Six Big Hotel Stories for 2014
You don’t need cute animals for a feel-good story or celebrity antics to alter Chicago hotels. Here are the top six hotel stories this year, according to the repositioning panel at Wednesday's Bisnow Hotel Investment and Repositioning Summit at The Westin Chicago River North.
Adaptive Reuse Works If You Overestimate Contingencies
Now on his 11th Chicago market hotel (Cass, Felix, Godfrey, Essex, Hyatt Mag Mile, Langham, etc.) and with more than a dozen adaptive reuse/historic renovation projects nationally (Chicago, NYC, Boston, San Francisco, etc.) under his belt, Oxford Capital Group CEO John Rutledge (left) knows the importance of due diligence, big contingencies and cushion in your underwriting. Oxford focuses on Main and Main--adjacent locations where it can buy at a deep discount and execute a multi-dimensional value-add strategy, like its under development 450-room luxury lifestyle hotel and two floors of upscale retail at iconic 360 N Michigan. After selling the retail and employing historic tax credits and Class L tax incentives, the firm estimates it will be in at 55% ground-up replacement cost, John says.
Customizable and Personalized Design is Key
BKV Group partner Will Jensen (center) outlined the future of design, and it all comes down to choice. Guests will soon select their own rooms, lobby and amenity spaces have become coworking labs/networking hubs, and it's an all-out battle for social media domination via Instagrammable inventions. (Like The Clift’s “Big Chair” in San Francisco, he says, which everyone posts pics with.) Sustainability is now a business issue, with people who care sharing hotel carbon footprint information online for the discerning green guest. While hotel designers focus on Millennials, you can’t forget that Boomers and GenX-ers still have 60% of the money, he points out.
It Pays to Take the Long View
Friedman Properties has developed 3,500 hotel keys, president Jason Friedman (right) tells us, with a focus on River North, which is experiencing record valuations among all asset classes including office and residential. The firm has historically committed its own capital to its hotel deals and typically works with strategic partners and operators, Jason says. That way, Friedman can adopt an investment horizon that is longer than those of most other investors and developers in the market. Friedman’s long-term investment approach, thorough due diligence and prudent use of leverage enable the firm to weather market downturns and to exit investments under conditions that fit with its strategic plan, he tells us.
Think Creatively to Boost Branding Benefits
Rebel Hospitality principal Gene Kornota (left) got his start doing SRO conversions on the North Side. Rebel’s ACME Hotel Co in River North was an SRO it reopened as a Comfort Inn in 2002, but when the 10-year franchise renewal came up Rebel decided to go independent and irreverent with the creation of ACME. Being tied to a chain’s perception put a ceiling on rates, he says, and independence has allowed Rebel to reduce fees. It’s about tapping into your community, he says, like Rebel’s Memphis-based Madison Hotel that opened with a bang (and some Kennedys) just in time for the Lewis/Tyson fight.
Consider Secondary and Tertiary Markets
In addition to the new Soho House and under-construction Chicago Athletic Association project, AJ Capital Partners hotel president Christian Strobel (right) is focused on building the firm’s Graduate Hotels brand in college markets. (It’s raised a fund, owns five and has four in the pipeline.) While smaller markets can be less liquid, their demand generators are more stable, he says. AJ Capital sees limited competition given the small deal sizes, and expects investors will likely pay a premium to diversify their portfolio into these burgeoning markets once the right portfolio is available. (Like Tempe, where State Farm is adding 8,000 jobs near ASU, or Boulder, where Google expects to soon have 1,500 on staff.)
Need Demand? Look Abroad
Our event kicked off with a Chicago update from Choose Chicago CEO Don Welsh. Our city’s ambitious goals: 55 million visitors by 2020 and 2.3 million hotel room nights and 50 new groups annually in partnership with MPEA. Internationally, Choose Chicago just opened its fourth China office in Chengdu, Mayor Emanuel just announced to Secretary Pritzker and a Chinese delegation, and the city’s seeing double-digit increases in Chinese tourism. McCormick Place has $6B in business on the books, Don says, with big development projects like its new 10,000-seat events center and 1,200-room Marriott Marquis.
Sheppard Mullin managing partner Larry Eppley moderated our repositioning panel. He co-leads his firm’s hospitality industry team, which does work for many of the panelists, he tells us. In addition to grilling the experts on brand strategy, the benefits of boutique and adaptive reuse challenges, he mentioned the impressive breadth of Chicago submarkets with hotel development potential, from River North to the South Michigan Avenue corridor.