Oversupply circles Chicago; demand trails supply growth
Oversupply circles Chicago; demand trails supply growth
11 APRIL 2017 7:47 AM

Experts assuage fears of oversupply in Chicago with confidence in the city’s potential to drive more convention business. 

REPORT FROM THE U.S. –2016 was a record year for Chicago tourism. In January, Mayor Rahm Emanuel along with Choose Chicago President and CEO David Whitaker announced 54.1 million people visited the city last year—a sign that the destination is surely on track to attain, if not exceed, the mayor’s goal of 55 million visitors by 2020.

The news was overshadowed a month later when Chicago Police Superintendent Eddie Johnson reported 51 homicides in January, one more than a year prior, which culminated in the city’s highest homicide rate in 20 years. Yet, what really put Chicago on the national radar this year was President Donald Trump’s twice asserted offer in January to “send in the Feds” if the city can’t rein in the violence.

But if Chicago’s robust hotel pipeline is any indication, investors and developers are largely unfazed by the latter and are instead banking on the former.

According to STR’s March 2017 pipeline figures for the Windy City, 58 new projects comprised of 9,434 guestrooms are under contract, including a 103-room Nobu hotel slated to open later this year when Viceroy Hotels and Resorts will also open an 18-story hotel. More recent announcements include Hilton’s plans for a triple-branded hotel at the city’s convention center, McCormick Place, and a 178-room, new-build hotel in the city’s River North section, by local developer Rebel Hospitality. (STR is the parent company of HNN.)

Total supply in the Chicago market has been on a constant growth trajectory since 2012. Demand, however, has been more capricious.

STR’s latest Chicago market report recorded supply has increased steadily from 2013 when it jumped 0.3% from 2012 to 1.8% by year-end 2016. But the rate of demand grew in fits and spurts, increasing from 1.3% in 2013 to 3.6% in 2014, only to slow to 2.4% in 2015 and again in 2016 to 0.5%.

The pace of revenue-per-available-room growth over the four-year period was commensurate with demand, increasing 10.1% by year-end 2012 and eventually decelerating to 0.1% by the end of 2016. The ever-expanding room inventory and lagging demand and RevPAR numbers are causing concern; the Chicago Tribune raised the issue of oversupply as recently as December.

Jan Freitag, STR’s SVP of lodging insights, said if RevPAR and occupancy rates continue to slow, developers will eventually look elsewhere.

He also pointed out that as a top 10 market, Chicago has “multiple demand legs to stand on” as both a business and leisure destination with the largest convention center in North America.

“All of these factors contribute positively to growth in hotel demand, as long as room supply growth isn’t stratospheric,” he said, adding that absolute occupancy is at a healthy 69%, which averages seven rooms sold nightly for 365 days consecutively.

If that translates to midweek business travel bookings and Friday and Saturday night leisure guests, Freitag isn’t convinced the city’s occupancy rates can improve.

“Occupancy growth is flattening because it’s already so high and a lot of hotels are near capacity, especially in summer,” he said.

Yet, other industry executives are betting that the situation could improve with more convention business, particularly as Choose Chicago aggressively seeks to bring new meetings business to the destination in its effort to achieve 55 million visitors by 2020. Thirty-five major meetings and conventions are on the books for 2017, up from 31 last year when the DMO’s convention sales team signed 59 new future meetings and conventions that will take place in Chicago for the first time, 30 of which will be held over the next three years.

“Additional inventory, particularly with this year’s opening of the Chicago Marriott Marquis, may soften convention business in the Magnificent Mile, but a lot of conventions come in summer which is also our tourism season so there will likely be sufficient demand and we’ll be able to absorb all of it,” said Patrick Hatton, general manager of the Chicago Athletic Association Hotel.

Otherwise, oversupply in the market hasn’t affected the hotel’s business since opening in late May 2015.

“We’re at the tail end of our ramp-up and we achieved our market share from a RevPAR perspective last June,” Hatton said. “We’ve already achieved market penetration and we continue to grow.”

Diego Lowenstein, CEO of Miami-based Lionstone Development, the developer behind Chicago’s Virgin Hotel, agreed that oversupply isn’t an issue in Chicago. Instead, he said a shortage in convention business has affected the city’s hotels.

“I think the convention center, which should drive so much business throughout the year, needs to ratchet it up,” he said. “If we get convention numbers back to growth figures, supply won’t be an issue.”

Lowenstein also criticized the media for last year’s coverage of crime in the city, blaming the negative press for deterring visitors from Chicago.

“The media’s references to crime and the perception of crime in Chicago has a direct link back to the hotel industry,” he said. “People’s perception of crime in Chicago causes leisure travelers to stay (away) and groups don’t want to risk bringing their attendees to the city.

“Not clearly identifying exactly where the issues are happening and lumping these crimes into one bucket labeled ‘Chicago’ has a detrimental effect and we all suffer.”

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