For Hotels, 2017 Will Be A Placeholder Year
Next year will be a set-up to an explosion in hospitality activity in 2018, according to expert panelists at Bisnow's Hospitality Boom event yesterday. Over 325 guests packed Londonhouse's grand ballroom to learn what to expect from hotels next year and beyond.
Viceroy Hotel Group CEO Bill Walshe, in a one-on-one conversation with Neal, Gerber & Eisenberg partner Lee Eulgen, says Chicago was a big gap in Viceroy's global portfolio that will be corrected when the Viceroy Chicago opens Sept. 1, 2017. Bill is impressed that Chicago's hotel market feeds into several economic drivers ranging from Fortune 500 companies downtown to the city's strong convention and tourism numbers. The Viceroy's location has something for everyone. It's accessible, affluent, has an ever-evolving bar and restaurant scene, and it's easy for business travelers to access but sufficiently removed from the downtown corporate core.
Bill, who flew in from Santa Barbara late Tuesday night and told the audience he never gets jet lag, believes the Viceroy can help boost Chicago's internationally generated business. Only 5% of Chicago's economic contributions come from international business, much lower than MSAs like New York and San Francisco, and Viceroy Chicago general manager Tjis Klerx has been hard at work selling the hotel to corporate clients.
Shown: our hotel design and development panel of Goettsch Partners principal Paul De Santis, Metropolitan Pier and Exposition Authority CEO Lori Healey, Oxford Capital Group president and CEO John Rutledge, The Prime Group CEO Mike Reschke and moderator, Sheppard Mulllin managing partner Larry Eppley.
John and Mike love markets with high barriers to entry. Mike cited California coastal markets as an example. If developers can overcome the objections of municipalities and the California Coastal Commission, then they're golden.
Locally, Mike loves the Loop, where RevPAR growth has outperformed other markets and leisure travelers see the advantage of staying downtown. Over 100 new restaurants have opened and Prime Group assets like the JW Marriott Chicago are near the Loop Theater district, the third-largest theater district in the world. Mike is busy building a Canopy by Hilton above the JW Marriott.
John identified Boston, Oahu and San Francisco as the three most difficult markets to enter, and loves waterfront real estate when he can find it. Oxford is repositioning the Bay Harbor Hotel in Tampa. On the local front, Michigan Avenue is Oxford's oyster. John says work is progressing at 168 North Michigan, where the firm's adding an extra five floors to the Atlantic Bank Building and turning it into a hotel, and redeveloping the Essex Inn, which will include a new 620-foot-tall apartment building. (He invited South Loop resident Lori to move there when it's completed.)
Speaking of the South Loop, Lori loves what is happening along the farther reaches of the neighborhood like Motor Row, and MPEA has been one of the biggest drivers of change there. Lori says the 1,205-room Marriott Marquis and Wintrust Arena, on the McCormick Place campus, will be completed in Q3 2017. Development isn't limited to McCormick Place, however. Lori says every building in Motor Row has erected scaffolding and is being rehabbed, as more conventioneers demand a sense of place when they're in town. They want to be able to grab a bite and a drink, and catch a show nearby.
As the neighborhood now rebranded McCormick Square changes to meet these needs, Lori says public transportation near McCormick Place must improve. Half of MPEA's convention business at McCormick Place is bused in from the suburbs. While the Marriott Marquis will be a welcome addition, the campus is maxed out on footprint. Transportation improvements like CTA's McCormick Place Green Line station help by making it easier for conventioneers to book hotels downtown. And MPEA and Metra are spending $2.5M to improve the station that runs through McCormick Place.
Another project to watch is the city's RFP process for the former Michael Reese Hospital site. Some of those bids could include hotels, which would strengthen the geographic connections between McCormick Place and Bronzeville.
Paul De Santis says one of the biggest shifts in hotel room trends is the ratio of bathroom-to-bedroom space. The changing ratios are getting an incredible amount of investment and driving room costs higher. This is resulting in a redistribution of a hotel's programmatic areas. In a city like Chicago with a strong food and beverage industry, more lifestyle hotels are focusing on unique food and beverage product and reducing the footprint earmarked to fitness centers and pools.
Pictured: our hotel investment panel of RSM US partner John McCourt (who moderated the panel), Hickory Street Capital VP and CFO Eric Nordness, Waterton CIO of hospitality Nir Liebling, Geller Investment Co chairman Laurence Geller and Lodging Capital Partners CIO Steve Kisielica. Three-fourths of the panel is cautiously optimistic about Chicago hotels next year.
Eric, who's building Wrigleyville's Hotel Zachary, says there's a lot of supply entering the market next year but he remains bullish about Chicago, with its strong convention and tourism numbers. Nir says the fundamentals of hotel investment in Chicago remain strong, and he's curious to see what impact President-elect Trump's proposed changes to Dodd-Frank and an Obamacare repeal will have on hotels. Nir says there's been a lot of speculation based on commentary, and we should react to the actions, not the rhetoric.
The one panelist who believes 2017 will be a banner year for hospitality is the always colorful Laurence Geller. He says he has to believe that, since he has $400M invested in Chicago hotels. Laurence predicts that even countries Trump is having spats with on Twitter will still invest in American real estate, because they see it as a safe investment.
What Chicago is lacking to buck the predictions of a flat market in 2017: marketing money. Laurence sees next year being very good for middle-market and limited-service hotels. The former is short-term oversupplied and Laurence predicts 1.5% to 2% revenue growth next year, but 2018 will blow it off the charts. Laurence ended the event with a one-fingered answer to how most of us have viewed 2016.