With the fear of flying reaching epidemic proportions and thousands of airline and hotel layoffs decimating consumer confidence, the lodging sector could see its already tottering financial performance fall into a virtual abyss.

During the first half of 2001, real estate firms outperformed most other sectors on Wall Street. The single, glaring exception were lodging companies, which suffered from a dramatic slashing of corporate travel budgets across the country.

The terrorist attacks in New York and Virginia now are causing American consumers and business travelers to rethink their past behaviors. Jumping on an airplane for a cross-country jaunt no longer seems very attractive. This already has impacted the airlines, resulting in more than 120,000 jobs eliminated and the threat of bankruptcy.

Now hotels are feeling the pressure. Reservations are being canceled left and right, and travelers are deciding they would rather stay home with the kids.

Already, industry experts are predicting that planned new hotel construction will take a nosedive in the next two years. PricewaterhouseCoopers expects 6 percent of hotel projects scheduled for completion in 2002 and 2003 to be canceled or deferred.

Room completions for 2002 are now estimated to be 81,800, or 28 percent below 2001 completions. Room completions for 2003 will decline to 77,000, or 6 percent from 2002 levels.

Room completions in 2001 will decline 18.5 percent below the level expected in PricewaterhouseCoopers' July 2001 Lodging Forecast, and 16.2 percent in 2003 below the level expected in July.

Combined with higher numbers of room removals in 2002 and 2003, net supply growth for 2002 is now estimated at 1.5 percent.

"This forecast is for room completions to be at the lowest level since 1995," said Bjorn Hanson, global industry leader, PricewaterhouseCoopers.

The pain already is being felt by at least one major lodging firm. ResortQuest International, Inc. (NYSE: RZT), the world's largest vacation rental property management company, has started a massive cost-savings program. This includes a hiring and wage freeze and 100 layoffs.

"As a result of the downturn in the vacation and travel market, and in response to the severe decline in national travel due to the tragic terrorist attack of September 11th, the company plans additional measures to address the changing business climate," said a statement from ResortQuest.

"All of us at ResortQuest mourn the tragic loss of life in New York, Washington and Pennsylvania last week," said David Levine, chairman, president and CEO for ResortQuest. "The effect of these national tragedies on the leisure and vacation industry has been very severe. While we are uniquely positioned to lead and attract new customers to our premium properties across the country, the next two quarters will be very challenging for the company.

"Traditionally, nearly 70 percent of our revenues in the fourth and first quarters are derived from customers who fly to ResortQuest destinations," Levine added. "The immediate and rapid decline in air travel and advance airline bookings will impact our occupancy, (revenue per available unit), and revenues in the upcoming quarters. As a result we are lowering guidance for the remainder of this year and expect a difficult first quarter of 2002."

The company is hanging its hat on improved performance in the second and third quarters of next year, when 70 percent of its customers drive to its properties.

After a steady, gradual climb spanning much of the year, ResortQuest stock has taken a nosedive since the beginning of September. Shares are now trading near their 52-week low at $3.95.

Just as the airlines go, so do lodging properties follow. And there won't be any government bailout for Marriott, Sheridan and the like. Look for a rough ride ahead in this most vulnerable sector of the real estate industry.

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