How DC’s Crippled Hospitality Industry is Accessing Capital

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The American Hotel & Lodging Association estimated that Washington, D.C. lost more than $2 billion in travel revenue in 2021, as the usually busy summer months were hampered by restrictions. 

Given the unprecedented drop in demand, and the sustained impact of near zero group travel, the ways in which hotels drive revenue to their bottom line have entirely changed. 

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Segments of the hospitality industry that have been able to create new revenue streams and novel experiences to entice tourism have seen success. But a key aspect of these efforts, along with the difficult task to simply manage costs and stay afloat, is being able to access capital to fund operating deficiencies and negotiate for financing and loan deferrals.

Government-based programs like the federal Paycheck Protection Program loans and COVID-19 Economic Injury Disaster Loans, as well as more localized assistance like the D.C. Hotel Recovery Grant Program, have helped. But often the hospitality industry has turned to private financing to stay afloat and reach their goals. 

Samantha Ahuja, shareholder in Greenberg Traurig’s Washington, D.C. real estate practice, spoke to Commercial Observer about the state of the District’s hospitality industry. 

Commercial Observer: How would you characterize the hospitality market in D.C. currently?

Samantha Ahuja: There is clear optimism in the D.C. market—the question we are asking is when will the market stabilize? There is some sense of optimism that we are over the worst of the pandemic, that the market will stabilize, and it will even begin to rebound as travel market indicators are showing signs of increases. 

What was the outlook at the end of 2021?

Over the last half of 2021, we saw some increase in average occupancy rates and Revenue per Available Room (RevPAR) and even some stabilization within the market from the lows of 2020. But that stabilization was just that—a leveling off. With major conventions and other group related business remaining stalled, D.C. did not fare as well compared to other large metropolitan areas in the U.S. However, some hotel properties retooled in early 2021 and were able to benefit from more localized tourism and pent-up demands with scaled down smaller group events like weddings. Prior to the emergence of oOmicron, we saw multiple hotels in the D.C. market trade at record levels, including some of the most iconic properties. 

What impact did the pandemic have on hotel sales this year?

Like many urban markets, the D.C. hospitality market has suffered on multiple fronts due to COVID-19, and the Omicron variant has further brought the immediate future out of focus.

While the pandemic fueled changes, there were significant transactions involving D.C. area hotels in 2021. These deals ranged from full-service luxury properties to more limited-service properties—some trading at record price points. While there was some of the softness as expected in group and convention center properties, D.C. appears to still be a strong market for long investment.  And while the D.C. hotel market fell victim to a few bankruptcies and preferred equity buy-outs, most of the hotels traded outside of any distressed sale scenarios. 

Is financing available for potential deals in this sector? What are you seeing?

The debt markets have started to remerge, and we are seeing more activity as debt is being put in place. Most of the loan deferments that were granted in 2020 and 2021 have ended or will be ending soon, and it is likely that more distressed hotel sales will occur in 2022.  

With that backdrop, a great deal of equity has been raised over the past 24 months, and the loosening of the debt markets will likely continue to spur hotel activity and lending. While we have seen some refinancing, C-PACE financing, upsizing of loans for pre-planned Property Improvement Plans (PIPs), and some financing for acquisitions, we expect to see more as the market settles. Determining valuation going forward is the biggest issue impacting existing loans and future property financing.  

How have hotel owners reacted during this time?

We have seen hotel owners using the down time to reposition their assets, renovate and otherwise rebrand, while others are finding meaningful and opportunistic ways to reduce expenses to bide time to recover. As loans come to maturity and loan deferments expire, the turnover in the hotel market and relevant underwriting will be telling as to D.C.’s hotel market recovery timeline. 

Overall, confidence in the Greater Washington hotel market is apparent given the pipeline of anticipated openings in 2022, 2023 and 2024. More than 5,000 additional rooms are slated to open in D.C. alone. 

What can you project about the hospitality industry in the District over this next year?

While there remains short-term uncertainty with the rise of omicron, the reemergence of group and business travel will be a trend to watch in 2022. Pent-up demand and expiring roll-overs of group event deposits could be a driver of this activity in the coming months.  The reemergence of international travel will be another market mover in many cities, especially D.C. 

I think the market will rebound quickly as soon as there is positive news regarding the end of the pandemic or acceptance of the “virus” as part of our lives for the immediate future. 

A further challenge for the D.C. market is the immediate impact of the national labor shortage. Like hotels in other markets, some D.C. hotels had to streamline their operations to account for labor shortages, which may have included closures of food and beverage operations, cessation or limited housekeeping, and limited availability of rooms or other amenities. 

Overall, the hospitality sector will face continued challenges in 2022 and 2023, but with a more focused ability to adjust to temporary disruptions.    

How are you advising hospitality clients on how best to navigate this time?

There is no one-size fits all approach. Key factors to consider include understanding the performance of the hotel prior to the pandemic, the current performance, terms of existing financing, and the availability of capital or funds from other reserves.

If possible, a strategy has often helped find a way forward by deferring repayment of debt. Calculating how much to reduce operations, whether to temporarily close or even revamp marketing and other operations is very much dependent on factors like seasonality, labor availability, and whether the hotel is in an urban, beach, leisure, or other metro setting.

Owners and operators may succeed by balancing the interests of lenders, investors, franchisors, and managers.

D.C. has benefited from its vibrant array of celebrity chef restaurateurs, luxury shopping districts and other high-profile tourism areas like the National Mall. The pandemic put a damper on that which resulted in many permanent closures. But the D.C. market will, in the long-term, rebound. 

Keith Loria can be reached at Kloria@commercialobserver.com