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Getting Its ‘Second Wind’

Chicago Looks To Leverage Hotel Supply Growth Into Increased Revenue

Friday, August 30, 2019
Dennis Nessler
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Like many of the major U.S. hotel markets, Chicago has seen RevPAR growth taper off during the first half of this year as supply continues to tick up while demand begins to wane, but nevertheless hotel experts remain generally bullish on the windy city going forward.

According to the NKF Hotel Market Nsights Report Q3 2019--which was released earlier this week and includes data through June--the market has exhibited improvement in some of the major performance categories in 2019. As an example, in terms of revenue growth the city is rated as an “above average performer,” ranking 9th out of the 25 top markets.

Bryan Younge, practice leader, senior managing director, hospitality, gaming and leisure group, Newmark Knight Frank (NKF), pointed out the Chicago lodging market has held up relatively well despite some challenges.

“There are a lot of headwinds in Chicago, a lot of things are not going right for the city and for the economics. But from a hotel standpoint the lodging market seems to be faring well given the headwinds,” he said.

Younge further touted the potential of hospitality in comparison to other asset classes, such as office, industrial, retail and multi-family. “I actually think that the hotel market is probably the most attractive of the major commercial real estate segments,” he said.

Younge asserted the market has seen a marked increase in supply in recent years, ”quite a bit more than there was three years ago.” The positive revenue growth outlook for the city has been largely attributed to that increased inventory.
The aforementioned ranking was based on the report’s assessment of the market in terms of total revenue growth over the past three to five years.

Younge further explained the positive ranking.
“Because good quality supply has entered the market...There’s been a pro-growth climate with respect to hotel development and the incentives that are offered for hotels, which open the gates for revenue growth,” he said.

Some of the projects that have opened in 2019 include the Hilton Garden Inn Chicago Downtown South Loop; Home 2 Suites by Hilton Chicago River North; Hyatt House Chicago/West Loop Fulton Market; Hoxton Chicago; and Homewood Suites by Hilton Chicago Downtown South.

From an occupancy standpoint, Younge noted this past June was particularly strong coming in at 83.5 percent, which was one of the top June’s for the city in the last decade. Nevertheless, Younge acknowledged the seasonality of the market and that it tends to struggle in comparison to other less seasonal markets.

“Chicago’s achilles heal where a ceiling in occupancy is concerned is really the extreme winters. It’s a difficult city to get to in the colder months. Two to three months out of the year there really is a limit on leisure travel to the area. When you see Chicago at the 80 percent mark for year-round occupancy figures that’s almost like maximum capacity,” he said.

According to the report, the T3M ‘19 occupancy percentage metric dropped by 4 positions compared to the same period in the previous year. The report ranks the city as a “below average” performer in occupancy rank coming in 19 out of 25.

Younge reiterated “the economic and demographics of Chicago are somewhat challenged.” He also expressed concern about the city’s demand generators acknowledging some Fortune 500 companies, such as Amazon, could be on their way out. As such, he added, “retaining these top demand generators could be a challenge and attracting new ones for sure.”

However, Younge was quick to point out that group business remains solid for the city. According to the report, although convention activity is expected to be moderate in the coming quarters, the market as a whole will be an increasingly popular “tier 1” convention market.

He added the 2017 opening of the Marriott Marquis attached to the convention center has helped boost group business. “It’s strong now, they’ve had better convention activity, especially since the Marriott Marquis [opened]. It’s reported there was a spike in interest because a flagship hotel like this makes a convention center hotel, and the city itself, more viable for a large convention,” he said.

Chicago’s hotel supply has accelerated over the past few years with projects primarily located in the River North submarket. Younge also touted some of the historic projects within the city as difference makers, specifically citing the J.W. Marriott, which opened in 2010 in the historic Burnham Building.

“The J.W. Marriott is a good example of a historic property that’s turned into a major and successful lodging operation thanks to the character and the climate in Chicago for hotels,” he said.

Finally, Younge touted the city’s hotels from a consumer standpoint. “I would view Chicago as one of the best value markets in the country. Hotels, especially the upper upscale and the luxury ones, are expensive, but the quality of the hotel against the price that they’re offering is among the best in the country,” he said.

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Dennis Nessler    Dennis Nessler
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