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Washington market faces uphill challenges
May 30 2012

A decrease in citywide conventions and a slowdown in government business remain a big obstacle for hoteliers in the U.S. capital city.

Highlights
  • The D.C. market is on pace to set a record in roomnights sold.
  • A large decrease in the number of conventions has greatly reduced the number of visitors to the city.
  • During the past seven years, supply has increased by 14% in D.C. with more rooms on the way.

WASHINGTON—You will have to do a lot of convincing to make hoteliers in Washington, D.C., believe any other city in the U.S. better represents the cyclical nature of the hotel industry.

The numbers presented at the second stop of the Tour de Data event earlier this month at the Hotel Monaco don’t necessarily paint an accurate picture for hotels in the market, hoteliers said. The event, sponsored by STR Analytics and HotelNewsNow.com, attracted approximately 100 registrants, and for most of those that attended, the mood was less than jovial. STR Analytics is a sister company of HotelNewsNow.com.

Carter Wilson, director at STR Analytics, said the D.C. market is on pace for a record-setting year after selling 2.3 million roomnights during the first quarter of 2012.

“I see very strong demand, but rates are down,” he said.

George Brennan, executive VP of sales and marketing for Interstate Hotels & Resorts, lamented the sharp decrease in citywide conventions—and the subsequent projected loss of nearly a quarter million visitors to the market. Interstate operates three hotels in the D.C. area, according to its website. In addition, the recent government decision to scale back travel expenses is not helping the cause.

“The (Washington Nationals) are in first place and that’s great news, but I’m afraid that’s all the good news I have,” said Brennan. “The citywide pace for the convention calendar is way off this year, and unfortunately for next (year) it’s not near where it should be.”

While the city was enjoying a citywide convention during the week the Tour de Data was held, Brennan said the lack of all-market conferences has prohibited hotels from maximizing rate compression to command higher rates.

Dori Familiant, GM at the 631-room DoubleTree by Hilton Washington DC-Crystal City, agreed with Brennan’s assessment and said the ever-shifting situation involving government business is just as impactful. That started in 2005 with the passage of the Base Realignment and Closure Act, which recommended closing 22 major United States military bases and realigning 33 others.

There is 1.5 million square feet of vacant office space in the Crystal City area, Familiant said.

“It has a tremendous impact on the whole area, but there is no hurry because some of the (office building) owners are still collecting rent from government,” he said. “There’s a slow transition that is putting extra burden on hotels.”

The burden of a scandal
Complicating matters is the recent
General Services Administration scandal involving extravagant business trips at hotels.

“Clearly, the government is in flux right now,” Familiant said. “The GSA actions affected everybody, and everybody is nervous to book.

“Government business is not only cutting back in terms of what they are willing to spend, but we’ve also seen government business cutting the rate below (the) per diem (rate), which is a huge concern.”

Brennan said all D.C. hotels are feeling the pain.

“We have the government moving in all sorts of directions to limit government travel,” Brennan added. “The government is the largest demand generator here, and it’s impacting us as well.”

Complicating matters is a slower government calendar because members of Congress are up for election this fall and spending more time in their home districts rather than receiving visitors in Washington.

But Brennan said it’s not all doom and gloom for the market.

“International travel to the U.S. is going to grow more, and this destination has so much that is appealing, particularly to international travelers,” he said. “This is our cultural center, our heritage, our landmarks. We have three airports to get people here. … I’m very optimistic about our future here.”

Brennan also said the government spurs business through meetings.

“The people who do business with the government are still going to find a way to do business with the government—that means they’re not meeting in Chicago, Phoenix, Atlanta or Boston,” he said. “It means they’re going to have to come here and meet with members of the government, which means they have to stay in our hotels. One way or another, we’ll grow this market.”

Looking for new business
In the meantime, hotels are left to fend for themselves when it comes to generating business. Familiant’s not shy about exploring all options.

“What we did is do what everybody else in Crystal City is doing,” he said. “You try to attract more lower rated business, try to use more third parties, try to fill up the bucket in advance, then react when you have something to work with. We see a drop in rate, and we’re fighting for the occupancy in different ways.”

However, opening those new channels can have unintended consequences, Familiant said: “As you move to different channels of soliciting your business, you’ll get customers who pay less and their level of sensitivity is higher than everybody else. You have to make sure you treat them the right way and take care of them, otherwise the penalties will be huge down the road.”

Neither hotelier foresees the results of this year’s presidential election having a major effect on hotel business in the District.

Data check
The Washington event began with representatives from STR Analytics providing a data-driven backdrop of the national and market performances.

Wilson said the industry’s 8.3% revenue-per-available-room growth during the first quarter demonstrates the overall strength of hotels. “The recovery is still strong,” he said. “It’s all about demand. Rate is starting to catch up—room revenue for the first quarter was the highest since 2005.”

Wilson said while rates are slowly rising, there is still a fear among hoteliers over potentially raising them too quickly.

He said the annual HOST study produced some interesting trends during 2011, including that the average hotel that participated in the study saw its profits increase 13%.

As for the Washington market, Wilson provided the following data (through the first quarter):

  • 675 hotels;
  • 67.4% occupancy rate;
  • $144.22 ADR; and
  • $97.27 RevPAR

“In the last seven years, there has been a 14% increase in supply in Washington and there are 7,280 more rooms coming in the next few years,” he said, specifically citing the construction of the 1,175-room Marriott Marquis Hotel that is scheduled to open in June 2014.

He told the crowd to not underestimate the demand a large hotel can create, and pointed to the 2008 opening of the Gaylord National Resort & Convention Center as an example.

Wilson said the company expects Washington’s RevPAR to increase by 9% during the combined 2012-2013 period. “Like the nation, we’re expecting most of it to come in rate growth,” he said..

Steve Hennis, another director for STR Analytics, said 2011 demand growth for D.C. was “fairly insignificant compared with other top 25 markets, but D.C. has been fairly resilient during the course of the downturn.”

In addition, STR Analytics’ research shows transactions for the market during 2011 came in at approximately $300,000 per key, the average hold period is 5.6 years, leveraged internal rate of return is 18.5% and the capitalization rate on trailing 12 months net operating income is 7.9%.

Caitlyn Milton, business intelligence manager at STR Analytics, told the gathering that the average competitive set in the Washington market is between five and six hotels. The name-back percentage—the percentage of hotels that name a competitor in their comp set that were named in the competitor’s set—is 48%. That’s about three percentage points higher than the national average.

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