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The Washington, D.C., hotel market has always been a safe bet for developers because the nation’s capital can usually withstand any economic downturns or political upheaval.

That is still true to some extent. Yet the Washington market struggled for a good part of 2019, based on key industry metrics, making it not so much of a lucrative venture for hotel developers and investors. That leaves developers entering the New Year feeling a bit uneasy about a potential oversupply problem in the nation’s capital.

Here is some of what they face. The occupancy rate dropped 1 percent from January to November 2019 to 72.1 percent in the Washington metro area, which includes suburbs in Maryland and Virginia, according to industry research firm STR. RevPAR, or revenue per available room, was down for six out of the 11 months reported so far last year. It did rebound by the end of November to an average of $116.62, a 1.3 percent increase.

The occupancy rate in the city of Washington, which STR defines as the central business district, was 78 percent from January through November, down 1.4 percent from the previous year.

RevPAR was down for six months of the year but rebounded to $179.07 by November, a 0.8 percent jump.

Those tepid numbers come even as the number of domestic and international visitors to the city continues to steadily increase. Visitation numbers for 2019 are not available yet, but in 2018, the city had 23.8 million visitors, a 4.4 percent increase over the previous year.

Why is Washington, D.C., such an important hotel industry market now? The city has evolved in the last two decades from a small company town with a population of about 800,000 that is focused on the federal government and the International Monetary Fund to one that is attracting celebrity chefs, entrepreneurs, nonprofit organizations, artists, and financial heavyweights.

It went from having one of the highest crime rates in the United States to now being one of the most affluent cities in the country, with new areas such as CityCenterDC, a luxury retail and dining complex located near the Convention Center that is anchored by brands such as Bulgari, Dior, Hermès, and Louis Vuitton.

Hotel companies have taken notice and count Washington as one of the U.S. cities in which they have to make their presence known.

“If you want an East Coast exposure, a lot of people talk about New York first. After that, Washington, Miami, and Boston are the next tier of major metropolitan areas where you want to be,” STR Senior Vice President Jan Freitag said. “If you are a foreign brand or even a new brand, (Washington) is one of the markets you want to be in so people know that you exist.”

Still, Washington had a few challenges in 2019, and 2020 could also prove to be a difficult one for the hotel industry.

Analysts attribute it to a classic case of supply and demand. As of November, there were 19 hotels in construction in the Washington metropolitan area, and 22 in the final planning phase, which means that construction will begin within 12 months, according to STR. Another 34 are in the earlier stages of planning.

Some notable hotel openings that took place from November 2018 to November 2019 include the Courtyard Washington Downtown Convention Center, the Residence Inn Washington Downtown Convention Center, the Moxy Washington D.C. Downtown, the Hilton National Mall, and the Conrad Washington D.C. The number of rooms ranged from 147 to 367 at each hotel.

“That’s quite a few large properties, 350-plus rooms, to open in the space of a year,” said Elliott Ferguson, CEO of tourism group Destination D.C.

That should ensure that hoteliers will not be able to boost hotel rates significantly, a phenomenon that has been affecting the city for a few years now. The average daily rate has not budged much since 2017, when it was $159.69. Through November of 2019, the average daily rate was $161.75.

“We’re basically just at the levels we were at two years ago. That’s nothing to write home about,” Freitag said. “Room and supply growth are outpacing room demand growth, which means mathematically, occupancy is declining. It’s been declining for a while.”

The political atmosphere has also taken its toll on the city’s hotel market. A partial federal government shutdown from Dec. 22, 2018, to Jan. 25, 2019, meant that the Smithsonian Institution, a group of free museums, was closed during the holidays, a peak travel period.

“Clearly, what we’ve seen is if the government shuts down, it really matters to tourism,” Freitag said.

The Smithsonian, he said, is “one of the largest draws of coming to D.C. Groups stay away, school groups stay away, and some of them never come back because for schools, this is your window.”

Another problem: The number of tourists from China has decreased in major U.S. cities because of tense trade relations with China and anti-immigration rhetoric from the presidential administration. Washington’s top overseas market is China, and the number of visitors from there declined 25 percent to 226,000.

The election this year will likely drive down occupancy even more.

“Travel to D.C. during an election year is complex. Hotels are challenged with booking business in a different way, rather than a traditional booking pattern,” Ferguson said. “Hotels are open with the fact that travel directly tied to Congress tends to slow down in the weeks before an election but still, domestic visitation to D.C. continues to increase year-over-year, even election years.”

That doesn’t mean that hotel developers are staying away from Washington. It used to be that New York was the city where hoteliers had to plant their flags. Now they also have to have a presence in smaller urban centers such as Washington.

Washington has matured as a city in the last two decades with a booming restaurant scene and entire neighborhoods sprouting. The demand for luxury hotels has grown.

Many foreign-based hoteliers, in particular, are capitalizing on that need. CitizenM, a Dutch hospitality brand, plans to open a 252-room hotel in Washington this year.

“It’s a small town but it has an international influence,” said Geoffrey Griffis, founder and managing member of CityPartners, which is developing the CitizenM. “It’s growing up and changing so fast.”

Europe’s hip hotel-hostel brand Generator will take over the 148-room Courtyard by Marriott. A German company is expected to introduce another hotel-hostel concept called the Meininger Hotel Washington D.C. later this year. Paris-based chain Mob Hotels will open the first of its five planned North American hotels in Washington.

“D.C. has been changing in scenery, going from more conservative to happening, with the latest hotel openings, restaurants, and bars,” Mob Hotels CEO Cyril Aouizerate said. “D.C. is becoming more than just politics. The art scene is changing, the nationalities and tourists traveling to D.C. are changing, and it’s becoming a destination for all.”

That’s why it made sense to finally open Washington’s very first Conrad, which is located in CityCenterDC. Worldwide, there are only 39 Conrad hotels, which is one of Hilton’s luxury brands.

“This has become an elite town,” said Andy Finn, director of sales and marketing at the hotel. “This has become a very cosmopolitan town. It was much more provincial in the 1980s.”

Griffis said he has no qualms about investing in Washington hotels despite the anemic numbers.

“Hospitality is always that balance of do you want to fill rooms or get a higher rate,” he said. “You have those kind of blips.”

Photo Credit: The Conrad Washington, D.C. opened in March 2019 in the CityCenterDC luxury retail and dining complex. It is the first Conrad, a Hilton brand, in the nation's capital. Conrad Washington, D.C.