by Anne Purcell

2016 was a solid year for the Washington DC Metropolitan region’s lodging market. According to Smith Travel Research (STR), the year-end 2016 RevPAR growth for the Washington DC MD VA region was up 4.9% over 2015, ranking it 9th of the 25 top markets it tracks. The region was 4th of 25 in terms of occupancy growth at 2.2%, but 18th of 25 in ADR growth at 2.7%. The predominance of demand tied to the Federal Government and the government lodging per diem continues to limit some of the region’s pricing power. While more press is given to business and tourism demand in downtown Washington, DC, neighboring suburbs, particularly Arlington County in Virginia, and Montgomery County in Maryland, are also contributing to the region’s solid growth statistics despite challenges in these suburban office markets.

Arlington County, VA, located just across the Potomac River from Washington, DC, enjoys excellent access to Washington, DC tourist attractions and is also home to Ronald Reagan Washington National Airport. Arlington is still recovering from the 2005 Base Realignment and Closure Act which left the county with nearly four million SF of vacated office space from defense related agencies and 17,000 less jobs. Although office vacancy in the county continues to be high (22% as of 4th Quarter 2016 according to JLL) limited lodging supply growth has allowed Arlington hotels to maintain positive RevPAR growth. As of year-end 2016, RevPAR of Arlington hotels was up 2.5% over 2015 to $125.09. Occupancy reached a high of 77.2% in 2016; ADR has grown 7.7% since 2013. In the past six years only two new hotels have opened. The 183-room Residence Inn Arlington Ballston opened in May 2013, and the 168-room Hyatt Place Arlington Courthouse opened in August 2016. One hotel is currently under construction; a 168-room Homewood Suites is being developed by B.F. Saul at 1900 North Quinn Street, less than one mile from Key Bridge and downtown Rosslyn. In December 2016, the 318-room Hyatt Arlington was converted to Hyatt’s Centric brand after an extensive renovation. Two notable hotels in Arlington sold in 2016; JBG sold the 338-room Westin Arlington Gateway in June 2016 for $97.3 million ($287,869/key) to a joint venture between Rockpoint Group and Highgate Holdings. HEI sold the 154-room Le Méridien Arlington to Carey Watermark Investors 2 for $51.8 million ($336,363/Key). HEI had purchased the hotel for $37.8 million in 2012. The economic outlook for the county received a significant boost in February 2017 when Nestlé USA announced it would be relocating its U.S. headquarters from Glendale, CA to Arlington. Nestlé will be leasing approximately 200,000 SF of office space at 1812 N. Moore Street and bring 750 jobs to the area beginning in 3rd Q 2017.

Like Arlington County, Montgomery County, MD benefits from its proximity to Washington, DC in attracting both government and private companies to the area, as well as attracting leisure travelers looking for a lower priced alternative to downtown DC hotels. According to STR, as of year-end 2016 the RevPAR of Montgomery County hotels increased 4.7% over 2015 with increases in both occupancy and ADR, but no increase in supply. Hotels had an occupancy of 67.8%, up 1.5 points over 2015 and ADR of $129.14, up 2.4% over 2015. Federal Government and Federal Government agencies comprise much of Montgomery County’s employment base. The top three employers in the county are all government agencies and include the National Institutes of Health, the Food & Drug Administration and Bethesda Naval Hospital. Together these agencies employ over 40,000 people. Montgomery County has also experienced high office vacancy rates. According to JLL, as of 4th Quarter 2016 the total office vacancy rate was 16.2% with just 75,000 SF under construction. Marriott International recently announced it would build a new 700,000 SF corporate headquarters in downtown Bethesda. The company currently leases 900,000 SF in the Bethesda/Rock Spring sub-market which already has the highest vacancy in the county at 28%. Like Arlington, very few hotels have opened in the past six years. The last hotel to open was the 140-room Cambria Inn & Suites in Rockville in 2015. There are two hotels currently under construction; the 177-room Canopy by Hilton at the Pike & Rose development on Old Georgetown Road in Rockville is scheduled to open in the fall of 2017 and a 100-room Home2 Suites on Elton Road in Silver Spring. Marriott is expected to build a 230-room hotel in conjunction with its new headquarters building in downtown Bethesda. Notable transactions in the market include The Meridian Group’s purchase of the 390-room Hyatt Bethesda for $89.5 million ($229,487/key) in May 2015. The company completed a $37 million renovation of the property in December 2016. Pebblebrook Hotel Trust sold the 270-room Doubletree Bethesda for $50.1 million ($185,555/key) in November 2016.

Limited supply growth is expected to continue to benefit both Arlington and Montgomery County lodging markets in the near term. However, the heavy reliance on Federal Government agencies for both its employment base and lodging demand present some risk given the uncertain direction the Trump Administration may be taking with regard to certain Federal agencies particularly those that are defense or healthcare related. Nevertheless, close proximity to Washington, DC is expected to continue to be very beneficial over the long term.