On top of fears that there may be too many new hotel rooms in New York City’s development pipeline, some industry experts are warning that if the credit crisis spurs a global recession, the hospitality industry could be further damaged due to a drop-off of foreign tourists visiting America to take advantage of the weak dollar. Still, even though financing for new hotel projects is all but dried up except for longtime local operators and certain national chains, some real estate experts say the strong fundamentals of New York City’s hotel sector will allow it to weather an economic downturn.

“People think they can still do a hotel without a franchise, and that just won’t fly,” a managing director at PB Capital, Peter Hannigan, said.

“We are concerned about the continued strength of this sector. So far, we haven’t seen any softening, but we expect there has to be. The New York market, in particular, has been helped by the weak dollar. This may not continue,” he added. “We will look at hotels very carefully in 2008. There are a number of hotel development projects that are being proposed in New York City. I don’t know how many of them will go forward. Given land costs, most developers are proposing small hotels with condos. I don’t know how many lenders are doing this.”

The managing director of the hospitality and gaming group at Cushman & Wakefield, Eric Lewis, said much of what is in the pipeline “will either be delayed or shelved due to the credit markets and changing fundamentals. The real story at this point is the demand side, which has always impacted the New York hotel market more quickly and dramatically than the supply side. There are some early signs of softening demand in Manhattan, but it is too early to conclude we are headed for a big drop in demand.”

However, Mr. Lewis said foreign capital has greater interest than ever in New York real estate, hotels included. “We’ve had meetings with several overseas hotel companies who view now as an opportune time to establish or expand their U.S. presence.”

In 2007, more than 46 million people visited New York City, up more than 5% from the 2006 all-time high of 43.8 million visitors. “Through the end of 2007, the revenue per room increased by 13.5% over 2006,” according to the managing director of Ackman-Ziff Real Estate Group, Mark Owens. “About 8.5 million of the visitors were from overseas, an increase of approximately 17%, and accounting for 20% of all overseas visitation to the U.S. in 2007,” Mr. Owens said.

To meet the demands of these new visitors, hotels are under construction and in planning stages throughout the region. “The market for hotel accommodations in New York City is one of the most robust in the world,” the chief executive officer of Lodging Investment Advisors LLC, Sean Hennessey, said. “Because of New York’s leading position among U.S. hotel markets, it is often closely watched as a bellwether of emerging trends.”

Mr. Hennessey said one of the biggest questions for 2008 is how the pipeline of new hotels will affect citywide occupancy levels. With about 80,000 rooms in New York City and nearly 65,000 in Manhattan, citywide occupancy for 2007 was 84%, he said.

“According to Smith Travel, the pipeline of hotel projects is roughly as follows: 8,500 rooms in construction, 1,500 rooms in final planning, 7,500 rooms in planning, and 3,800 rooms in pre-planning. Considering normal attrition rates and development lead times, the market will likely see about 14,000 new rooms eventually enter the market,” Mr. Hennessey added.

He added: “There have been no explicit signs of weakness in the market, but the slowdown on Wall Street, coupled with the writers’ strike and the weakness in the Irish stock market, has created a noticeable softening of demand even during a prime mid-week period. The main bright spot or hope for hoteliers is that the weak U.S. dollar will set the stage for a robust tourist season, but the reality is tourists are not as attractive as the corporate customer.”

The chairman of Massey Knakal Realty Services, Robert Knakal, said the fundamentals of the Manhattan hotel marketplace remain strong, despite the supply additions that are currently in the pipeline. “The city benefits from the highest guest room-to-office space ratio in the country and substantial demand that cannot be accommodated because it is either priced out of the market, or space is simply not available,” he said.

Unfortunately, the possibility of a recession, the crisis in the credit market, the inability to obtain financing, and the excessive amount of planned new developments may change the tide for the hospitality industry.

The chairman of the Lightstone Group, David Lichtenstein, said he thinks lenders “will take a wait-and-see attitude for the next three months. There is too much in flux. Will Europe follow the U.S. into a recession, which will affect travel? Will the cuts in Libor and federal incentive programs of the White House help?”

He went on to say: “Will spreads for financing tighten or widen? A lot of lenders are fearful of their jobs. For many, waiting to see where the world goes will be the default mode.”

The principal of one of Manhattan’s most active hoteliers, Richard Born of BD Hotels, said: “I probably get a call every day from someone asking if I want to joint venture or invest in their new hotel project. When I discuss the perils of new development at this time most people laugh and suggest that I just want to discourage others from building so I can monopolize that market myself. My response is simply that I would rather purchase new hotels from the banks in three years at 50% discount, than invest at full price today.”

He added: “Although we have not, as of yet, felt any effects of a national economic slowdown on hotel demand in the city, it is likely to come at some time. This coupled with an inventory increase of 20% to 25% will have a significant depressing affect on occupancy. While many people are anticipating a modest decrease in occupancy over the next two to three years, no one is factoring in how that decrease will affect rates. I think that the curve is fairly steep. I would estimate that for each occupancy point decrease we will see a 2% to 3% rate decrease. If you do the math, that would mean that a 10% drop in occupancy would result in a 30% to 35% drop in total room revenue. That would surely be enough to effectively bankrupt every newly built hotel and any existing hotel carrying a large debt burden.”

Perhaps the biggest problem facing developers is the ability to obtain financing for new hotel development. “The pendulum of getting non-recourse loans on hotel deals has now swung in the opposite direction of one calendar year ago,” the principal at Troutbrook Companies, Marc Freud, said. “In general, for small and mid-size deals to $70 million in overall capitalization, if one is not willing to sign with your corporate balance sheet as collateral, then good luck in finding a construction loan and lender.

“The credit market dislocation has made the financing of hotel deals increasingly difficult with diminished capital sources; that amount of new supply in New York City has spooked some lenders to withdraw from the construction of hotels with first-time newbies,” Mr. Freud said.

Mr. Hennessey said that even experienced operators “are now required to place as much as 30% to 40% in equity for a lender to commit for financing. Spreads are nearly twice as high as less than twelve months ago, with pricing at Libor plus 350 for the best-sponsored projects.”

He added: “At this point only a few projects planned for development have been canceled and a number put on hold. I suspect that lenders will closely watch whether that the hotel fundamentals show any signs of weakness during the first quarter before re-entering hotel lending.”

The senior real estate partner at Herrick, Feinstein LLP, Dennis Russo, said that for new construction, “it is true that lenders are few and far between at the moment and standards are tightening a bit. Additionally, if an owner is to have any hope of building a hotel today, the right team must be in place. The team must include the right architect, franchise, and most importantly, the development and construction team with New York City experience.”

Nan Molofsky, a senior vice president with the City Investment Fund, which owns the Crowne Plaza Times Square, is optimistic: “We will, of course, continue to watch carefully, but at this time, all of the market indicators for the start of this year remain strong year-over-year. While it is true that financial services firms may scale back, they are but one segment of a broad-based demand for hotels in New York City and we feel confident that there will continue to be strong demand for hotel rooms here.”

A principal at Singer & Bassuk Organization, Scott Singer, said one significant shift that has already occurred in the finance market is a growing preference among lenders for projects with national flags. “Whereas boutique and independent hotels were viewed rather attractively over the last few years due to the high-profile success of projects like the Gansevoort, lenders are now seeking comfort in established brands with big reservation systems,” he said. “I guess you could view it as another instance of a flight to quality in uncertain times, although I’m not aware of any softening of the fundamentals of boutique hotels to date.”

The senior partner at the law firm Pitta & Dreier LLP, Vincent Pitta, said he doesn’t think “it’s necessarily a bad thing that some discipline is being put upon the hotel development sector of the economy. Many of the new hotel development projects over the past three years have been undertaken by non-hotel industry entrepreneurs who have been funded by inexpensive foreign and domestic financing.

“These are not usually long-term players and historically are usually the first hoteliers to panic in recessionary times, and in doing so, immediately layoff employees, cut room rates to the bone, and curtail services.”

He added: “Based upon the usual and accepted hotel economic yardsticks, over the last three years, the buyers of existing New York City hotels have likewise been overpaying for their properties, with record per room purchase prices that cannot and will not be sustained by traditional New York City hotel industry cash flow models in the most robust of times. One has to be concerned whether or not these high-priced buyers can survive anything more than a short, mild recession.”

Nevertheless, a number of hotels continue to sell and gain national franchises. Earlier this month, Hersha Hospitality Trust acquired the 45-room boutique Duane Street Hotel in TriBeCa for $24.75 million or $550,000 a key.

Hersha, a real estate investment trust, also purchased a “condominium interest” in a 93-room independent upscale hotel project at 75 Smith St. in downtown Brooklyn for $17.24 million, or $185,376 a key. The hotel component is within the mixed-use condominium project developed by Boymelgreen Development, and Hersha will spend about $6 million, or $64,500 a key, to finish the hotel. To be named the Nu Hotel, it is expected to open by the end of the third quarter.

According to the real estate sources, the Hotel 57 on East 57th Street and Lexington Avenue has been sold. The new owners will rebrand the hotel a Marriott Renaissance. Also, the Roger Williams at Madison Avenue and 30th Street will be sold before the spring, according to real estate sources, and the Paramount Hotel in Times Square and the Omni Berkshire on Madison Avenue could also be for sale.

Some industry leaders expect the hospitality industry to flourish in 2008. Nevertheless, experts say undercapitalized developers with limited equity, who fail to have national franchises, may have difficulty in obtaining financing for new hotels.

Mr. Stoler, a contributing editor to The New York Sun, is a television and radio broadcaster and a senior principal at a real estate investment fund. He can be reached at mstoler@newyorkrealestatetv.com.