Waterton’s Zettl: Pace of hotel construction remains strong in Chicago, across the Midwest

The former home of the AAA-Chicago Motor Club in downtown Chicago has been converted to a new hotel.

The former home of the AAA-Chicago Motor Club in downtown Chicago has been converted to a new hotel.

by Dan Rafter

Several cities across the United States stand to benefit from new hotel construction this year, according to the latest research from Marcus & Millichap, with Chicago leading the way in the Midwest.

And a local hospitality professional working the Chicago market also has good things to say about the hospitality industry in the city and its suburbs.

A strong industry

In its national hospitality investment forecast, Marcus & Millichap reported that 110,000 hotel rooms are scheduled to be completed this year across the country, while several thousand more rooms are ready for ground-breaking. According to the report, this all comes out to a 1.6 percent growth this year in the number of hotel rooms across the country, though most of these new rooms are hitting the nation’s largest 25 markets. This is the greatest yearly total of new hotel rooms in eight years.

Despite the new hotel rooms, Marcus & Millichap expects hotel occupancy rates to remain high. Marcus estimates that these occupancy rates will jump 30 basis points this year to 65.9 percent. The report cites a lower national unemployment rate and falling gas prices that are encouraging more consumers to travel this year.

This will result in a 5 percent increase in full-year RevPAR — revenue per available room — to $82.64.

The Midwest is expected to perform well this year, too, according to Marcus & Millichap. The company predicts that major hotel completions in Chicago and Ohio will lead to an increase of available rooms of 1.7 percent this year. If the region reaches this percentage, it would mark the highest annual growth of hotel-room supply during the current cycle.

Marcus is predicting, too, that hotel occupancy rates across the Midwest region will rise 30 basis points to 61.7 percent this year.

A bright future for hotels

Mark Zettl, chief operating officer for Chicago-based real estate management company Waterton, said that hotel construction is increasing not just in the center of Chicago but in its surrounding suburbs. This includes an influx of smaller, select-service hotels.

There is some worry, though, that certain segments of the Chicago market – especially downtown Chicago – are adding too many hotel rooms.

“Downtown is still robust when it comes to hotel construction,” Zettl said. “A lot of rooms are being added to the downtown market in Chicago. Look at what the area around the McCormick Place convention center area is producing alone. There is significant hotel development there.”

This isn’t unusual to Chicago, of course. Several major cities across the Midwest are adding hotel rooms at a fast pace. In many core cities, developers are turning older office space into hotel properties.

Chicago offers a good example of this trend. The 17-story Chicago Motor Club building in downtown Chicago, which once served as the home of the AAA-Chicago Motor Club, is now the Hampton Inn Chicago Downtown. MB Real Estate purchased the building, while Walsh Construction handled the construction work necessary to transform it from an office to a hotel.

Demand is still strong for hotel space, Zettl said. But it’s unclear how close developers are to having provided enough hotel rooms to meet this demand.

“The fundamentals are still pretty strong,” Zettl said. “Are we in the seventh or eighth inning of the cycle? How much longer do the fundamentals hold out? No one really knows.”

The majority of hotels being added to the hotel stock in downtown Chicago today are upscale, boutique-type properties, Zettl said. The last full-service hotel that was developed in Chicago is The Langham, at 330 N. Wabash in the city.

Outside of the city’s center, the select-service niche of the market has grown increasingly popular, said Zettl. Select-service hotels are facilities that usually lack a full-service restaurant or bar. These hotels, though, have increased the services they do offer throughout the years. Select-service hotels today often offer swimming pools, on-site fitness centers, continental breakfast and often a snack bar or limited beverage service.

“There is a lot of demand out there for select-service hotels,” Zettl said. “The customers appreciate the simplicity of the stay. Different brands have done a good job of differentiating themselves even in the select-service niche. They might offer free continental or full breakfast service. There might be a reception at night for the guests. Today, the room stay and amenities at select-service hotels are becoming more comparable to that at full-service luxury properties.”

Hotspots

In the suburbs, locations featuring a diverse workforce base and office markets with low vacancy rates generally are the areas seeing the most hotel construction outside the center of Chicago.

Suburbs such as Schaumburg, Oakbrook and Naperville are all seeing new hotel construction today, Zettl said.

But what is generally not being built anywhere are the 300-room full-service hotels with 2,500-square-foot meeting rooms, Zettl said. During the last cycle of these larger suburban hotels, municipalities such as Lombard, Wheeling and Schaumburg backed the construction of these facilities with their own funds.

That is not happening today, Zettl said.

“Those big full-service hotels are difficult to get off the ground,” Zettl said.

Instead, new hotels are often of the select-service variety with club-level exercise equipment in their on-site fitness centers, modern pool facilities and free breakfast areas.

The lobbies of these new hotels are bright and airy, bathed in natural light. They feature natural woods and grains. Lobbies are the heart of many of the newer hotels, as owners encourage guests to spend less time in their rooms and more time in a hotel’s common areas.

These lobbies often feature fireplaces and large-screen TVs. They have public-access computers and plenty of outlets for guests toting laptop computers.

“The lobbies have become engagement centers,” Zettl said. “They are very trendy and comfortable spaces, very relaxing. They are places that encourage you to lounge and relax.”

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