A developer plans to turn one of Washington's best-known hotels -- the Watergate in the posh West End -- into residential units. The trend is increasingly popular, say developers and real estate brokers, as interest rates remain relatively low and the housing market stays hot.

"In any major city -- D.C., Chicago, New York -- this is a growing trend," said Marc A. Magazine, managing director of hotel brokers Insignia/ESG Hotel Partners. "Residential property is worth more than hotel property now."

Donald Trump in 2002 paid $115 million for the 193-room, all-suites Hotel Delmonico on Park Avenue in New York and converted it into luxury condominiums, said Mark Gordon of Sonnenblick-Goldman Co., a real estate investment banking firm in New York and an adviser to the seller in that deal. Gordon's company is doing several similar deals in Philadelphia, Toronto and San Diego.

In the District, the buyer of the Watergate Hotel -- Washington's Monument Realty LLC -- said that by early 2006 it will turn the 251- room hotel into 133 luxury cooperative apartment units that will sell for $700,000 for a one-bedroom unit on a lower floor and up to $3 million for a three-bedroom penthouse. The hotel was built in the 1960s.

Chevy Chase developer JBG Cos. plans to pay nearly $300 million for the 1,300-room Marriott Wardman Park Hotel in Woodley Park on Connecticut Avenue NW, which is the District's largest hotel, and may turn some of the rooms into condos, according to real estate brokers and people close to the deal who wish to remain anonymous because the deal is still being negotiated with Thayer Lodging Group Inc., an Annapolis investment firm. The deal is to close by the end of the year. Benjamin R. Jacobs, a partner and one of the founders of JBG, would not comment.

Thayer bought the property in 1998, paying $227 million. It spent $100 million renovating the hotel, which was built in the 1920s.

In many markets, including Washington and New York, there are plenty of hotel rooms now -- and more to come, hotel consultants and developers said. That means hotels cannot often charge the kind of rates they did before the Sept. 11, 2001, terrorist attacks led to a slump in their business. For developers these days, turning a hotel property into condos is often a better return.

"What customers are willing to pay for a hotel room is not enough for the developer of a project to receive a fair return," said Mark Woodworth, an executive vice president at PKF Consulting, a hotel advisory company in Atlanta.

The last time Washington went through a conversion of properties was in the early 1980s, but then it was apartments being converted to hotels downtown as the hotel industry boomed. Now some of those hotels are aging and half-full.

"Some have become obsolete," said Bill Moyer, director of hotel brokerage at District-based developer Donohoe Cos. "They may have small rooms and need extensive renovations, so it makes more sense to take that money and convert them into condos where you can sell them off and then get your money out almost immediately rather than over the long period of time which a hotel takes."

At the Watergate, for example, the developer says it will make a healthy profit on its investment. Monument paid about $50 million to the investment group Blackstone Real Estate Advisors LP for the hotel, according to sources close to the deal who did not want to be identified because the price is confidential. Monument plans to spend $55 million renovating the complex, to be called Belles Rives at the Watergate.

"The hotel is last in its competitive set. It's kind of stayed stagnant with its average room rate and its occupancy levels," said Michael J. Darby, a principal of Monument. "It's a hotel that needs a lot of work, so it's a logical conversion. You have to spend the money to renovate it anyway so you might as well make it residential."

There are other hotel conversions in the D.C. region to be completed in the next three years -- 710 condos altogether, according to Delta Associates, an Alexandria research firm that tracks local housing markets. They include a 100-unit project at 2000 N Street NW and 78 units in Old Town Alexandria.

"These projects are being converted because they are a better place to live than they are to visit," said Greg Leisch, chief executive of Delta Associates. "You get higher ground value for a condo than you can for a hotel."

These conversions would add to the 18,211 condos under construction or expected to start soon in the area -- almost double the amount a year ago, Delta Associates said. That many condos could cause a glut, brokers said.

So how long will the conversion boom last?

"Until the interest rates go up for individuals buying residences, and when the supply of these older, obsolete hotels becomes exhausted," said Moyer, the Donohoe hotel broker.

Closings

The Pharmaceutical Research Manufacturing Association has signed a letter of intent to take 70,000 square feet in the Atlantic Building, which is under construction at 950 F Street NW. The deal is still being negotiated.

The trade group said it expects to move out of its offices at 1100 15th Street NW in early 2006 once the building is done. The 280,000-square-foot building is now 80-percent leased; the law firm of Alston & Bird is the other major tenant.

Studley represented the pharmaceutical trade group.

Dana Hedgpeth writes about commercial real estate and economic development. Her e-mail address is hedgpethd@washpost.com.

Monment Realty plans that by 2006, the Watergate will be a 133-unit luxury cooperative called Belle Rives, with top units selling for as much as $3 million. The Marriott Wardman Park, the District's largest hotel, could also be in for changes as developer JBG Cos. may convert some rooms into condo units.