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Government travel challenges DC hotels
May 6 2013

Uncertainty in government travel casts doubts over the Washington, D.C. hotel market.

  • Washington experienced unprecedented increases in hotel sales prices in recent years.
  • Several factors could limit the downside of less government travel.
  • HVS said now is the time to sell hotels in the Washington market.

WASHINGTON, D.C.—Thanks to the presence of the federal government, Washington, D.C., is not a typical hotel market. The ups and downs of hotel room rates often go hand in hand with government activity.  That said, the value of hotels overall is not so susceptible to the whims of the government market, said presenters and panelists at HVS’ local U.S. Hotel Market Connections event.

Anne R. Lloyd-Jones, managing director of HVS, said Washington experienced an unprecedented increase in sales price per room between 2000 and 2013, rising from an average of $150,000 to $400,000 during the period. The sales price per room average for suburban hotels rose from $125,000 to $275,000 during the same timeframe.

However, the entire market faces challenges. Long a stabilizing element, the future of government demand is clouded by issues of sequestration and potential changes to the per-diem rate, said a panel of local hotel executives.

Area hotels suffered a drop in room revenue last year. And because of the unknowns with the sequestration, rates are expected to be flat this year. Prices may drop even more with the decline of government travel, which could impact per-diem rates for upcoming years.

Paul L. Somogyi, director sales, middle market, government and affinity segments for Marriott International, said to combat that possibility advisory committees have been formed to steer the General Services Administration in the right direction. He said hoteliers need to be cognizant of the impact of reducing rates as well.

"We want to maintain good price value in Washington," Somogyi said. "But if we start dropping rates, it will affect what per diems will be in the future."

Even though government employees may not be traveling as much, there are several offsetting factors that could limit D.C.’s downside. Less government travel may mean suppliers and contractors will come to Washington to meet with federal agency officials, creating more local demand. Furthermore, when government business goes off-kilter, there are other sources of traffic, including corporate and leisure, to pick up the slack. Certainly, lower hotel rates due to decreased government demand make Washington a more attractive destination for the leisure traveler.

Panelists agreed that despite today's challenges, long-term prospects for the market are strong. Due to its status as a global city, a Washington property has become a must in the portfolios of most hotel groups, said Lloyd-Jones. Increasing demand from global hotel companies plus high barriers to entry and even height restrictions that limit upward growth (new buildings can only be about 12 stories tall), mean the D.C. market will continue to be a good buy over the long run.

However, HVS recommends if owners are looking to sell, now is the right time. Lloyd-Jones predicted little appreciation for D.C. hotels until 2016.

Michael Barnello, president and CEO of LaSalle Hotel Properties, agreed the future looks bright.

"From our perspective, we take a much longer view. When we look at it long term, this is a great place to invest,” he said. “Yes, from 2009 to 2012 this was one of the country's worst performing markets. However, if you peel back to 2002 through 2009, D.C. was one of the best markets, thanks, in part, to the development of the Central Business District and the 14th Street Corridor."

The growth, Barnello added, continues today, with the opening of the 10-acre CityCenterDC downtown and the build-up around Nationals Park.

Somogyi cited another positive as a potential growth in conventions due to the opening of a 1,175-room Marriott Marquis next May. The hotel will open adjacent to the Washington Convention Center, allowing the city to go after a wider convention market.

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