Washington Hotels Hold Their Own as Industry Lags

The hotel industry expects another difficult year as loans come due and occupancy rates drop, but the Washington area is expected to bear up somewhat better than other parts of the country.

At a meeting of hotel investors in Washington yesterday, industry researchers said they expect to see more hotels here and across the country defaulting on loans, going into foreclosure and seeking to restructure their debt.

A newly released industry report did not name Washington-area hotels or any others potentially in distress. However, hotels that are about to open are considered vulnerable because they may have taken on more debt than they can support now with lower room receipts.

U.S. hotels are carrying about $96 billion in commercial mortgage-backed securities issued within the past five years, with much of it maturing by 2012, according to Jones Lang LaSalle Hotels. The Chicago-based hotel investment services firm said in the industry report, co-authored by the DLA Piper law firm, that the number of distressed properties will increase substantially in the second half of the year.

At the same time, capital to refinance that debt is drying up, researchers at the firm said. Last year, there were $9 billion worth of large-scale hotel transactions in the United States, down from $45 billion in 2007. The figure is expected to drop further in 2009 to $4 billion to $6 billion.

"Today, a lot of hotels both nationally and in D.C. are going to start feeling increasing stress," Tom Fisher, managing director of Jones Lang LaSalle Hotels, said in an interview. "Demand is going to be falling, and they're going to have to adjust operations to deal with it. Debt is coming due." The stress, he added, "will accelerate in the second half of the year."

More than three dozen hotels are scheduled to open in the Washington area over the next few years. Area hotel officials, while acknowledging that it's not the best time to open a new property, said they expect to succeed.

"Clearly, we would much rather open in a stronger economic environment," said Ed Baten, general manager of W Washington, a luxury hotel that is taking over the former Hotel Washington site. "We're excited to open a hotel in the D.C. market, which has not been as affected by the downturn as other cities. With the power of the W hotel brand along with this location, we . . . think we'll do well."

The report offered a positive outlook for the Washington hotel industry, saying it outperformed the rest of the country. What that essentially means is revenue didn't decline as much as it did in most other metropolitan areas.

Hotel revenue this year fell at a much slower pace, largely propped up by the throngs drawn to President Obama's inauguration. As a result, researchers are forecasting that the industry here will emerge from the economic malaise sooner than other markets across the nation, perhaps by the end of this year.

Still the report shows that the region's occupancy rate, which peaked at 68.3 percent in 2007, is not expected to rebound for at least five years.

Occupancy dropped by 1.8 percent in 2008, still better than the 4.2 percent fall nationwide. The area's revenue per available room is projected to decrease 9 percent this year, compared with the national decline of 12 percent.

The report projects that the region's revenue per available room will grow 2.9 percent in 2010 and 4.6 percent in 2011. The average daily rates are expected to exceed last year's 2.3 percent growth rate by 2011.

A flurry of hotel construction this year will add about 3,400 rooms, mainly in Maryland and Virginia, within the next few years. But analysts say they wonder whether the demand will catch up to the growth in available rooms.

"It will take longer to pick up [in the suburbs] because there will need to be an absorption of the supply," Fisher said.