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How Oxford And Graduate Hotels Are Staying Busy In A Flat Market

Chicago Hotel

The predictions of 2017 being a placeholder year for Chicago hotels have proven out. Occupancy rates and RevPAR growth remained flat through the first six months of the year, while downtown hotel supply grew by nearly 8% over the past two years. We spoke with two particularly active players about what is keeping their pipelines full and their projects successful in non-boom times.

An aerial rendering of Essex on the Park, with views facing Grant Park and Lake Michigan
An aerial rendering of Essex on the Park, with views facing Grant Park and Lake Michigan.

Oxford Capital Group principal Sar Peruri said Chicago is an attractive hotel market because it has many robust submarkets, and different demand generators in different neighborhoods. Oxford's Chicago portfolio includes hotels in the Gold Coast, River North, the Loop, South Loop and Lincoln Park — each of these areas has different demand profiles, and unique elements driving demand.

Take Essex on the Park, Oxford's repositioning of the Essex Inn in the South Loop. Peruri believes the hotel's location is strong in terms of occupancy and rate, it is close to McCormick Place, proximate to the central business district and Loop, adjacent to Grant Park and has a Michigan Avenue address. Oxford is shutting down the hotel next summer and doing a full gut rehab, including all-new bathrooms, guest rooms and public areas, and a new restaurant and nightlife component that will complement the new 57-story apartment apartment tower Oxford is building.

Oxford Capital Group Principal Sar Peruri
Oxford Capital Group principal Sar Peruri

Oxford's hotel projects have a strong mixed-use component. Peruri said this is driven less by financing and more by the highest and best use in its infill city center locations. With Londonhouse, Oxford realized adding retail would maximize value. At the Hotel Langham, it made sense to shrink AMA Plaza's office footprint. With Essex on the Park, the apartment tower will benefit from location, unobstructed views of Grant Park and Lake Michigan and the adjacent hotel, restaurant and nightlife amenities.

"Mixed-use creates more of a destination because you have critical mass and multiple uses that benefit from one another," Peruri said.

As a specialist in adaptive reuse, Peruri said finding opportunities to reposition existing buildings into hotels comes down to basis. If an investor can buy an asset at a decent price and have wherewithal to take down a large complicated asset with a long-term view, it can make sense. Part of the issue facing investors now is sellers have high expectations regarding pricing amidst rising construction costs, meaningful new hotel supply and challenging debt environment for zero to low existing cash flow hotel deals. All considered, it is hard to get deals done today. But Peruri said Oxford loves large, complicated projects and can underwrite them more precisely than most, given the firm's track record and recent similar projects.

Graduate Hotels President Tim Franzen, John Rutledge, Aries Capital CEO Neil Freeman, Laurence Geller and Faegre Baker Daniels partner Thomas Posey
Graduate Hotels President CEO Tim Franzen, Oxford Capital Group CEO John Rutledge, Aries Capital CEO Neil Freeman, Geller Capital Partners CEO Laurence Geller and Faegre Baker Daniels partner Thomas Posey

Graduate Hotels President Tim Franzen has been busy growing the brand since AJ Capital Partners launched it in 2014. AJ Capital opened nine hotels to date, another is set to open at the end of the year and another nine will open in the next 18 to 20 months.

Franzen said AJ Capital's strategy for the Graduate brand has been looking in markets with a larger university — typically with an enrollment of 10,000 students or more — as an anchor. AJ Capital targets these markets because the schools have proven to be a stabilizing factor to the local economy; Franzen said an analysis of the volatility in the hospitality sector over the past two recessions revealed that hotels in college towns are significantly less volatile than hotels in the top 20 MSAs.

But AJ is slowly entering some of those major markets, as well. Franzen said Graduate Hotels are planned for Minneapolis and Seattle, and Graduate Hotels' largest upcoming project is on New York's Roosevelt Island, where Cornell University and the Technion Israel Institute of Technology are building a Cornell Tech engineering campus.

Franzen said a contributing factor to the growth of the Graduate platform is that the hotels' designs and amenities stand out in markets dominated by limited service brand hotels. Franzen said Graduate's interior design team draws inspiration from the histories of their markets and universities to tell the story of a town through design.

"We eschew literal connections to schools and design our product in a more thoughtful and layered way," Franzen said. For amenities, Franzen said inspiration came from AJ Capital's success with the Hotel Lincoln. There, hotel guests do not feel like outsiders because they are surrounded by local residents, and Franzen said his firm is translating that strategy to college markets. Food and beverage is important, and Graduate sees opportunity in adding more meeting space than typically found in a limited service hotel. 

"Our meeting spaces are capable of accomodating 150-300 person events," Franzen said. "We can capture the market for social events."

Graduate Hotel, Ann Arbor, Mich.
The lobby of the Graduate Hotel in Ann Arbor, Mich.

AJ Capital Partners finished raising a second $500M equity fund. Franzen said the likely majority of that fund will be used to expand the Graduate Hotel platform. He said there have been no problems acquiring assets, aside from a few white whales.

On the debt side, Franzen said AJ Capital is not having much difficulty getting lenders to come to the table for one-off transactions, regardless of product type. There is a competitive market for value-add development, but the firm's track record of working on successful independent and boutique projects is smoothing the underwriting process. With construction financing, AJ Capital does stress testing of costs and prefers to be far along in the planning process in order to line up the best contractors and get solid pricing as early as possible. The firm's experience helps to expedite this, and Franzen said he also looks at cyclicality and takes a longer view to the previous two or three real estate cycles to see how those markets have rebounded.

To learn more from Peruri, Franzen and our other panelists, attend Bisnow's Chicago Hotel Investment & Development series, 7 a.m. Oct. 10 at the Hilton Downtown Chicago on Michigan Avenue.