The path back to prosperity for hotels and hotel companies is clear but treacherous, lodging company mogul Fred Malek told an audience of hotel asset managers last week in Arlington, VA.

“Innovation is the key,” said Malek, co-chairman of Thayer Lodging Group, during a luncheon address at the fall meeting of the Hospitality Asset Managers Association. “We’ve cut costs as much as we can. Now, the focus is on managing our distribution and maintaining rate discipline.”

Malek, whose firm owns 15 properties, recalled the immediate aftermath of the Sept. 11, 20011 terrorist attacks and their effect on the hotel business. At the time, Thayer owned the Wardman Park Marriott, the large convention hotel in Washington, DC.

“We were devastated,” he said. “By October (2001), our occupancy was four percent, and we were hemorrhaging money. But we came back, and by 2002 the property was covering debt service. We sold it in 2004 for an 18-percent internal rate of return.

“This shows an industry can come back from even the worst of circumstances, although this time we won’t snap back as quickly as we did after 9-11,” he said.

Although Malek sees the slowdown in new hotel supply as a positive for the industry, he believes a number of threats are on the horizon. One is the huge federal deficit (“the real estate industry was overleveraged, and now the federal government is”), which he believes will eventually spawn inflation. “While inflation means hotels can raise their rates, ultimately it’s no one’s friend,” he said.

Another long-term challenge (and opportunity), according to Malek, is how to cater to the two demographic segments—Gen Xers and Baby Boomers—that are growing rapidly. In 20 years, he noted, more people will be over 65 than under 25, and the average age of the country will be older than is the average age of Florida today.

As the head of a private hotel investment firm that’s completed nearly $2 billion in hotel transactions in its 18-year history, it’s not surprising Malek is especially bullish on acquisitions.

“If you buy right, and not just cheap, and you buy in the right markets, you’ll do well in the coming years,” he said. Later in the month, Thayer will close its fifth private equity fund worth $300 million. According to Malek, the firm’s previous four funds averaged 28-percent return, but he’s confident the new one will top that mark.