Construction is up, but so is demand in the hotel industry

Even as Chicago is amidst a robust hotel development cycle, with 6,000 rooms scheduled to open between 2015 and 2018, demand from users continues to increase at a greater rate, enticing investors to remain active in Chicago.

According to CBRE Hotels Research, the annual rate of growth in demand for room nights continues to outpace the annual growth rate in supply of new rooms in Chicago. Since 1987, the total downtown Chicago market supply has grown at an average annual rate of 1.6 percent (from 9.2 million to 14.5 million available room nights), while demand has grown at an average annual rate of 2.2 percent (from 6.2 million to 10.9 million room nights).

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“This trend is expected to continue in 2016, as we expect the city to absorb the new supply currently in the pipeline in fairly short order,” said Mark Eble, Managing Director with CBRE Hotels in Chicago. “The only clouds on the horizon, aside from the potential for future national economic disturbances, are Chicago’s recent cuts in the budget for Choose Chicago (the City’s convention and visitors bureau), which is a major demand generating engine.”

The fundamentals have supported robust investment activity in recent years, as 2015 saw sales volume of roughly $2.44 billion with year over year (YOY) exceeding 100% in hotel volume growth.

Chicago, which currently offers 41,680 guest rooms, is uniquely situated in the region and the country to act as a hub for business and tourism, driving this activity at a pace much greater than surrounding metropolitan areas.

 “Chicago has more to offer than any of the other regional cities,” said Peter Greene, First Vice President at CBRE. “We have all the restaurants, museums, shopping and everything is walkable from one end of Michigan Avenue to the other plus the airfares are better.”

The three-legged hotel business

According to Greene, the Chicago hotel business is divided into three sections:

Commercial –There is a lot of new business coming into Chicago, which started with big companies moving their headquarters to the city and suburban companies relocating or putting satellite offices downtown. These businesses drive a lot of visiting professionals to the city.

Tourism –The City’s goal was to have 50 million visitors by 2020 and we achieved that last year. Chicago has great attractions including the soon-to-be Presidential Library and Lucas Museum.

Convention Business –McCormick Place has been divided into pods and each pod can generate CBD hotel occupancy of up to 30-35%.

 The travel to Chicago is also “easy and fast,” according to Greene, as it’s inexpensive and the convenience of being located in the center of the country allows people from different parts of the country to get here relatively around the same time.

The big city comparison and hotels abroad 

“One thing that sets Chicago apart from other cities is McCormick Place as a demand generator, which has a significant impact on the city,” said Kevin Mallory, Senior Managing Director of CBRE Hotels. In addition to the CBD, the surrounding suburbs benefit as well from compression generated by various citywide conventions housed at McCormick.

The three major convention destinations in the United States are Chicago, Orlando, Las Vegas, followed by New York and San Francisco.

Chicago is one of the few major markets in the US that has seen a fair increase in both room demand and supply as rooms that have been delivered continue to be absorbed.

2016 Hotels Forecast

Outlook for the fundamentals at the property level continues to stay positive as demand continues to outpace supply. 2016 should bring another strong year in investment sales.

“The primary buyers for hotels include private equity, REITS, pension funds, high net worth individuals, and foreign,” said Mallory. “We continue to have demand from most investor types and in addition have good liquidity in the debt markets allowing for continued investment activity in the sector.”

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