With hotel market in freefall, Alexandria considers financing luxury hotel in Old Town

This week, the City Council is docketed (items 27 and 28) to review a proposal for the city to, in a round-about way, be involved in the financing of a new luxury hotel in Old Town.

With hotel revenue going into freefall during the pandemic, the prospect of building or renovating hotels in Alexandria hasn’t been a particularly financially appealing option, but a report prepared by Alexandria Economic Development Partnership (AEDP) and city staff said that’s going to be a hit to tourism in the city as people travel again.

At the City Council meeting tomorrow (Tuesday), the Council is scheduled to vote on a “tourism development plan” developed with the Virginia Tourism Development Financing Program (TDFP) to provide gap financing for a hotel project at 699 Prince Street.

The project is coming to the city for financing because the project is below the anticipated yield investors would hope for. According to the tourism development plan being presented to the City Council, the anticipated operating profits for the hotel are between 6.5% and 7% — below the 10% yield targeted by investors for financing before the pandemic. According to the report:

The project’s $69.6 [million] (includes building sale) ancipated cost will be capitalized with approximately $45.2M (65% loan-to-cost) senior construction financing, and approximately $10.27 million of net historic tax credit proceeds. The remaining $14.13 million will be funded through a combination of TDFP proceeds and investor capital.

It’s a somewhat complicated chain of financing, but a graph in the presentation lays out some of the financing web.

The tourism development plan laid out to Council also highlighted some of the issues with hotel room supply city-wide. One of the big issues, the plan said, is that residential units are seen as a safer bet than hotels. The report noted that the city has lost five hotels in the last two years.

“The major challenge for Alexandria’s tourism economy is our recent reduction in hotel room supply,” the plan said.”The loss of hotel rooms is largely a result of the booming residential real estate market. With low-interest rates and increasing post-Covid migration from urban centers to suburban communities, the demand for residential housing in Northern Virginia is causing many hotel property owners to convert their properties to residential. As a result of these conversions, Alexandria’s hotel base dropped 17% in the past two years.”

The report also said while there are “upscale properties” in the city, there are no real luxury hotels in Alexandria.

“This proposed development would fill a void in the market and in turn, increase City revenues by increasing our Average Daily Rate,” the report said.

The report also said the new hotel would provide large meeting spaces that are in short supply in Old Town.

Finally, Alexandria would benefit from more hotel meeting space in Old Town. Our largest conference hotel, the Hilton Mark Center, is located on the City’s West End, a 20-minute drive from Old Town. Within Old Town, Alexandria has only three properties that can accommodate a large meeting (200+) — the Westin, the Hilton Old Town and Holiday Inn & Suites. Despite the walkable and historic downtown that many meeting planners and their attendees are seeking, Alexandria loses mid-size meetings to adjacent localities like Arlington, VA and National Harbor, MD.

The report from AEDP and city staff, though, said the expectation is for the hospitality market to rebound this year and next — how the ongoing wave of Covid cases from the omicron variant affects those projections isn’t said.

“In the recent HVS market study, the tables indicate demand for higher-end hospitality that will surpass pre-Covid levels in 2022-2023 and point to continued growth thereafter,” the report said. “Targeted for delivery in the 2023 timeframe, the Project will be well-positioned to capture this demand.”

At the meeting on Tuesday, the City Council will vote both on creating a “tourism zone” at the site to incentivize hotel development and, immediately after, a tourism development plan for the proposed hotel.