How We’re Advising Our Hospitality Clients In Washington DC’s Booming Construction Market

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Washington DC MGAC Hotel Construction Market Report Hotel Acquisition Bidding, REIT Investor

I haven’t seen a construction 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.

Needless to say, these developments are creating some challenges for our hospitality clients when obtaining entitlements and permits, and getting competitive bids.

L'Enfant Plaza Hotel DC MGAC

L’Enfant Plaza Hotel, a project we are currently managing for a client, is one of the many major developments currently underway in Washington DC. Source: Mapquest

A Booming Construction Market & 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, including over 900 rooms scheduled to enter the market by the end of 2017, 900 by 2018, and 700 by 2019.

In short, there is an urgent shortage of qualified hotel general contractors and specialty subcontractors available to handle the current pipeline.

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, we’re 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 go down with nearly 700 rooms scheduled this Fall at the Wharf and other properties to be delivered in the suburbs and downtown.

How We’re Advising Our Clients

In response to these challenges, we have looked for ways to gain cost and schedule certainty while maintaining a competitive general contractor (GC) selection process. As a firm, we have developed GC procurement alternatives to the traditional competitive lump sum bid method.

One approach we have proposed to our clients 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 for informational purposes only at this stage, but serves to help us 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 will have 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.

In addition, we are leveraging our 20+ year relationship with DC Department of Consumer and Regulatory Affairs (DCRA) and other agencies involved in the entitlement and permitting process to move projects through these burdened agencies. Our clients would also benefit from our connections with the most knowledgeable legal, zoning, and expediting consultants in the region.

For more information on our procurement strategies or questions about our research, contact me through LinkedIn or the Contact page.

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Dermot Ryan

Dermot Ryan serves as Managing Director of Hospitality for MGAC. With over 30 years of experience and a background in quantity surveying and commercial development, he brings his clients the unique perspective required to successfully manage the design and implementation of hotel projects.
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