Two years ago, at the height of the housing boom, developers realized that hotel property had fallen out of favor. Residential property was worth more, and travelers weren't willing to pay top dollar to stay in fancy hotels.
So it made perfect economic sense, real estate brokers say, when local developer Monument Realty in 2004 bought the Watergate Hotel to convert it into upscale cooperative apartments.
Now the developer is reconsidering that plan. With the housing market on its way down and the demand for posh hotel accommodations on the rise, Monument Realty may end up renovating the hotel into a luxury five-star destination.
"We're certainly looking at the potential to reposition it as a hotel, but we're still looking at the financial viability," said Michael J. Darby, a principal of District-based Monument. A decision, he said, should be made within two months.
The initial project to turn one of the Watergate buildings into 130 apartments has been tied up in a legal battle after residents of another building in the Watergate complex voted against the change. Many opponents of the conversion say the building serves the community better as a hotel, bringing foot traffic to the area and keeping a variety of uses within the Watergate complex, which also includes three apartment buildings and office space -- the site of the notorious break-in that brought down a presidency.
"The hotel is a living part of the complex," said William Diedrich, a six-year resident of Watergate East, the tower whose residents challenged the conversion in court. "It can be quite dead if it were apartments. We want the movement."
The Foggy Bottom Current reported last week that Monument may have reconsidered the change. Hickok Cole Architects, which Monument hired for the conversion, declined to comment.
Local real estate brokers say the decision to consider renovating the hotel reflects national market forces that are magnified in the Washington area.
"This speaks to the strength of the hotel market today versus what it was 2 1/2 years ago," said William W. Moyer, director of the Hotel Advisory Group at District-based developer Donohoe Cos.
The supply of hotel rooms decreased when developers turned many existing buildings into permanent housing. Washington had a shortage of high-end hotels even before that trend, and now luxury rooms are scarce for an area its size. Soaring construction costs and land values have made it difficult to obtain new sites for hotels, making "existing hotel rooms more valuable than ever," Moyer said.
That has been reflected in other local deals. Last year, Strategic Hotel Capital, a private investment firm, purchased the Four Seasons in Georgetown for about $850,000 a room. Last spring, private investment company B.F. Saul purchased the Hay Adams Hotel near the White House for $100 million, about $690,000 a room.
"Those prices would have been unheard of two or three years ago," Moyer said.
Marc A. Magazine, who leads CB Richard Ellis's Hotel Partners division in Washington, said the Watergate location is great for a high-end hotel. But after two years of planning to convert it into apartments, the challenge will be re-promoting the property as a hotel.
"It's exactly the right market for the hotel," said Magazine, whose family was involved in building the complex, which was completed in 1971. "The cost of renovating will be much cheaper than making it condo."