Investor interest increases in D.C. hotel market

WASHINGTON, D.C. The U.S. capital is seeing a jump in interest from the hotel investment community, climbing to third place in terms of liquidity among American markets. Only New York City and Boston have had more hotel transaction volume this year, according to Jones Lang LaSalle Hotels.

Hotel deals in Washington have exceeded US$327 million year to date. The year’s two largest transactions are LaSalle Hotel Properties’ purchase of Sofitel Lafayette Square for US$95 million and Pebblebrook Hotel Trust’s acquisition of Hotel Monaco Washington DC for US$74 million. Both properties traded just above US$400,000 per key.

“Since 2000, there have only been five other single assets that sold above US$400,000 per key in Washington, D.C. This indicates the strength of current and forecast market fundamentals,” says Bruce Stemerman, managing director of the strategic advisory and asset management for JLLH.

Upper-upscale and luxury hotel properties in Washington will benefit from a strengthening convention calendar in 2011. Hotels are expected to achieve RevPAR growth of 5% to 7% in 2011 year over year, with increases driven more heavily by ADR growth than occupancy growth.

“The number of nights with more than 5,000 convention center room nights booked is expected to increase by nearly 50% in 2011,” Stemerman says. “The market will benefit from increased demand, which, amid steady supply levels, will lead to a considerable amount of compression.”

While the city overall is set to experience healthy RevPAR increases in 2011, the local government per diem rate will actually decline by approximately 10% compared to 2010.

Rising ADR will enable operators at upper-tier hotels in the city to increasingly focus on blocking out lower-rated government business. “This shift in business mix will lift rates at the city’s upper-tier properties, while also boosting rates at the city’s upscale select-service properties, along with properties located in suburban markets that will in turn absorb more government rate business, which often exceeds the rates of their group and leisure base,” says Clay Dickinson, executive vice president for strategic advisory and asset management for JLLH.

Consistent with national trends, new guestroom openings were above the long-term average in 2009, but the city now has a relatively limited supply pipeline for the next three years. No new guestrooms are projected to enter the market in 2011. Supply additions will total approximately five hotels with 700 guestrooms in 2012, a relatively constrained increase historically, which will further boost the recovery in the market. The most significant new hotel opening over the longer term is the 1,167-key Marriott Marquis Convention Center Hotel, scheduled to open in 2014, which just celebrated its groundbreaking.

“As the core downtown area has virtually no vacant land, real estate development is moving to several areas that are being revived,” Dickinson says.” Among the areas to watch for future hotel development in the medium-term are the blocks around the new Nationals Park in Navy Yard, the area north of Union Station and Capitol Hill.”