Posted February 22, 2021
A change in presidential administrations typically doesn’t alter the regional lodging investment environment
As the Biden administration settles into the District of Columbia and the worst of the COVID-19 pandemic slowly appears in our rearview mirror, we offer our take on the current state of the commercial real estate industry in the Washington, D.C. metropolitan area and what may lay ahead.
Most are sure to agree that 2020 proved devastating to many real estate investment firms and travel-related companies near and far. Office vacancy rates are up, hotel occupancies are down, many shopping malls have been shuttered, and debt forbearance agreements are pushed to their limits. So what trends or trend reversals we can expect with a change in administration and the effect of the anticipated economic recovery in the Greater Washington, D.C. metropolitan market (including the District of Columbia, Southern Maryland, and Northern Virginia, and commonly referred to as the “DMV”)? Here we’ll explain why we believe the region is on strong footing to recover alongside some of the most promising Top 25 markets.
A national overview
There has been much analysis on the effects of a Republican or Democratic administration and national real estate industry performance. A recent study conducted by the Newmark Group that analyzed administrations over the past forty years shows the returns on total real estate investment to be about equal. During Democratic administrations, total returns reached 9%, while under Republican administrations, values achieved about an 8% gain.
According to Sandy Paul, the lead author of the study, administrations are a less likely cause of change in real estate markets, but instead “outside events that are not directly controlled by American policy tend to have a much greater impact on the commercial real estate market.” From this, one could infer that the real estate industry is left to its own creativity and entrepreneurial skill to improve competitive positions as the economy heals thanks to widespread COVID-19 vaccination efforts and a return to a “near normal” social environment.
Zooming in on the DMV
While the effects of the pandemic have been crippling for the commercial real estate industry, the DMV has experienced continued growth in demand for multifamily and single-family residences, commercial office space, warehouse, and data center spaces.
In the greater Washington, D.C. area, the change in dynamics in real estate can be meaningful as a result of a change in a presidential administrations. No doubt, movement in and out of the area will affect residential, lodging, retail, and office assets. Historically, however, a change in administration has had little effect on the DMV’s Gross Regional Product (GRP). Generally, according to Stephen Fuller, founder and director of the Stephen S. Fuller Institute for Regional Economics at George Mason University, there is little economic impact on the region’s GRP during this recurring change. The Institute’s projections bode well for real estate and hotel investments in the DMV market as a whole. With the increasing accessibility of COVID-19 vaccines, travel for personal and professional purposes will begin to show marked improvement compared to the period after the virus struck the U.S. in early 2020. Likewise, doing away with occupancy limits on indoor gatherings will benefit hotels and restaurants, providing an upward boost to the travel, meetings, and food and beverage industries.
Typically, a new administration comes to the U.S. capital with a fresh set of policy goals. Each of the initiatives championed by the Biden administration will require the help of many external consulting, advisory, legal, and lobbying firms, according to Scott Pastrick, CEO of Prime Policy Group. In addition, the new Congress and the remaining holdover representatives will begin the implementing the new administration’s policy goals. This will require a significant amount of travel and both virtual and in-person meetings. As quickly as the vaccine becomes widely distributed, a process currently underway in the U.S. Congress for all representatives and staffers, GRP will begin its recovery in the DMV. A decrease in virus transmission risk and the resulting increase in business activity will positively affect the hospitality economy of the DMV and other major markets across the country, most likely starting in the second half 2021.
Government activity will be only one of several contributors to the DMV’s economic growth in the months ahead. The development of Amazon’s HQ2 in National Landing near Reagan National Airport continues to progress, with new buildings opening monthly. Amazon is on track to meet its commitment of adding 25,000 jobs in the region, a substantial gain for the local economy. Likewise, in the second half of 2020, the DMV welcomed $500 million in new venture capital to enhance the region’s start-up ventures catalyzed by the pandemic’s effects. The DMV continues to expand its inventory of new technology-based firms in the data science, life sciences, education, insurance, and finance sectors. The economic activity generated by those businesses will support demand for rooms and meetings across the Metro area.
According to the Stephen S. Fuller Institute, “Economic growth for the DMV in 2021 is projected to be 2.4 percent, with the strongest gains in the second half of the year. The largest economic rebound will occur in 2022 after the vaccine is presumed to be available and used. In 2022, businesses and households are forecasted to fully catch up on the forgone economic activities of the prior two years. In 2023, economic growth will slow to 2.3 percent because most catch-up activity will have occurred. By 2024, the Professional & Business Service sector is projected to have large gains as this sector pivots away from the pandemic-economy and returns to its pre-pandemic trend of diversifying away from the Federal Government.” This projection is very much in line with expectations for the national economy, where economic growth will continue in all sectors enabling the year 2022 to benchmark the results achieved in 2019.
The forecast for lodging investments in the region
What does all this mean for hotel owners in the DMV market? For owners, investors and operators, now is a time to plan for the recovery to ensure assets will be competitive as the lodging landscape returns to some semblance of normalcy. This is a great a time to review near- and long-term capital needs, brand contributions, franchise and management obligations, personnel deployment, sales strategy, partner expectations, existing business practices, business and disposition plans. Hotels in the DMV are highly likely to be on the road to full recovery in the coming months, and the journey will hopefully be a short one.
The data suggest good news ahead for hoteliers so long as they can endure what will probably be a tumultuous first half of the year. A significant, yet measured recovery in occupancy is predicted to begin by late summer 2021, aided by modest individual business travel which will likely return in the fall. Hotels can look forward to small meetings (less than 350 people) and social events returning sometime in October to December. We anticipate that increased business and Federal Government-related travel and meetings will only bolster the region’s performance in the quarters to come. When it comes to lodging asset values, a return to figures in the range of 2019’s peak is broadly predicted for late 2022 or early 2023.
Using the historical results of past administrations as a guide, hotel owners can expect to experience nominal, but positive effects on their assets during the incoming administration’s transition. Further, the greater Washington, D.C. market is beginning to show green shoots for the spring and summer months. Following broad COVID-19 vaccination efforts, the DMV market is poised to return to the high level of economic activity it experienced in the months before 2020 began.
The area can look forward to improvement in all areas of the economy as the vaccines’ protections take effect, and the public returns to a more regular pace. Barring some unforeseen black swan event, D.C. area hotels can expect continued growth in occupancy through 2023 and a return to 2019 RevPAR levels sometime in 2024.
As markets across the country recover, there will be pockets that improve more quickly than others. Additionally, some submarkets will probably experience a permanent change in demand profiles. The Washington, D.C. metropolitan area is poised to be closer to the leading edge of this recovery than many other major markets across the country given its diversity in demand generators.
Given the amount of capital eager to invest in lodging assets—often at or near pre-pandemic values—it could be an opportune time to consider divesting portions of your hotel and resort portfolio in the DMV or elsewhere. Contact a member of our team to discuss strategy for your holdings and acquisition plans.