DC's Rapid Hotel Construction Has Kept Rates Stagnant, Owners Say

As of earlier this year, 23 new hotels were under construction in the DC area. This addition of 3,154 rooms into the market represents a 2.9% increase in supply, according to the HVS/STR Hotel Valuation Index. Largely because of this influx, local hotel owners, managers and financiers say rate growth has been underperforming. Many of the big players in the regional hotel industry will discuss their market outlooks at the fifth annual Bisnow Lodging Investment Series next Wednesday at the JW Marriott in DC.

B.F. Saul Co president Mark Carrier, who will speak at BLIS, says the firm's eight Dulles-area properties have underperformed largely due to this supply influx.

"“The Dulles submarket is challenging," Mark says. "Growth at the airport has stalled and while the regional hotel set has a reasonable occupancy, rates remain depressed. The market became oversupplied in the last cycle and has never truly recovered from a RevPAR perspective. The connection of Metro to Dulles may be a significant future factor. " 

In order for demand to keep up, one of DC's main drivers—conventions—must see solid activity in the next year. Foxhall Partners managing partner Matt Wexler says the District has a robust convention schedule for 2017, which makes him optimistic about his hotel portfolio. 

"September is a strong, healthy month here in the District from a demand perspective," Matt, who will also speak at BLIS, says. "We think that that’s only going to continue, the convention booking advances for 2017 are really at levels that have not been seen before in the District and we believe that that demand will help us."  

In June, Foxhall celebrated the reopening of the Kimpton Glover Park Hotel, which underwent significant renovations, including the addition of an Urban Athletic Club gym by Graham King that's open to the public for memberships and classes, plus a signature restaurant, Casolare by Michael Schlow. 

Matt says the hotel's performance has exceeded expectations since the reopening. He expects a 35% to 40% higher room rate this month than in the previous two Septembers before the renovation.

"That is indicative of the guest satisfaction of the new product," Matt says. "We believe it shows the demand for an attractive, fully renovated, boutique offering in upper Northwest DC, which hasn’t really existed." 

On the financing side, CapitalSource CRE finance director Sonia Khanna, another speaker at BLIS, says she sees some upside potential in DC; sequestration delayed the District's growth relative to other markets.

"From the lending point of view, nationally, we’re very cautious on hotels, given increases in supply and slowing RevPAR growth," Sonia says. "In DC we're a little bit more positive, depending on the submarket and historical performance of the property."  

CapitalSource has mostly financed value-add projects to existing hotels, and while it has deals in the works for construction projects nationally, Sonia says because of all the supply coming to the DC market she would be hesitant to finance new hotel construction in the region. 

"We are a lot more careful in regard to hotel construction," she says. "Of course, supply plays into that."  

Greenbelt-based Chesapeake Hospitality manages dozens of hotels nationwide with a large Maryland portfolio. Principal/COO Chris Green, who will also speak at BLIS, says the Maryland hotels have lagged behind other markets, and he expects this slow growth to continue for the next 18 to 24 months. 

"I continue to see a softening," Chris, above with VP of HR Brenda McGregor, says. "There’s still rate opportunity, but occupancy seems to be moderating...I think it's going to take time to absorb the supply."

BLIS, Bisnow's annual, full-day hotel summit, is six days away at the JW Marriott in DC. Sign up here.