D.C.’s Hotel Industry Right Now

New Washington hotels are coming online, but analysts say things won’t return to normal until there’s a coronavirus vaccine

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A new report compiled by commercial real estate tracker Trepp reveals that the hotel industry is facing a historic wave of foreclosures as the COVID-19 pandemic continues to devastate small business hotel owners and its workforce. Additionally, many hotel projects in motion earlier this year have halted.

SEE ALSO: Colony Capital Sells Six Massive Hotel Portfolios, Unloads $2.7B in Debt

But not everything is grim news for the D.C. hotel industry.

Dutch hotel brand citizenM will be opening its first D.C. hotel Aug. 27 at 555 E Street SW. It will feature 252 rooms, 194 apartments and 10,000 square feet of retail.

“Our site selection strategy has always focused on picking well-connected urban locations with a lean toward business districts,” Ernest Lee, citizenM’s managing director of development and investments, North America, told Commercial Observer. “The citizenM Washington D.C. Capitol fits that profile, being surrounded by roughly 12 million square feet of office space, and a short distance to L’Enfant Plaza, The Wharf, Reagan National Airport and Amazon HQ2—all important for weekday travel.”

Obviously, the company didn’t plan for a global pandemic to coincide with its hotel opening date. Still, Lee said that when COVID-19 happened, citizenM’s options were limited.

“After we ran a number of calculations, we felt it was better to open the hotel at a negligible cost difference compared to keeping it closed,” he said. “We are grateful that we’ve always had a lean operating model with a heavy technological component, so we are able to keep costs down as we navigate the short-term challenges ahead.” 

The hotel developer is also going ahead with a new hotel project at 1222 First Street NE in the NoMa/Union Market area, targeting a late 2021 opening.

“As a basis-oriented developer, we are viewing this as an opportunity to benefit from a much more competitive cost environment,” Lee said. “Over the next couple years, we think we’ll be in a position to attract top crews and contractors, resulting in a higher-quality product delivered on a tighter schedule and at a better price. Furthermore, any new project will take a couple years to open, which will be at a time when, hopefully, we are opening with tailwinds.”  

Both hotels will have some combination of smartly designed bedrooms, creative meeting spaces, dynamic social hubs, and outdoor programming. A roster of local and global artists will use the areas inside and outside the buildings as their canvas – speaking to issues such as climate change and consumerism..

“Most of the hotel stock in D.C. looks and feels like it was designed for the government (much of it was),” Lee said. “D.C. is much more than just brown suits, and we believe our modern design and eclectic approach will be a bit more representative of the diverse culture and creative hub the city actually is.”

citizenM has also been actively searching the market for a third hotel, with its ultimate goal of owning between three and five hotels in the D.C. area.

OTO Development, part of The Johnson Group, just opened its newest hotel, Hyatt Place National Harbor, this week at 123 Waterfront Street. 

“Opening a hotel during a worldwide health pandemic certainly creates new challenges,” Corry Oakes, OTO Development’s CEO, told CO. “We have different uniform standards to include PPE for our team members and have even stricter protocols for cleaning and sanitation. However, we firmly believe people travel to experience new places, foods and cultures. We are ready to welcome travelers to the vibrant National Harbor community.”

Located within the 350-acre shopping, dining and entertainment destination of National Harbor, Md., the seven-story, 156-room, all-suite hotel offers waterfront views, on-site dining, a fitness center and 1,900 square feet of flexible meeting and event space.   

Kannan Sankaran, senior director at CBRE Hotels, noted that a good number of D.C. hotel projects have started in the past several months, with most active projects pushing their timing out three to 12 months.

According to Jamie Lane, senior director of economics at forecasting at CBRE Hotels Research, through the first six months of 2020, the D.C. market has seen an occupancy decline of 53.3 percent and an average daily rate (ADR) decline of 20.9 percent. The net result is a revenue per room (RevPAR) decrease of 63.1 percent. In the second quarter,  RevPAR was down 90.3 percent annually, according to Kalibri Labs.

“Occupancy averaged 16.1 percent for the quarter, down 80 percent from 2019,” Lane told CO. “Room rates were down 50.1 percent on average. The near term, like many major metro areas across the country, continues to lack clarity on when recovery will occur and what that will look like.”

That being said, there is mid- to long-term comfort in the region’s fundamentally recession-resistant sectors, including the federal government and trade associations. 

“Through the beginning of August, 17 percent of hotel rooms were still closed in the D.C. metro region, which is higher than the national average of 6 percent,” Lane said. “A concern that we’ve heard is the pandemic’s impact on global economies (let alone health and safety) and how that affects inbound international travel to the region.”

Jeff Davis, senior managing director at JLL’s Hotels and Hospitality Group, said D.C. mirrors what’s happening in other major markets. They depend on transient corporate travel, international travel and business group travel, so business is down heavily. That has basically stopped any hotel acquisitions from occurring and investors are shying away, he said.

“The acquisition market is sort of at a standstill and you’ll probably not see notable transaction activity until deeper into the fourth quarter,” Davis told CO. “It’s not a good time to be selling an asset in the market today and people will only be selling if they have to.” 

Developer Brian Friedman, who helped build the Line Hotel DC in the city’s Adams Morgan neighborhood through his D.C.-based firm Friedman Capital, noted the hotel industry has recovered slightly since the onset of the pandemic and the city’s shutdown. But demand is still incredibly low and the industry as a whole is suffering. 

“Washington, D.C., relies heavily on tourism and most people are still afraid or resistant to travel anywhere right now,” he told CO. “I do not think that the hotel industry will see any sort of real recovery until there is a vaccine readily available.”

The biggest challenge right now is consumer confidence, observers say. There is a misconception about the safety of staying in a hotel during the pandemic, but as long as hotel rooms are properly cleaned experts note there is a very low risk of catching COVID-19.

“Hotel rooms are relatively safe since the virus is known to spread through airborne droplets as opposed to lingering on surfaces,” Friedman said. “Hotels need to do a better job at getting that narrative out there and promoting their disinfecting procedures. Once confidence is back, demand drivers such as meetings, small events, weddings, etc., can come back.”

Many hope the market will begin recovery next year. For 2021, CBRE is forecasting a RevPAR gain of 59.7 percent though RevPAR for D.C. hotels is not expected to surpass 2019 levels until 2025.

“The biggest challenge is getting corporate and group travel back to normal levels,” CBRE Hotels’ Sankaran said. “With many companies allowing employees to work from home through early 2021 and maintaining restrictions on corporate travel, we expect that demand to be slow to recover. This will result in a longer recovery timing for the largest U.S. cities, like Washington, D.C, due to their high dependence on corporate demand.”