Between COVID-19 And Crime, Chicago Hotels May Not Recover For 5 Years

The filing of a $338M foreclosure lawsuit in late August against the owner of the Palmer House Hilton, Chicago’s most iconic hotel, capped off months of woes for the downtown market. The onset of the coronavirus pandemic sent occupancy levels to historic lows, and a small, mid-year rebound mostly vanished after civil unrest and looting briefly returned to the central business district.

Hotel operators now pin their hopes on the introduction of a vaccine to fight the coronavirus and bring back business travel as well as revive tourism. They also expect foreclosure suits to hit more owners, perhaps leading to the closure of additional hotels. That could mean the eventual recovery will be measured in years, even if the U.S. quickly secures a workable vaccine, as lenders struggle to find new owners to reopen shuttered locations.

“It’s probably going to get worse before it gets better,” The Prime Group CEO and Chairman Mike Reschke said. “Many hotels have sizable cash reserves, but after a while, you just run out of liquidity.”

But however long it takes for a full recovery, the city has enough economic drivers to make it happen and bring back hard-hit trophy properties.

“We’re not going to lose the Palmer House; someone is going to buy it,” HVS Managing Director Stacey Nadolny said, adding the same will happen for any other well-established hotels that go under. “But demand will have to come back before that’s feasible.”

There’s a long way to go. Year-to-date occupancy in Chicago’s CBD sank to 31% by July, according to STR, a Tennessee-based company that collects hotel data, although as the firm does not include closed hotel rooms in its calculations, now about 38% of the total, the real occupancy rate is much lower, Nadolny said. The average daily rate fell to $132, a decline of about 70% compared to the previous year.    

There have been a few hopeful signs this summer, according to Reschke, whose firm converted the historic office building at 11 South LaSalle St. into the 380-room Residence Inn by Marriott. Even though the mass cancellation of conventions dried up almost all business travel, sizable groups of leisure travelers, many blocked from traveling overseas by the pandemic, began occupying rooms, especially on the weekends, bringing in some much-needed revenue. He estimates occupancy hit about 45% on the weekends, roughly double the current rate on weekdays and a big boost over the April doldrums, when 10% of the rooms were typically occupied.

“It’s a sign that people want to come back to the city, and it’s at least filling up a small portion of the hole we’re in,” Reschke said.

Similar numbers were seen around much of the U.S.

“Fortunately for U.S. hoteliers, indicators of market recovery began to emerge during the quarter,” CBRE Hotels Research Senior Director Jamie Lane said. “After bottoming out in April, lodging demand increased 83% in May and June. This mini surge in demand was fueled by leisure travelers looking to escape the bonds of home quarantine for safe and healthy rural and resort destinations.”

Maverick Hotels & Restaurants CEO Bob Habeeb said for Chicago, it shows that if a vaccine is available by winter, even more travelers will begin returning, swelling revenue flows and allowing hotels to bring back some of the thousands of furloughed cleaners, restaurant workers and managers.

“It’s been eerie: The hotels that are normally bustling this time of year are all very quiet,” he said. “By spring, it could start to feel like it’s becoming normal again.”   

The former CEO of First Hospitality Group, Habeeb plans to open the seven-story, 222-room Curio Hotel later this fall on Chicago’s Navy Pier.

But even if the most optimistic forecasts come true and a vaccine is available early next year, more trouble could lie ahead. Hotels need a 50% occupancy rate to make a profit, and Chicago hotels depend heavily on conventions that pack McCormick Center with tens of thousands of visitors, Habeeb pointed out. But restrictions on events like that will be the last lifted by the state.

“That’s going to leave a big hole in the boat for next year,” he said.

To make matters worse, the recent civil unrest scared away much of the summer leisure travel in the past few weeks, Habeeb added.

“There’s a sense in that COVID is no longer the greatest danger facing the industry,” he said. “The thing that you hear people in the hotel industry talk most about is crime. There is a growing perception that Chicago is unsafe, and this could have a chilling effect on the next tourist season. There is not going to be a vaccine for crime.”  

Both Reschke and Habeeb said it will take several years to not only bring back Chicago’s visitors but clean up the foreclosures that happen in the meantime.

“There is the belief that we have about five more years before the downtown hotel industry fully recovers,” Habeeb said.

Reschke hopes the state will speed up the recovery by loosening some of the restrictions on gatherings.

“Nobody in the hotel industry is going to put their guests in harm’s way, so there should be a little more delegation to the industry to do what is right,” he said.

He suggests events can be safely held in large ballrooms and spaces, as long as attendees are not packed into these spaces.

“It’s ridiculous, if you have a 12K SF ballroom, to not be able to host an event for 100 people.”

Whatever the challenges, like Habeeb, Reschke is going forward with his company’s development plans. It still has significant cash reserves and in December began building out a 232-room, five-star hotel atop the JW Marriott Hotel at 208 South LaSalle St., which will open next year.

“Hopefully, our cash reserves will hold out until things return to something close to normal,” he said. “That could take six months, a year, but it could also be two years. Nobody knows.”