by Dermot Ryan
I haven’t seen a development boom of this scale in Washington DC since the mid-nineties. These days, it seems that you can’t walk a block without passing a construction site or seeing a few cranes on the skyline.
And the momentum shows no signs of slowing. Last year, the number of construction permits issued in the District reached a five-year record high of 16,500. As of October 2017, over 15,200 construction permits have already been issued. At this pace, the total number of permits issued by the end of 2017 is likely to exceed last year.
These construction permits include over 30 major commercial and residential developments within the District, each valued at over $100 million, and with a combined total worth over $9 billion in construction value.
AN INCREASINGLY COMPETITIVE HOSPITALITY SECTOR Although much of the new construction is in the mixed-use, office, and residential sectors, hotel supply has also grown considerably. This is largely because of conventions/events and tourism growth, as well as the planned rise of the federal per diem rate in 2018. DC currently ranks sixth in the nation for events, ahead of significantly larger cities like Nashville, Dallas, and New York.
Recent hotel developments have added over 3,000 rooms to the market from 2016 to 1H 2017, a 10% increase of the district’s total number of rooms. Our group has tracked more than 4,000 rooms that are currently at various stages in the pipeline, with over 900 rooms scheduled to enter the market in 2017, 900 in 2018, and 700 in 2019.
The 29 major hotel projects in Washington DC. Gray denotes recently completed projects; Blue shows projects currently in the pipeline.
With the number of new rooms coming into the market, I’ve also been seeing fewer hotel transactions in 2017. Many of our clients are cautious in pursuing assets in the market because of high acquisition costs and limited RevPAR growth prospects. Several major hospitality REITs with properties in Washington DC have expressed their market outlook:
- Host Hotels & Resorts – “We expect growth for the second half of 2017; however, we anticipate that the rate of growth will decelerate.“
- Sunstone Hotel Investors – “…some markets may experience new hotel room openings at or greater than historic levels, including in Chicago, Houston, Los Angeles, New York City and Washington DC where there are currently higher-than-average supplies of new hotel room openings.“
- Thayer Lodging – According to President Bruce Wiles, the city’s performance next year is expected to decline, with nearly 700 rooms scheduled this Fall at the Wharf and other properties to be delivered in the suburbs and downtown.
IMPACTS ON HOTEL CONSTRUCTION The sheer volume of development in DC has resulted in an urgent shortage of qualified hotel general contractors and specialty subcontractors available to handle the current pipeline, as well as an overloaded permitting agency. Two major challenges facing hotel developers in DC are:
Ensuring A Competitive General Contractor Procurement: In my experience, small (<$10M) and complex or large (>$100M) projects currently have the most difficulty in soliciting qualified general contractor (GC) interest, while median-sized projects ($50M) have an easier time attracting both large and small GCs.
Using GC procurement alternatives to the traditional competitive lump sum bid method can help owner’s gain cost and schedule certainty, while maintaining a competitive GC selection process.
One alternative approach is to request that GCs provide a full cost estimate, project schedule, general conditions, and fee at an early Design Development milestone. The cost estimate and project schedule are used for informational purposes only at that stage, but serve to help better understand each proposing GCs’ knowledge, creativity, and competitiveness. The general conditions and fee of the selected GC are then locked in as a competitive hard bid.
Through the development of the design and construction documents, the selected GC and its key subcontractors are given the opportunity to provide preconstruction services including cost management, scheduling, constructability, and design input. Involving the GC during these phases (especially construction document development) can help optimize the design and minimize future surprises.
Only at an established milestone (typically 50%, 90%, or 100% construction documents), will the GC produce a GMP. If this final price falls outside of the owner’s budget, the owner reserves the option to re-bid the project with other GCs.
Obtaining Entitlements and Permitting: Because of the volume of entitlements and permits in the pipeline, the DC Department of Consumer and Regulatory Affairs (DCRA) typically needs six to twelve months to issue a building permit for most significant new build projects. The right legal, zoning, and permit expeditor consultants can help navigate the permitting process and help save otherwise lost time.
With thousands of new hotel rooms scheduled to enter the market and thousands more nearing their renovation cycles over the next several years, the hospitality industry will continue to be affected by every facet of the construction boom in DC.
Proactively seeking input from players in the construction market, such as general contractors, subcontractors, regulatory agencies, and consultants will be important to help owners and managers maximize their occupancy time and profitability in an increasingly competitive hotel sector.
