Chicago's Full Hotel Recovery Linked To Attracting More Shoppers Downtown

A much-needed burst in leisure travel is fueling a comeback for Chicago’s hospitality industry as it celebrates a sharp boost following hard hits taken during the pandemic.

But amid continued labor and supply chain issues, hoteliers have their work cut out for them to achieve full recovery — and some say a retail comeback for downtown’s notably vacant streetscapes could be the Hail Mary hotels need to get there.

Hotel owners and heads of hospitality at Bisnow’s Chicago Hospitality Real Estate event Aug. 18 at Loews Chicago Hotel said a series of store closures precipitated by the pandemic and longstanding downward trends in retail sales have made it increasingly difficult to attract and retain tourists who once flocked to the city for major shopping trips.

Poag Shopping Centers President and CEO Joshua Poag referred to the current hotel market as a tale of two parts of the city.

“Getting new deals in place [in the city] has been more difficult than the suburbs,” he said. “Our property, Deer Park Town Center, opened about 20 years ago and frankly is now the No. 1 destination for retailers in the metropolitan city because malls are not as desired for some retailers. Everyone used to come down to Michigan Avenue first, but with the lack of office, lack of tourism — obviously tourism is coming back — it’s been harder.”

Chicago's annual hotel revenue was up 166% year-over-year through May, according to Marcus & Millichap’s Midyear Hospitality Market Report, driven by domestic tourists and business travelers, with conventions and events like Lollapalooza and the Taste of Chicago raking in the highest weekend performances. 

Recovery looks incredibly different for retail though, especially along the Magnificent Mile, which has suffered from the growing threat of e-commerce, an uptick in crime and an increase in empty space exacerbated by an already depressed market.

Owners of Water Tower Place and Shops at North Bridge relinquished their Mag Mile malls to their lenders earlier this year, as brokers pointed to an overall area plagued by excessive vertical mall space, according to reporting by Crain’s Chicago Business.

“Hotels are supposed to bring people to exciting new places,” Poag said, adding a struggling Mag Mile, void of experiential retailers and specialty stores, is dominating the media landscape and scaring away would-be shopping tourists.

Given a 29% vacancy rate on North Michigan Avenue, the quality and type of stores surrounding hotels matter to industry heads, who say tourists can find big-box stores in any metro. It's high-end retailers and merchants with unique products that are needed to actually help drive tourism, especially in the offseason. 

“One of the encouraging things is we have all of these vacancies on Michigan Avenue, and there’s been a reluctance and a resistance to just do the easy thing and flip them all over to become Targets and Walmarts and so on," Maverick Hotels and Restaurants CEO Robert Habeeb said. "We’ve held our ground there and decided Michigan Avenue should be a special place and I hope that continues."

The build-out of big-box stores has lost its luster, according to Chad Huber, W.E. O’Neil Construction’s vice president of operations. Huber said small-scale work and projects to convert old malls and big-box into multifamily or senior living are increasingly in demand. 

As investors target upscale buildings with heightened velocity, the River North to Gold Coast area remains the most liquid region of the city for its concentration of high-end retail in the Central Business District, according to Marcus & Millichap’s report.

But if retail and hospitality want to work toward recovery together, panelists said build-outs also need to happen beyond the downtown area.

Cleveland Avenue Managing Partner Andrea Zopp said increased development, especially in areas like Bronzeville and Woodlawn, will lead to expansion of neighborhood retail. Thriving neighborhoods with stores, hotels and restaurants have the ability to attract new people to the city, according to Zopp. 

“If you look at what’s happening around the Post Office Building and that whole corridor — which was nothing, and now in the building, there’s a lot of retail, and in the corridor, there’s retail coming — that is going to have an impact on the entire rest of the South Loop,” she said.

While hotel occupancy rates have risen almost to pre-pandemic levels and room rates have surpassed 2019 levels, the hospitality industry is keeping a wary eye on debt as well as the fate of retail.

The past few months have seen some of Chicagoland's largest-ever distressed hotel sales, including the Hilton Orrington in downtown Evanston, the Westin Chicago Northwest in suburban Itasca and the sale of a distressed loan tied to a Hilton hotel in Northbrook.

"They better be prepared to be in a position of debt because to go out and get new debt on any distressed hotel and acquisition is going to be 50% less leverage [and] high spread, and that greatly reduces the return on equity and just makes it less attractive," Prime Group CEO Mike Reschke said.