What Our Hotels Stole From NYC
The NFL draft. The James Beard Foundation Awards. Both events were previously held in NY. Now, we've got 'em. Events like these are the reason nobody seems to be worried about hotel oversupply, even if at least 10 more hotels are coming online around Chicago in 2015.
In addition to the massive PCMA Convening Leaders convention, Chicago’s 2015 lineup includes Microsoft’s Ignite global conference (which already has 110,000 room nights contracted), we learned yesterday at Bisnow’s Hotel Investment and Repositioning Summit, held at The Westin Chicago River North. 175 of you joined us to hear our expert panels discuss the investment climate, the effects of disruptive forces like EB-5, crowdfunding and Airbnb (short answer: not much, yet) and upcoming mid-term elections. (Everyone’s glad Reilly is running unopposed and hopes federal income tax issues get resolved.) Six questions for our hotel investment experts:
The John Buck Co SVP Ben Kochalski
What he’s watching: Increased supply softening CBD RevPAR growth in 2015. Also an urban shift in office and residential to live/work/play atmospheres (which can drive hotel demand).
How to make your product a Millennial magnet: Rooftop bars are a must-have. Operators (like Virgin, which TJBC is working with at 203 N Wabash) are also focused on flexible public spaces—business/conference center by day, table with bottle service by night.
The skinny on food & beverage: It’s challenging in the capital markets to get credit for underlying F&B revenue, and TJBC relies on an experienced operator for underwriting the F&B.
Capital markets buzz: The historic tax credit market almost crumbled during Virgin’s construction, going from $1.25/SF in value to just below a dollar. TJBC stays relatively low leverage, between 60% to 65%.
Perks and pitfalls of mixed-use: It’s all positive in this challenging construction cost environment. It’s good for land allocation and you can amortize amenity packages over both uses (it could be office or residential).
Fun facts: Ben (pictured on the right) is an avid triathlete headed to Puerto Rico for the holidays.
MB Real Estate Vice Chairman John Murphy
What he’s watching: White collar job growth as a barometer to revenue growth. We need a more steady pickup for sustainable revenue growth over the next three to five years.
How to make your product a Millennial magnet: Emphasize lifestyle, experience and exceptional service. (The rooftop used to make the Wit stand out. Now there are tons around the city.)
The skinny on food & beverage: Ownership decided to segregate that piece off at its Hyatt (with French resto Cochon Volant) and Hilton in the CBD. It’s a very specific execution, we’d rather collect rent and happily pay for a coffee there each morning, John says.
Capital markets buzz: Historic tax credits offset equity requirements on both Loop properties, allowing for a unique high-leverage situation.
Perks and pitfalls of mixed-use: Still unexplored, but John’s noticed significant weekend demand at each CBD hotel, which they never projected (and now attribute to Millennium Park).
Fun fact: John (pictured in the center) will spend this winter dreaming about golf courses.
Ultima Hospitality CIO Nir Liebling
What he’s watching: Four years into an eight- to 10-year cycle, there’s been incremental improvement in fundamentals. But don’t be overly bullish, four to five years is forever for opportunistic investors and requires discipline.
How to make your product a Millennial magnet: It all comes down to the right brand, location and a re-energized management philosophy.
The skinny on food & beverage: Ultima doesn’t stretch on price for food and beverage. It's too much of a specialty niche.
Capital markets buzz: Ultima doesn’t do ground-up, so its deals have ongoing cash flow and a business plan, attracting lenders from balance sheet to CMBS.
Perks and pitfalls of mixed-use: Multifamily giant Waterton owns Ultima 100%. It’s looked into existing assets to convert to multifamily and hotel but hasn’t found the right blend.
Fun fact: Nir (snapped on right) plans to moonlight as a scuba diver.
The Prime Group CEO Mike Reschke
What he’s watching: Owners are eliminating turndown service, concierge and bellmen to cut costs and boost margins.
How to make your product a Millennial magnet: Brand and location (like Prime’s upcoming CBD Marriott Residence Inn and Canopy by Hilton). Millennials prioritize value, technology and convenience, so you’re seeing upscale select service with fine dining attached, and keyless check-in isn’t far off. (The airlines did it.)
The skinny on food & beverage: Restaurants are all owned by Prime but managed third-party. They’re separate from the hotel mostly for union reasons. You can’t make any money running a restaurant with union labor.
Capital markets buzz: Class L property tax incentives are huge, reducing real estate taxes by 50% for 12 years. Mike’s also chasing EB-5 as a new source of funding.
Perks and pitfalls of mixed-use: Prime is a pro in converting office to hotel, and tenants aren’t complaining given the amenity packages. Once condos bounce back, Mike expects luxury condos atop luxury hotel, similar to the Waldorf (whose condos command some of the highest rents PSF in the city).
Fun fact: Recovering nicely after serious ankle surgery, Mike (pictured in the center) hopes his physical therapist will let him golf soon.
CohnReznick senior manager Wes Prato (center) moderated our investment panel. In addition to grilling the experts on the supply/demand curve, the shift from luxury to lifestyle and the difference between multi-use versus single-source revenue product, he asked some true hardball questions. The verdict? Everyone prefers eggnog to rum balls, Chicago Cut and Gibsons are favorites for closing dinners and National Lampoon’s Christmas Vacation might just be better than It’s a Wonderful Life. Stay tuned for continued event coverage tomorrow!