DC Hotel Owners Mixed On How Industry Will Fare During Next Downturn

It's been a big year for hotel openings, with the Watergate paying homage to political scandals of the past and the Trump International potentially creating some new ones. 

Even beyond the most expensive projects, the District's hotel industry has seen a supply boom caused by years of strong occupancy and rate growth, with at least 45 hotels opening since 2010 and 40 more in the pipeline. With a likely economic downturn looming, DC hoteliers wonder if the now supply-heavy market will weather the next recession as well as it did the last one. 

The current positive US business cycle of 87 months is the fourth-longest in history, suggesting a downturn may be on the horizon. At NGKF's recent gathering of more than 500 DC real estate professionals, the audience was surveyed and 65% said a recession would come in 2018 or 2019, which senior managing director of market research Greg Leisch said matched up with the consensus of most economists. 

Since 2010, the DC Metro area has added more than 7,000 hotel rooms. It has another 3,356 under construction and 3,355 in final planning, according to STR. This supply influx alone is expected to bring down occupancy, as the above graph of the District's hotel metrics shows, but some hotel owners worry a recession could exacerbate the problem.

A big part of the recent supply influx has been the Marriott Marquis, which brought 1,175 rooms connected to the convention center in 2014. The duo that developed it, Capstone Development and Quadrangle Development, is now teaming up on another project next door with two hotels and 504 rooms. Columbia Place, rendered above, is scheduled to deliver in August 2018.

Capstone Development president Norman Jenkins says the ongoing supply influx is "more than I've ever seen in my lifetime," and says it is a cause for concern.

"My feeling is that we’re headed toward the end of a pretty long cycle for the lodging industry and are probably due for some sort of downturn," Norman tells Bisnow. "My belief is there will be some impact to the lodging space, specifically to DC." 

As an owner of more than 25 hotels in several markets, he says he feels better about DC than most cities. He also says quality hotels in good locations, like Columbia Place, will be able to sustain demand through a downturn.

Hotel Association of Washington, DC, president Solomon Keene said he is very optimistic about the market in 2017 given the robust convention schedule. As for how it will fare during the next recession, he believes it will outperform other markets.

"We are uniquely positioned because we house the seat of the federal government," Solomon tells Bisnow. "That means while we’re still impacted by broader economic conditions and trends, we still have people coming here to conduct business with the government and visit the nation’s capital."

DC is expected to be one of the top cities for RevPAR growth in 2017 at more than 7%, according to PKF Hospitality research. Foxhall Partners' co-founder Matt Wexler says DC's continued strength despite lagging markets in other cities positions it well for the next recession.

"I think that itself, despite the increase in supply this year and in 2017, shows that we can withstand that supply even potentially if there is a downturn," Matt tells Bisnow. "We still believe very strongly in this market." 

Foxhall this summer reopened the 154-room Kimpton Glover Park Hotel after significant renovations, and it is developing the 220-room Line DC hotel in Adams Morgan with the Sydell Group, slated to deliver early next year. 

In the luxury hotel sector, two major new DC properties delivered this year: the 336-room Watergate Hotel and the 263-room Trump International Hotel.

Euro Capital Properties principal Jacques Cohen bought the iconic but worn-down Watergate in 2010 and gave it a $200M renovation. With all of these new luxury hotel rooms available, Jacques is not concerned about oversupply, rather he sees it as an opportunity to improve DC's brand. 

"With better product coming online," Jacques says, "the DC market will be more on the radar screen for high-end groups and events and high-end travelers will look at DC more than they used to, because now there’s product to back it up."

Jacques is also not concerned about at a looming downturn because, he says, the DC hotel market outperformed others during the last recession and he expects the next one to be much less severe. 

STR senior vice president of lodging insights Jan Freitag believes the DC market will largely be able to absorb the supply in its current pipeline, though occupancy is expected to tick down. But throughout the country, he says new supply should be expected after 80 consecutive months of RevPAR growth naturally led developers to build more hotels. He says the fear of oversupply could lead to supply growth coming down in the next couple of years.

"We're seeing this pickup in room supply growth which has a lot of people in the industry freaked out, so I would expect lending will get tougher," Jan says.