D.C. Hotels Below 20% Occupancy During Usually Busy Summer Tourism Season
The summer months have always been the backbone of D.C.'s tourism industry.
Families taking summer vacations, international tourists visiting the nation's capital and business travelers attending conferences typically provide D.C.'s hotel market with robust demand during the summer. But this has been anything but a typical summer.
The coronavirus led to a sharp drop in tourism and business travel that has brought D.C. hotel occupancies to a fraction of their pre-crisis levels, and that impact is especially pronounced now during what is typically a lucrative time for the city's hotels.
The occupancy rate for D.C. hotels stood at 19.2% for the week ending June 20, according to STR. That figure, which only counts the occupancy among hotels that remain open, represents a 78.6% decrease from the same period last year. For the week ending June 13, STR pegged D.C.'s hotel occupancy at 20.4%, down 76% from last year.
"Last year those weeks were very full, and this year they are not," STR Senior Vice President Jan Freitag said. "That has to do certainly with a lack of corporate demand but also, of course, with schools out, with the lack of tourists."
One of the city's most iconic hotels, the Washington Marriott Wardman Park Hotel, told employees last month it may close permanently. With demand unlikely to return to normal levels this year, hotel owners expect to see more properties closing.
Large downtown hotels that rely on convention bookings appear particularly vulnerable to the crisis. D.C. has lost about $255M in spending from 31 large-scale events that had been planned this year, according to Destination D.C., the city's tourism agency.
The loss of international visitors and long-distance domestic tourists has also taken its toll on the market, especially since the weather has gotten warmer. Between Feb. 23 and June 6, D.C. lost $3.3B in overall travel spending, according to Tourism Economics data provided by Destination D.C. Hotel owners say the market continued to struggle throughout the last month.
"We're really starting to feel the impact of that in June," Donohoe Hospitality President Thomas Penny said. "June is when we start to see a significant amount of leisure travel, so now we're starting to bear the brunt of the National Mall and Smithsonian museums not being open."
Penny said tourism has been limited to families taking short summer vacations within driving distance. He said D.C. is competing with regional destinations including New York City, Philadelphia, Baltimore, and the Virginia and North Carolina beaches for those visitors.
"Our destination would have been seen to be more attractive had those family-friendly offerings been available," Penny said of the Smithsonian museums, including the Museum of Natural History, the Air and Space Museum and the National Museum of African American History and Culture. "Not having them available has the reverse effect on us. We're trying to compete in a hyper-competitive regional environment."
Donohoe Hospitality had two hotels that remained open throughout the crisis, and it has four hotels that closed temporarily but reopened between May 1 and June 1. Penny said occupancy at Donohoe's hotels has ranged from single digits to around 30%, with most of the properties falling in the 10% to 20% range.
This time of year typically brings hotel occupancies north of 90%, Penny said, and his hotels are usually fully sold out during the Fourth of July weekend. He said his hotels did experience a surge this weekend to around 62% occupancy, but that was still well short of their normal levels for the holiday weekend, when visitors flock to D.C. to see fireworks on the National Mall.
Carr Hospitality CEO Austin Flajser said occupancy rates in his firm's portfolio, which includes the Willard InterContinental, the InterContintinental at The Wharf and multiple Alexandria properties, were in the single digits for much of the crisis. They have gradually begun to rebound, he said.
"We have recently seen a slow trend into the mid-to-upper teens in occupancy, though we expect the trend to be very slow until corporate travel and group business begin to return," Flajser wrote in an email.
Hotels in the suburbs have performed slightly better than those in the District. Occupancy across the D.C. Metro area was 30.7% for the week ending June 20, according to STR, down 63.5% from the prior year.
"Typically, D.C. rebounds faster than the suburbs," Penny said. "This is one time we’re not seeing that trend prove true."
Frontier Development & Hospitality founder Evens Charles said he is now seeing occupancy above 30% in the suburbs. He said the market has been particularly strong for extended-stay hotels, including Frontier's Homewood Suites by Hilton in Largo, where Charles said occupancy never dropped below 40% and has reached as high as 70%.
"Extended stay has fared extremely well," Charles said. "If you have a full kitchen within your room, you can actually comfortably stay in the room and cook food. That's one of the reasons why it's fared well."
Charles said select service and discount options in the suburbs have also outperformed higher-end downtown hotels. Freitag said the data bears out this trend, as the most heavily impacted hotels have been downtown.
"Because the main meeting-focused hotels, the large hotels with large volumes of meeting spaces are all downtown, those got hit disproportionately hard with the lack of corporate travel," Freitag said.
The D.C. hotel market already faced challenges prior to the coronavirus, as an oversupply of new hotels in recent years has made it difficult for hotels to raise rates. But this hadn’t stopped developers from building, and Charles said he is still searching the D.C. market for opportunities to develop a new hotel.
"We're trying to find some development opportunities," Charles said. "We think by the time we open up, it will be three years from now and hopefully this will be behind us. And we don't see a lot of other projects coming down the pike."
Experts say it may take at least three years for the market to fully rebound. Frietag said he does not expect room rates to return to their pre-crisis peak until at least 2024.
Looking at the hospitality downturns following 9/11 and the Great Financial Crisis, Freitag said the recovery period took twice as long as the period of decline. After 2009, he said it took 17 months to reach the lowest levels of room rates, and then it took 39 months after that to return to the previous peak.
"The history says it's going to take us two times as long to get back to it, and we're still on the downward trajectory," Freitag said.
OTO Development CEO Corry Oakes said his firm's hotels have slowly begun to improve their performance in recent weeks, but he does not expect demand to return to pre-crisis levels until at least 2022.
"We need corporate travel to come back, and certainly conventions, although we see larger corporate and convention group as the slowest segments to recover," Oakes wrote in an email. "Our ability to climb out of the trough will be dependent on pivoting our approach to capture the demand that does exist while keeping an eye on the horizon for 'green shoots.'"
Penny said he had initially hoped to see a recovery by Q4, but now it is clear that won’t happen. He expects it will take at least until next year for demand to return to sustainable levels, but the timing depends on the resolution of the health crisis.
"We definitely need to continue to see the COVID numbers go in the right direction," Penny said. "If we can continue to make smart decisions around protecting the safety of everybody involved and having associates and guests wear masks, this is a strong market, and it will recover. We just need it to recover sooner rather than later."
The longer the hotel market's downturn continues, the more financial pressure owners will feel and the more likely they will be to close hotels or sell them in distress.
"Everybody is experiencing financial stress," Penny said. "Long-term holders are in a better position to weather the tide, but opportunistic short-term holders are the ones who tend to put more leveraging into assets, and they're probably experiencing an even higher level of difficulty."
Some hotel businesses have benefited from the Paycheck Protection Program and other government relief efforts, Charles said, but he expects those benefits will run out before demand returns to normal, potentially leading more hotels to close.
"There are definitely going to be hotels that do not survive," Charles said. "All of us in hospitality have a little bit of a cushion, but it's not going to solve our problems. Some of those funds have run out for some people, and maybe it'll get you through August and September, but I think we'll have a slower Q4."
"After Q4 and Q1 of next year, people will be going through their reserves, and I think you'll have a lot of distressed situations come Q2 of next year," Charles continued. "I'm sure there's going to be a lot of bank defaults and properties traded in distress."