Chicago hoteliers face new supply.owners and operators remain bullish on the Chicago hotel market.

March 5 2014

 

Despite up-and-down performance data and an expected influx of new supply,

 

More than 6,000 hotel rooms are in some stage of development in the Chicago market.

 

By Ed Watkins

HNN contributor

 

CHICAGO—The Chicago hotel market is a tale of two cities. Hotel performance has been mixed in recent months, and a significant amount of new supply is under development, yet many operators and analysts remain optimistic about the market.

 

“It’s a strong and healthy market, and we’re bullish on Chicago on a long-term basis,” said Jerome F. Cataldo, president and CEO of Hostmark Hospitality Group, which operates four hotels in the Chicago market. “We like the diversity of the economic base of the city. We also like the tourism elements of Chicago, which have developed dramatically in recent years. And it’s not just tourists from other locations; it’s also tourists who come from the suburbs and cities and states nearby.”

 

2013 was up and down for Chicago hotels, according to data from STR, parent company of Hotel News Now. Revenue per available room for the market rose 4.4% during the year. RevPAR was up 3.8% for downtown hotels and 5.7% in the O’Hare Airport submarket.

 

In downtown Chicago, RevPAR fell during four months of the year, including a 15.1% decline in November based on a 6.4% fall in occupancy and a 9.3% drop in average daily rate. 

 

Downtown hotels rebounded sharply in December with a 31.4% increase in RevPAR, but fell again in January this year as occupancy (-9.8%), ADR (-2.7%) and RevPAR (-12.3%) all declined.

 

Once heavily dependent on large citywide conventions for the bulk of their business, Chicago hotels are now attracting a wider array of guests, sources said.

 

“Twenty years ago, 65% of (the city’s hotel) business was conventions. Today, it is Iess than 50%,” said Ted Mandigo, director of TR Mandigo & Company, a Chicago-based hotel consulting firm. “The convention business has shown moderate growth while our room supply has expanded fairly dramatically. Also, we tend to have more regional and local shows and conventions and fewer big blockbuster citywides that used to bring in 80,000 people. Today, those events more likely draw 50,000 or even less.”

 

The changing business mix

While convention business might be down, leisure visitation, especially on the weekends, is on the increase, Cataldo said.

 

“Years ago, when we were a convention city only, we were fighting for customers on Friday and Saturday nights and had to run newspaper ads for weekend packages,” he said. “Now Fridays and Saturdays are some of the city’s highest occupancy nights.”

 

Chicago Mayor Rahm Emanuel recently launched a marketing campaign to boost tourism to the city, especially international visitors. His goal is 55 million annual visitors to the city by 2020. In 2012, 46.4 million people visited Chicago, including 1.4 million international visitors.

 

“There was very strong leisure travel last summer, and we’re expecting the same to occur this year,” said Phil Tufano, partner and COO of Kokua Hospitality, a Chicago-based management company with three properties in downtown Chicago. “The airlift to Chicago is great and it continues to expand, which will bring more leisure and more international travel to the city.”

 

Pierre-Louis Giacotto, GM of the Radisson Blu Aqua Hotel Chicago, is optimistic about the short-term outlook for the city as rates rise and occupancies remain steady. He’s more cautious beyond a year or two.

 

“The only black clouds coming in the background are the new hotels that will become available in 2015 and 2016,” he said. “More rooms on the market mean more competition, which means keeping our (rates) at a certain level will become more difficult.”

 

The supply problem

Chicago hotels rebounded strongly following the recession, starting in 2010 when RevPAR jumped 9.2%, followed by an 8.8% increase in 2011 and 10.1% in 2012. This performance caught the attention of developers and a mini development boom took hold in the city.

 

“Demand has been growing faster than supply (growth) in the past few years … and probably through 2014,” said Hans Detlefsen, managing director of HVS Global Hospitality Services in Chicago. “We think that will change starting in 2015 when supply starts growing faster than demand.”

 

According to STR, 1,892 rooms are under construction in Chicago and 6,122 rooms are in some stage of development. If all rooms under development open, the city will see a 5.6% jump in its current hotel supply of 109,044 rooms.

 

“They’re headline readers,” Mandigo said of developers who have been attracted to the city. “A lot of other markets have been hit with substantial downtown construction. Many of these other markets are hard to get into, but Chicago has some fairly inexpensive land and outdated office structures that look ripe for development.”

 

New development is reaching past the traditional Loop and North Michigan Avenue locations, Mandigo said. Neighborhoods with little or no hotel supply but with properties under development include Randolph Street, Wicker Park, Diversey Parkway, Wrigleyville and others.

 

“There are probably 1,000 rooms going into neighborhood pockets that just didn’t exist before,” he said. “They will probably underperform the downtown market in both rate and occupancy, but they’re also less expensive to build.”

 

Reflecting the shift in the market’s mix of guests, much of the new development is in the lifestyle and select-service segments. Last week, for example, a joint venture between developer Albert Friedman and White Lodging Services announced plans for a dual-branded hotel in the city’s River North neighborhood. The project, which is scheduled to open in 2016, will include a Hyatt Place and a Hyatt House in the same building.

 

One high-profile downtown opening expected this summer is the first Virgin Hotel, a 250-room property off Michigan Avenue near the Chicago River. According to Virgin Hotels CEO Raul Leal, because the property will be positioned as a 4-star lifestyle hotel that serves the corporate market during the week and leisure guests on weekends, it will be less susceptible to the increase in the city’s hotel supply.

 

“The lifestyle segment is less likely to be affected by some of the other hotels being developed,” he said. “This segment is very destination-based, and people gravitate to these products. They just don’t go for the hotel room; they go because they want a different experience.

 

“We won’t be unaffected if the city gets overbuilt, but we will survive well,” he said.