Housing Complex

The D.C. Government is Inflating the Hotel Market

The Marriott Marquis, brought to you by you! (Treviicos)

A couple months ago, we looked at the District's hotel construction pipeline, and found thousands of rooms coming online in the next few years, even as jobs flatline and the rest of the commercial real estate market contracts. The question I should have asked is this: Who's financing all these hotels? Don't they see they're heading into a glut?

Well, Jonathan O'Connell made a really good point late last Friday: Quite a few of them are being subsidized by you and me.

The District put $272 million and land into the convention center hotel, another $198 million plus land into the Southwest Waterfront and $260 million into the CityMarket at O project that will feature the Cambria*. The developers of the next two Marriotts have asked the city for $35 million. Perhaps the hospitality industry will recover sufficiently to support all the new rooms when they open, but some worry the D.C.-financed hotels may just end up cannibalizing one another. The closest competitor for the new Carr hotel, for instance, is the Mandarin Oriental Hotel—financed with $46 million in city funds.

And he doesn't even mention a $46 million tax abatement for the Adams Morgan Edition hotel!

Government entities, of course, aren't set up as well as a private investor to assess market risk. Each of these financing decisions was made years apart and pushed by different politicians who want projects in their own wards. Cumulatively, the end result could be a bunch of high-end hotels that are never full because visitors simply have too many options.

Still, those private investors seem undeterred as well. Another "ultra-luxury" hotel recently announced plans to move forward in Georgetown, as did the folks behind the former 1Hotel at 22nd and M Street NW. So either they're headed into the muck as well, or a hell of a lot more people are going to be visiting D.C. two years from now.

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* UPDATE, Thursday, 8:55 a.m. - The D.C. government only put $35 million in tax increment financing and $2.5 million in predevelopment grants into the project, not the full $260 million development cost, as the Post reported.

Photo courtesy of Treviicos.

  • Ben

    Interesting analysis. Although it's also worth looking into occupancy rates in close-in suburbs like Bethesda, Arlington and Alexandria as well. District hotels don't just compete against other District hotels, they also compete against hotels constructed in nearby jurisdictions that cater to similar clientele. The Marriott Marquis, for instance, isn't being built simply to offer the District another large, upscale hotel option--it's meant to support the Washington Convention Center and help it attract conventions and shows that might otherwise go to National Harbor in PG County. Other centrally located hotels might also be competing against hotels like Bethesda's Hyatt Regency, or the North Bethesda Marriott/Conference Center.

  • Eric

    Ben is right. While reading both of these pieces I thought again about the convention center and the three Marriotts that may end up right next door. The point of these hotels is not necessarily to meet an existing demand, but to engender a demand by working in synergy (I know, I hate that word, too, but it works here) with the convention center to draw back those conventions and conventioneers who may have otherwise gone to the Gaylord at National Harbor. These are conventions that may have wanted to be in DC, but because of a lack of convenient hotel options nearby found National Harbor a lot more attractive. I think that it would be wiser to consider these hotels separately from a citywide or area-wide analysis. I think that the Southwest Waterfront may also need to be considered separately considering that the very development of the property will stimulate more demand to visit the city.

    The point is that many of these hotels are not being built in a vacuum and that a number of them are being constructed in response to the potential effects of nearby developments. We already saw how a lack of hospitality options affected business at the new convention center, and I think it would be wise not to doubt the solution at this point. I think it intelligent that PN Hoffman would not want to miss the boat (pun intended!) at the Wharf on the SW Waterfront, either.

  • Lydia DePillis

    @Ben @Eric

    You guys make good points - I didn't say it wasn't a good thing that the Marquis is being built; clearly the convention center needs a big hotel next to it to be truly competitive. But I wonder whether the private market would have made the same decisions to finance the other hotels that the District has and will be helping along.

  • Jeff

    That really is a sickening amount of public money to be poured into a bunch of luxury hotels. The convention center hotel alone is almost $500 per DC resident. Not sure I see the problem in the "glut" you point to, though. Won't the mismatch of supply and demand most likely just drive down prices? Even if the hotels don't slash prices so low as to all fill up all the time, surely the total effect of more supply has to be at least some more total usage across the bunch, which is evidently the city's goal. Now if every DC resident convinces just 1 tourist to visit and blow $5,000 on knicknacks and meals, we'll have earned back our investment!

    If I were controlling the purse strings on that much cash in a city with unemployment and poverty rates this high, I'd use it to build a few massive new apartment buildings on vacant or nearly vacant land near metro stops... Capitol South would be a good place to start. Then instead of hoping to grub a few bucks of sales tax off rich tourists, we could actually get more of the bridge-and-tunnelers to move ashore from Virginia and start paying income tax. Then we'd be in good shape. Lydia, how would you spend $272 million?

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