Group demand, taxes, supply complicate Chicago outlook
Group demand, taxes, supply complicate Chicago outlook
11 MARCH 2020 8:45 AM

Chicago’s hotel performance is currently mirroring many of the dynamics seen across the U.S. such as slow-to-no growth. However, the city’s group demand and new tax assessment remain key questions for the market in 2020.

REPORT FROM THE U.S.—Hoteliers are keeping a close eye on several factors in 2020 that could have an impact on the performance of Chicago’s lodging market, which is coming off of a relatively flat 2019.

This year, Chicago metrics are expected to mirror the slower growth witnessed nationwide. However, group business, as well as potential tax changes, could have notable effect on citywide demand, sources said.

According to data from STR, parent company of Hotel News Now, the market’s occupancy for January 2020 rose 5.2% to 50%, average daily rate was up 3.9% to $108.83 and revenue per available room was up 9.3% to $54.93.

Most recently, during the week of 16 to 22 February, occupancy in Chicago dipped 2.8% to 59.2% and ADR grew 3% to $117.57 while RevPAR was mostly flat at 0.2% to $69.59, according to STR data.

Chicago’s occupancy grew just 0.6% in 2019, to 69.6%, while ADR fell 2.1% to $145.93, for a RevPAR dip of 1.6%, to $101.63. New supply, meanwhile, was outpaced by demand growth, at 1.6% and 2.1% respectively. Experts are predicting a similar performance in 2020.

Jan Freitag, SVP of lodging insights at STR, said slower growth is really “the name of the game” for 2020.

“We expect occupancy growth to be flat, and room-rate growth to be flat-up to flat-down, which basically gives you almost no RevPAR growth,” he said.

The group business factor
There are, however, some important factors still in play that could have an appreciable effect on the Chicago hotel market in 2020. Perhaps most important will be the city’s group business performance, which suffered in 2019, falling 6.3% in occupancy, fueling the market’s decline in ADR.

“If there are fewer group nights sold, there are fewer compression nights. There are a lot more nights when hoteliers have rooms available, which does not allow them to drive a lot of room rate growth,” Freitag said. “The secondary effect then is that transient ADR growth is stymied, too, just because there are more rooms available on those nights.”

The good news is that dynamic is expected to improve in 2020, he said.

Convention business tends to be cyclical, with groups often rotating convention destinations each year, so it is likely that Chicago’s meetings demand is back on the up. Freitag noted that if group occupancy can improve this year, room rates may also get a needed boost.

“On the group side, there was just not a whole lot of pricing power in 2019. That was likely driven by occupancy on the group side being down 6.3% last year, which probably has to do with a weak convention calendar,” Freitag said. “But analysts from investment banks are saying the convention calendar for Chicago for this year should actually be a bit stronger than it was in 2019, so it’s going to be interesting to see if that translates into stronger room rate growth this year.”

Meet the new boss
Another crucial concern among Chicago hoteliers is the possibility of real estate tax hikes in the market, which has many developers adopting a “wait-and-see” approach before committing to new projects.

Bob Habeeb, CEO of Maverick Hotels and Restaurants, said former Cook County Assessor Joe Berrios has long had a “secret but nonetheless widely accepted formula” for calculating the commercial real estate taxes levied on hotels. He said hoteliers have come to depend on this formula when forecasting future taxes.

However in late 2018, Berrios lost his bid for reelection, and was replaced by new County Assessor Fritz Kaegi, an adamant reformer.

“The new assessor has been very outspoken that he intends to move more of the tax burden to the commercial real estate base, and particularly the hotel sector stands out as one where he believes we’re under-taxed,” Habeeb said. “So a lot of developers have pulled back and said, ‘We don’t know about this increase in supply—whether the demand will continue to grow to outpace the additional supply—and now we face this uncertainty next year about real estate taxes, which at least in theory could shoot up. So we’re not going to do anything.”

The upside of that hesitancy is the strong supply and demand balance in the market, which has been reportedly capable of absorbing the new rooms added in 2019. Aside from a handful of new smaller upscale hotels in development, sources said there’s not a ton of new supply in downtown Chicago’s pipeline at the moment. That, combined, with the potential for a better convention year, bodes well for the market.

“We’ve had additions to supply, but demand has kept pace, which has netted a flat market,” Habeeb said. “That’s actually encouraging news, because to have an off convention year in 2019 and still absorb that supply and not lose ground, you can interpret as being a very positive thing. We’re expecting 2020 to start off soft and then build momentum throughout the year.”

Finding the opportunities
Chicago’s development climate isn’t consistent across the market, however. While downtown development has slowed, hoteliers operating in the suburban neighborhoods just outside of the city center are seeing significant growth, due to relatively low supply in many neighborhoods.

“What’s happening now is the hotels are spreading out across the surrounding neighborhoods, whereas formerly you’re just thinking of downtown Chicago,” said Anthony Beach, GM of the Sophy Hyde Park, which opened in late 2018. “Whether it’s Lincoln Park, Hyde Park or the West Loop, we’re starting to see an influx of hotels, retail and food and beverage opening up in the general outskirts of downtown Chicago. For us, Hyde Park is an attractive location, and once we introduce the product to people, they fall in love with the neighborhood and realize they’re not paying $75 for valet parking or $60 for self-parking in downtown Chicago.”

Experts caution, though, that these sub-markets can only hold so much room inventory. Those developers who’ve already opened new properties or recently broke ground in Chicago’s surrounding environs are already reaping the dividends, but it would be a mistake if too many developers jump on the bandwagon.

“We’ve been blessed that demand has kept pace with supply over the last five years in this market,” Habeeb said. “But it would be naive to believe that you can just keep adding and there will never be a hiccup and the pace of demand growth will never slow down. You really don’t want to tug on Superman’s cape.”

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