit a six-year low this summer, falling almost all the way back to 1990 recession levels. 

This time around, the events of Sept. 11 were a factor. 

The Commerce Department reported that for July the national, annualized rate of new construction of lodging properties was $10 billion -- down from $15.2 billion in July 2001. 

Locally it's the same story. 

"Hospitality is not the hot thing," said Pamela Berneking, president of the Briarcliff Gold Bank in Kansas City, North, and president of the Kansas City chapter of Crew Network, an organization for commercial real estate professionals. 

During the late 1990s, hospitality projects blossomed as their own sub-market in the financing industry, Berneking said. Those days are over. Now, "it's a deal-by-deal situation," she said. 

At the same time, Kansas City's hotel market is healthier and more resilient than most other cities, and industry expert Jeff Marvel reports commercial lodging developers and investors here are beginning to stir after a four-year hibernation. 

"People are starting to snoop around in classic interstate locations," said Marvel, president of Horwath Horizon Hospitality Advisors, LLC, in Kansas City. 

Hot spots include western Wyandotte County, which Marvel predicts will boom in the next five years, and blossoming commercial corridors in eastern Jackson County communities such as Blue Springs and Lee's Summit. 

Johnson County also is attracting renewed attention, said Marvel, especially around the Overland Park Convention Center and companion Sheraton Hotel that are scheduled to open later this year. 

Work has even started on renovation of the long-vacant President Hotel downtown. 

Norman MacLoud, executive vice president for Sheraton Hotels & Resorts, said the national slowdown hasn't deterred Sheraton from bricks-and-mortar projects. Two hotels are under construction near Phoenix with others in New York, Detroit, Denver and Charlotte, N.C. 

"The recovery is not going to happen as quickly as we'd like," MacLoud said. "But these projects in the works will be successful." 

Sheraton, he said, is looking to the third quarter of 2004 for a return to normalcy and pre-Sept. 11 business levels. 

Sept. 11, however, was only the latest factor in an industrywide construction malaise. 

Until 1990, annual private investment in the nation's commercial lodging real estate market had grown steadily for decades, according to the Commerce report. 

Marvel said the repeal of favorable tax laws during the late 1980s and numerous recessionary pressures of the early 1990s put the brakes on an era of steady growth. 

Economic recovery spurred a construction binge through the late 1990s, aided greatly by technology breakthroughs in hotel operations that shaved traditional break-even margins. That period of exuberant expansion peaked in 2000 when $16.3 billion was poured into new facilities. 

But that 1990s building boom overbuilt many markets, including Kansas City. 

Between 1995 and 2001, Kansas City's room inventory grew by 45 percent. After 1999, however, the pace slowed dramatically, to 6 percent. 

Today growth in demand for a hotel room in Kansas City lags behind supply, and at a time when supply is starting to grow again. 

It is that imbalance -- combined with the industry chill of Sept. 11 -- that is feeding today's depressed hotel occupancy rates and earnings. 

Although cautionary flags are out, Marvel said anyone planning to build or buy a hotel in the next couple of years ought to be busy right now. 

"If you believe the economy is going to be stronger in 2003 and 2004, now is the time" to do lodging deals, said Marvel, and start the clock on the typical 18-month construction lag. 

Money is fleeing Wall Street and much of it is headed to real estate, he said. 

So far, however, comparatively little cash is being funneled into lodging projects, according to an analysis in the Sept. 1 issue of National Real Estate Investor. 

From early 2001 through June loan originations in the hotel sector fell 50 percent, the trade journal said. 

During the second quarter of 2002, the Primedia Business Magazines & Media Inc. survey of commercial mortgage banks found 2 percent of all commercial loans went into lodging projects. 

Instead, the survey said 51 percent of available mortgage dollars went into apartment buildings and other multifamily housing deals. 

"Underwriting standards have gotten so tight, nothing's getting financed," Gold Bank's Berneking said. "Financing has been a problem the past 12 months, for obvious reasons, but we may be seeing some improvement." 

Marvel cautiously agrees. 

"The economic outlook is cloudy," he said, "with the enthusiasm prevalent early in the year now confused with stock market disarray and election-year finger pointing." 

Since Sept. 11, 2001, Marvel said, area hotel occupancy rates are down 1.5 percent as the market recovers from a Sept. 11-induced travel recession. That's good news compared with the national market, which is down 3.7 percent for the same period. 

For the first six months of 2002, area occupancy is averaging just 60.1 percent. That's the low end of what Marvel said is the market's healthy range of 60 to 65 percent. 

The good news is that the seasonal vacation bulge pushed June occupancy to 68 percent. For investors the bad news is that the average cost for one of those rooms was $72 -- down 2.5 percent from June 2001. 

"The results can be interpreted as the market returning to stable, pre-Sept. 11 levels," Marvel said. "The glass is half full." 

The marketplace isn't getting any easier. Marvel said hotel room supply in Kansas City was up almost 1 percent through June and by year's end will jump by nearly 3 percent with the opening earlier this month of the 147-room Hilton Garden in Kansas City, Kan., and the December opening of the 412-room Overland Park Sheraton. 

In Kansas City, Kan., Hilton represents the long-missing lodging complement to the city-owned Reardon Convention Center in the middle of the downtown government office district. 

"The Reardon Center was never really functional without quality hotel rooms," Marvel said. 

Now, he said, Kansas-based groups that meet in Kansas will have another option, and one that will help grow convention activity in the metropolitan area -- and ideally beyond the Hilton's bed capacity. 

And that is the challenge. If it is not met; if new demand for hotel rooms cannot be generated to make up lost ground of recent years while also outgrowing new supply, then the local lodging industry could stall in neutral or even slip into reverse. 

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(c) 2002, The Kansas City Star, Mo. Distributed by Knight Ridder/Tribune Business News. HOT, PRM, HLT,