Key hotel metrics show the D.C. market has struggled this year amid a continued supply boom, and the negative numbers have not stopped hotel developers from launching new projects that will add thousands of units to the market.

A rendering of CityPartners' 555 E St. SW project, where CitizenM is opening its first D.C. hotel

Hotel occupancy in the D.C. metro area dropped to 72% for the first seven months of 2019, according to STR, down 2.2% from the same period last year.

The market's RevPAR, or revenue per available room, was down 1.2% through July, STR found. The metrics were even worse in D.C. proper, which STR defines as the central business district, where occupancy was down 2.7% and RevPAR was down 2.6%.

STR's Jan Freitag, who presented the data at Destination D.C.'s annual meeting Tuesday, told Bisnow hotel owners should be more concerned about the year-over-year trend than the performance numbers themselves.

"The absolute level of occupancy is still at a fairly high level, but hoteliers look at change and they want to know 'am I doing better than the year before?'" Freitag said. "If occupancy is slower that means a lot of them don't feel confident with their pricing."

Average daily hotel rates have risen 1% in the D.C. metro area so far this year, while rates have increased 0.1% in the District.

Courtesy of STR

An STR graph showing the imbalance of supply and demand growth in the D.C. metro region

Freitag said he attributes the market's difficult year to the continued hotel development boom. Room supply in the D.C. metro area increased 1.7% through July, and supply in the District was up 3.5%, STR found. The metro area has 2,062 rooms under construction and another 8,514 rooms in planning.

"What drives a lot of this performance is the increase in new supply," Freitag said. "That new supply needs to be absorbed and room demand is not at that level, which drops occupancy."

Abdo Development CEO Jim Abdo said demand has still been strong for micro-hotels like his Hotel Hive, but he said it has been difficult for D.C. hotel owners to raise rates this year. He attributes the lackluster market performance to a combination of the growing supply and declining visitations from China, which Destination D.C. said dropped 25% last year.

"There is downward pressure on rates and an increased number of hotel rooms brought to the market and a lot more coming," Abdo said. "And you've seen some issues come about with regard to China and the number of foreign travelers coming into the District. Those numbers are down as well, and that all has a direct implication on rate and occupancy. There are a lot of factors right now that make the D.C. hotel market a little more challenging."

The D.C. hotel market also suffered from declining RevPAR and rate growth last year, though 2017 was a stronger year with the visitors for the inauguration and women's march. The poor metrics last year and this could be expected to make developers wary of building new hotels, but Abdo said that is not happening.

"There's an irony because you're still seeing a tremendous level of interest," Abdo said. "D.C. is still on everybody's lips and minds as it relates to development of housing and hotels, even though you're seeing numbers that contradict how many new hotel rooms should be here."

Abdo said he doesn't understand how all of the new hotel projects have managed to secure financing.

"An enormous number of developers and brands want to have a position in D.C. and are willing to pay top dollar for land to make it happen," Abdo said. "How they underwrite it is beyond me."

Banks remain willing to loan money to developers of new hotels in D.C. despite the lack of growth and the economic cycle this year becoming the longest ever.

"In this environment, money is very readily available and fairly cheap," Freitag said. "You could argue a lot of projects that didn't pencil, now you have willing lenders that are like 'well, this is the time.' Even though we're a little bit long in the cycle, Washington, D.C., still has a lot of potential."

Bisnow/Jon Banister

CityPartners' Geoffrey Griffis, Ruben Cos.' Richard Ruben, Republic Properties' Holly Hull and Mill Creek's Sean Caldwell

CityPartners founder Geoffrey Griffis, whose company is building a CitizenM hotel at 555 E St. SW and developed a Hyatt Place across the street in 2015, said the citywide market performance metrics do not concern him when considering new development. He said he is exploring three potential deals for new hotel projects in D.C.

"There are always blips in the market," Griffis said. "We need to look longer term, and mostly we need to look at submarkets ... Southwest D.C. I think is a phenomenal market that is maturing."

Griffis said obtaining debt and equity for a new project is not easy, but the more challenging part of the equation is the growing cost of constructing and operating a hotel. He also said rising taxes, such as D.C.'s new tax increase on commercial properties, are making matters worse.

"If the construction costs are too high and the land costs and operating costs are too high, no one’s going to do a deal and you’d be foolish to finance one," Griffis said.

Hodges Ward Elliott Managing Director Cyrus Vazifdar, a D.C. hotel investment sales broker who joined HWE in June from HFF, said it has been a challenging two years from a hotel performance standpoint. But he said that has not changed the level of interest from institutional investors, who he said still consider D.C. a top five market.

"The way we're talking through projects we're bringing to market is that 2019 may have been the trough for D.C. this cycle," Vazifdar said. "It becomes a compelling argument from a relative value standpoint that if you're buying today, it really feels like you're only going up ... it feels like now is a good time to be putting money in D.C."

A rendering of the hotel Virgin Hotel had planned at 411 New York Ave. NE near Union Market, released along with the 2017 announcement.

Several hotel brands have entered the D.C. market with new projects in recent years, including Conrad Hotel, The James Hotel, Virgin Hotels, Meininger Hotels, Generator, CitizenM, Mob Hotel and Yotel. Freitag said he sees D.C. in the second tier of cities that global hotel brands want to enter, behind New York, Tokyo, Singapore, London and Paris.

"A bunch of the brands are building and opening and there are still brands that are not yet in D.C. that want to plant their flag in the nation's capital," Freitag said. "That's a fact of life. D.C. is attractive to developers."

Vazifdar said D.C.'s prominence in the U.S. hotel market makes it an appealing target for emerging brands, even if the city's hotel market isn't achieving strong year-over-year growth.

"Part of it is D.C. is a high-profile market," he said. "If you're trying to build a brand, Washington, D.C., is a place you want to plant a flag. In some respects it's almost a marketing expense. That's obviously not entirely accurate, it still needs to pencil, but there’s inherent value in just planting a flag in D.C."

Griffis said the new brands entering the market, such as CitizenM opening its first D.C. hotel at his 555 E St. NW project, aren't worried about the recent market performance. He said the emergence of new brands in D.C. can help the market grow by attracting new visitors who have had positive experiences with those brands.

"I think we're seeing there's an untapped market we've never been able to address," Griffis said. "It's exciting to see these hotels coming in. They’re much more conceptual and site specific and that’s going to continue to draw more people. I do not see hospitality in the D.C. market as zero sum; I think it's constantly growing."

Despite the lack of year-to-date growth, some causes for optimism can still be found in STR's data. The market had its best month of the year so far, from a year-over-year growth standpoint, in July.

ADR in the Metro area last month was 3% higher than July 2018, according to STR, and RevPAR was up 3.4%. D.C.'s market performance has improved since the first quarter, when the government shutdown led to a 3.8% drop in occupancy. STR forecasts 2019 will end with a metrowide RevPAR increase of 0.9% and it predicts next year will be better.

STR predicts the D.C. metro area will experience a RevPAR increase of 2.7% next year. Freitag said the calendar for large conventions, which was relatively weak this year, is expected to pick up next year.

"We think the convention calendar is going to get better, and that has a big impact with driving up group demand and filling up hotels," Freitag said.