Drop In Convention Business Causing Worry, But Doesn’t Shake Confidence In Hotel Sector

In the past few years, developers in Chicago created thousands of new hotel rooms, and that boost in supply makes 2019 an anxious time for some in the hospitality sector, especially those establishing locations in new neighborhoods like Fulton Market, or bringing in concepts new to the city.   

Part of the worry comes from a drop-off in business. In 2018, Chicago attracted a record number of visitors, including millions of convention-goers who packed its hotels. But conventions typically alternate which cities get to host their annual events, and many from 2018 won’t return to Chicago until 2020 or 2021.

“We all knew 2019 was going to be a rough year,” said Leah Murphy, executive director and national practice leader of Cushman & Wakefield’s hospitality group. She will speak at Bisnow’s Chicago Hospitality Summit on June 26. 

“People are far from panicking yet,” Murphy added, but the decline in convention activity does leave a big question mark hanging over Chicago. With another 1,200 new hotel rooms expected to open this year, have developers overbuilt, or will the return of conventions in the coming years help validate the construction boom?

The Prime Group CEO and Chairman Mike Reschke, another conference speaker, said anyone looking at the big picture has to be optimistic about the Chicago hotel sector's balance between supply and demand.

Developers added about 7,000 rooms to the city’s Central Business District since 2012, an increase of 17%, according to STR, a Tennessee-based company that collects hotel data. During the same period, the number of visitors to Chicago increased from 46.4 million to 57.7 million, a roughly 19% jump, according to Choose Chicago, the city’s tourist information center.

Reschke pointed out that New York City developers have worked at a much faster pace.

New York City had 121,965 rooms by the end of 2018, according to STR data, up from 73,692 in 2007, a 65% increase. During the same period, the number of visitors there grew from 47 million to 60 million, a roughly 30% boost.

“We’re not oversupplied at all,” Reschke said.

The most recent stats seem to bear that out. Although RevPAR in Chicago’s CBD declined 1% and 2.2% in 2016 and 2017, respectively, last year it increased 5.1% to $160.59, according to STR. Furthermore, occupancy hit 75.4% in 2018, roughly the same level as in 2012.  

“Everyone has been waiting for us to hit the saturation point, but it hasn’t happened yet,” James McHugh Construction Vice President Kate Ivanova said. McHugh is building Chicago’s 1,200-foot Vista Tower, which will include the Wanda Vista Hotel. Ivanova will also speak at the hospitality conference.

The pipeline of new projects for Chicago’s downtown includes eight new hotels with a total of 1,255 rooms under construction or in the planning stages, according to a recent analysis by Cushman & Wakefield.

Reschke believes the city could absorb an even larger number.

“Right now, about one-third of convention travelers stay in suburban hotels, and then have to travel an hour from Rosemont or Oak Brook to reach McCormick Place, and that’s a real problem,” he said.   

Murphy worries this year’s convention drop-off may be significant enough to harm the newest hotels trying to attract visitors to neighborhoods just outside the downtown. In 2019, for example, Fulton Market alone is expected to get nearly 500 new rooms.     

The 2018 convention calendar was quite healthy, and the city recorded over 2.6 million convention hotel room nights, a 33% increase over the 1.9 million room nights recorded in 2017, Cushman & Wakefield reported. As of this May, there were about 2 million convention room nights confirmed for all of 2019.

Still, the outlook for Fulton Market is a lot like the Chicago market as a whole, Murphy said. Whatever hiccups occur this year, the long-term outlook is rosy. She pointed out that many of the nation’s most well-known corporations, including Google and McDonald’s, have established headquarters in the neighborhood, and neighborhood hotels, such as Soho House Chicago and Ace Hotel Chicago, which opened in 2014 and 2017, respectively, attract streams of business travelers. And growth in this office submarket is accelerating.

“The fundamentals are there for Fulton Market to really explode,” Murphy said.

She also has high hopes for the 222-room Curio Collection by Hilton that will open on Navy Pier in 2020. Located on the complex’s eastern side near Festival Hall and surrounded on three sides by Lake Michigan, it is in a unique location that sets it apart from the competition. But how it impacts the many hotels crowding nearby River North won’t be known for a year.

“At the end of the day, it’s still new supply,” Murphy said.   

In the midst of so much expansion, she believes Chicago providers will have to put more thought into designing new concepts that will help their projects stand out. And she already sees a lot of innovation.

Related Fund Management, which in April 2018 acquired the 500-room, 26-story DoubleTree Chicago Magnificent Mile at 300 East Ohio in Streeterville, is converting the top six floors into vacation rentals by combining rooms into studio and one-bedroom suites. Orlando-based Hilton Grand Vacations plans to buy up and operate the new units.

The Streeterville hotel’s previous owner had struggled financially, and Murphy believes the city has a number of older, possibly obsolete hotels that could pursue similar strategies and pull in renters who might otherwise go with an Airbnb.

She also knows of providers interested in bringing Chicago more hotels with tiny, pod-style units, popular in many Asian cities, and introducing family-friendly hostels, most commonly found in Europe, but rare in the U.S.    

“These are all attempts to get more creative in this new, more competitive environment,” she said.

Ivanova said the growing number of visitors to Chicago also means successful hotels will have to cater to a far more diverse group of travelers.

As a result, she expects to see more Chicago hotels with multiple brands and shared amenities under one roof.  

For example, Hilton and First Hospitality Group opened a 23-story hotel near McCormick Place last year with 184 Hilton Garden Inn rooms, 187 Hampton Inn rooms and 95 suites by Home2 Suites. That combination brings in business travelers attending conventions, as well as larger groups or families.

“This strategy works and we are seeing more and more of these dual or tri-brands pop up all over the country,” she said.

Reschke’s Prime Group is also bringing some diversity to the market, or at least one part of it. It plans to open a 232-room, ultraluxury hotel atop the JW Marriott Hotel at 208 South LaSalle, which the firm also developed. Reschke said it will be the only true five-star hotel in the heart of the Loop, one that can rival the Four Seasons and Ritz-Carlton in River North, the traditional location of the city’s luxury product.

And by the time it opens in late 2020 or early 2021, Chicago’s convention business will likely be back in full swing, he said.

Even with all the worries about the decline in convention business, Murphy believes it isn’t out of the question for the good times to return earlier than 2020, perhaps as early as this summer.

“We know it’s a seasonal market, and we’re entering the part of the year when Chicago really shines.”