Trying to find a place for Aunt Millie to stay in the District?

Good luck. Hotel occupancy and room rates in D.C. have trended up over the last year—prices averaged $206 per night in 2011—while no new hotels have opened. Business travel and tourism are on the rise again, after flatlining in 2008 and 2009, and the city’s tourism promotion outfit projects that it’ll keep increasing into the future. Unless she’s crashing on your couch, Millie will have to decide between coughing up for the high-end hotels downtown, or finding a cheaper room on New York Avenue NE. (The cluster of economy chains there have been doing better lately, as unaffordable digs push people out of the city center.)

In a few years, there should be more than enough hotels to choose from, though. Besides the 1,167-room Marriott Marquis now under construction on Massachusetts Avenue NW next to the convention center, 500 rooms are contemplated for two smaller Marriotts just north of that. Another 400 rooms are planned for CityCenterDC, 350 rooms for two hotels at 5th and Eye streets NW, 182 rooms at Citymarket at O in Shaw, and 268 rooms in the new Wharf development in Southwest. Adams Morgan may see a 227-room “boutique” hotel, JBG is planning 250 rooms at 13th and U streets NW, the Hine School development on Capitol Hill may include up to 160 units, a 238-room Hilton Garden Inn is in the works in West End, 116 rooms in the old Editors Building on H Street NW near the White House, and the old American Trial Lawyers Association building will become 48 luxury rooms in Georgetown. That equals more than 3,000 potential hotel rooms, which would add more than ten percent to the total of about 28,000 rooms in the District now.

And that’s just the ones we know about. Hotels have been proposed for city-owned buildings like the Stevens School in West End and the Franklin School at 13th and K streets NW. In the biggest evidence of the strength of the hotel market of all, no fewer than 5 known groups have bid to convert the federally-owned Old Post Office Pavilion on Pennsylvania Avenue into a hotel, too.

The froth tracks with the general exuberance of D.C.’s real estate market, which is one of the few bright spots in the U.S. right now. But it still seems like an awful lot of new rooms. Why is all this money rushing into D.C. hotels all at once?

Part of the reason is cash coming from the District government, in the form of $272 million in subsidies plus land for the Marriot Marquis, $198 million plus land into the Southwest Waterfront, and a $46 million tax abatement for the Adams Morgan hotel. In a system where politicians look out for the developers in their wards, it’s possible the city may not operate with cold, economic logic when handing out money for this type of thing.

But at least as much of the financing is from private lenders, because, as one developer explained to me, real estate money is like a line of fire hydrants: It’s either on, or it’s off. Right now, financing is on for apartments and hotels, since both are better bets than building offices. (Young people are flocking to D.C.’s relatively robust job market and filling apartments, while the many micro-leases of hotel rooms are easier to manage than the large blocks of office space that can sit empty for months.)

By the time the money’s tapped out, the city could be dealing with a flood.

* * *

Like many kinds of real estate development in Washington, there wasn’t much hotel construction for decades. Visiting dignitaries and businesspeople found places like downtown’s Willard Hotel and the Latham in Georgetown met their needs.

As the city started to come back after its Control Board era, Mayor Anthony Williams’ administration wanted to lure hotels downtown. In 2002, it threw down $46 million and public land to push forward the 400-room luxury Mandarin Oriental Hotel just off Maine Avenue SW. The next year, $11 million went to the 384-room Embassy Suites at 11th Street and New York Avenue NW. To date, the additional tax revenue generated by the Mandarin has paid off $21.6 million of the bonds used to pay for it. Even subsidy skeptic Ed Lazere, of the progressive D.C. Fiscal Policy Institute, figures the money was worth it.

“It wasn’t so clear that the city was a great place to invest in, so you could see that there was an argument then to put some money in to counter the concern from other investors,” Lazere says. “It has probably given a sign to investors that they shouldn’t be as nervous, the city’s probably a safe investment for hotels.”

From the city’s perspective, hotels are a good deal. They’re the most profitable kind of real estate in terms of tax revenue; on top of property taxes and a 10 percent restaurant tax, D.C. takes a 14.5 percent tax on room rates. Last year, the District collected $207 million in hotel room taxes alone. Plus, hotel jobs tend to pay better than retail and offer paths for advancement, and 40 percent of all rooms are in unionized hotels. (That’s pretty good labor representation for a D.C. business sector.)

So, you could argue that any subsidy will have a good return on investment. Brian Friedman, the guy trying to build a luxury hotel on top of the building that now houses Washington City Paper’s offices in Adams Morgan, told community members during the endless debates over his $46 million tax abatement—strongly backed by Ward 1 Councilmember Jim Graham—that “nobody” builds hotels in D.C. without some form of public assistance.

Except that unless you have a councilmember like Graham pulling strings for you, that’s definitely not true anymore. The city’s attitude now is that public funding stopped with the convention center hotel—when developer Norm Jenkins asked for $35 million to finance the two downmarket Marriotts planned just north of the Marquis, doors slammed in his face. “We’re not entertaining those requests,” says Jose Sousa, spokesman for the Deputy Mayor for Planning and Economic Development. Even at Shaw’s CityMarket at O, which is heavily financed by both D.C. and the federal government, the hotel component is entirely private. “They made it clear that there’s no money for hotels,” says Armond Spikell, of developer Roadside Development.

Indeed, the idea of taxpayer dollars financing a new hotel downtown is laughable these days, especially since every real estate developer seems to want to build one. Over Sousa’s four years with the District’s economic development agency, he says they’ve never had to pursue a hotel in the way that they have large retailers; hoteliers are usually the ones who ask the District for help. The current wave of hotels will even reach into the further-out neighborhoods, where Aunt Millie might come to stay to see family members who moved into the city in recent years, or enjoy attractions outside the tourist traps of the city’s core.

In years to come, that surge may finally even reach east of the Anacostia River, where there are no major chain hotels. And future hotels there may not even require a subsidy, like almost everything else that goes into Wards 7 and 8. That’s because the Department of Homeland Security consolidation at St. Elizabeths Hospital on Martin Luther King Jr. Avenue SE will bring a slew of visitors who need a place to stay, and they’ll look for it on the District-owned east campus, which has left room in its master plan to build a hotel.

Pretty soon, the city may have a new problem on its hands: What will happen if all 3,000 planned hotel rooms actually get built?

Considering the federal government is headed for a major contraction, with anemic job growth and substantial cuts in government contracts and travel budgets—the local data analysis firm Delta Associates estimates the latter at about 20 percent—people could be spending less time visiting Washington.

But those forging ahead aren’t worried too much. Bob Cohen, of Perseus Realty, has finally hit on the right formula for his parcel at 22nd and M streets NW: After trying to make it condos, and then turning to a super-luxury eco-hotel concept that couldn’t get financed, he’s moving forward with a relatively humble Hilton Garden Inn that falls into the “select service” category (read: no pool or fancy restaurant) gaining popularity in D.C. these days. Although Cohen hasn’t even gone out to look for a loan yet, he’s confident that he’ll get one, after misjudging the market the first time around.

“I think the reason you’re not noticing any real high end hotels, or full service hotels, like a Ritz Carlton, is because they just are too expensive and the profit margins are not quite as good,” he says. (West End, where George Washington University and the foreign policy establishment create a bottomless thirst for continental breakfasts, has perhaps too many hotels for a residential community to flourish.)

For their part, the existing hotels are banking on serious increased convention traffic enabled by the new Marquis next door. Delays caused by a developer squabble caused many huge organizations to shift their thousands of people to National Harbor in Prince George’s County—and maybe sign a multi-year deal at the same time. As a result of that and a sluggish economy, D.C. will host only 11 city-wide conventions next year, down from 22 in 2011. If the Marquis can bring in conventions that might have gone somewhere else, other visitors will be pushed to the smaller hotels on the edges, keeping everyone happy.

The nice thing about hotels, though: If the whole renting rooms thing doesn’t work out, they make pretty good apartment buildings. And we’re not going to stop needing those anytime soon.

Photo by Darrow Montgomery

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