Oversupply concerns loom over Chicago

Drilling down to Chicago’s central business district, STR shows 25 hotels with 6,000 rooms under contract.

Chicago is poised to see an abundance of hotel rooms come online over the next few years, which has many in the industry wondering whether the market could be at risk of oversupply.

“There are some concerns of oversupply given how many projects have been announced over the last several years,” said Stacey E. Nadolny, managing director and senior partner of consultancy HVS.

She said that over the next several years, greater Chicago is projected to open an additional 12,000 to 13,000 hotel rooms, which is about a 12-percent increase.

“That’s at least three years out,” she added. “Probably more will be announced.”

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According to STR, the Chicago market has 60 hotels with 9,685 rooms under contract in the pipeline. Of those, 19 hotels with 3,780 rooms are under construction.

Drilling down to Chicago’s central business district, STR shows 25 hotels with 6,000 rooms under contract. Eleven hotels with 2,937 rooms are under construction in the CBD.

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However, Nadolny said demand has grown over the past few years with many suburban employers, such as McDonald’s and Kraft, relocating their headquarters downtown. Additionally, Chicago saw a record 54.1 million visitors in 2016, a 2.9-percent increase over 2015.

“2016 surprised us when the Cubs made the World Series, and high demand extended to the fall,” Nadolny said. “Going forward, Chicago is in a good position. The equilibrium will hit with supply catching up to demand, but in the long term there’s still a lot on the horizon.”

As of January, supply growth hit 2.2 percent, while demand grew 2.9 percent, according to STR data. All three key performance metrics saw increases as well. Occupancy was up 0.7 percent to 47.6 percent. Average daily rate increased 2.7 percent to $106.05. Revenue per available room grew 3.5 percent to $50.50.

Meanwhile, Nadolny noted that not all hotels projected will open and some will fall out of the pipeline due to rising property taxes, operational costs and construction costs.

“The construction financing for new hotels is getting harder to find,” she said, which will cause projects not already financed to fall from the pipeline.

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For those in the pipeline, there are a few key openings on the books. The largest opening comes from the 1,205-room Marriott Marquis Chicago that will open this year and be directly connected to the city’s McCormick Place. Right across from the Marquis, a tribranded hotel recently broke ground with an anticipated open date in 2018. The 466-room project, a joint venture between First Hospitality Group and James McHugh Construction, will comprise a Hilton Garden Inn, a Hampton Inn and a Home2 Suites under one roof.

Branching Out

Nadolny noted a couple key secondary markets outside of Chicago that developers have their eyes on: Milwaukee and Madison, Wis.

“These are really strong secondary cities,” she said. “Madison is a college town and state capital, which is a boost to travel.”

Year-end 2016, Milwaukee saw increases in occupancy (+1 percent to 63.1 percent), ADR (+2.9 percent to $106.35) and RevPAR (+3.9 percent to $67.14), according to STR. Demand grew 3 percent, while supply grew 2 percent in 2016.

Growth was the story for Madison as well, according to STR data. In 2016, occupancy was up 3.1 percent to 65.6 percent; ADR grew 3.6 percent to $116.08; and RevPAR increased 6.8 percent to $76.16. While supply grew 1.5 percent, demand jumped 4.7 percent for the market.

“These are cities that for a long time didn’t have much supply growth and now demand is catching up … so developers are saying, ‘Wait, this market is primed for a new hotel,’” Nadolny said.

Milwaukee has nine hotels with 1,121 rooms under contract, according to STR. Of those, five hotels with 648 rooms are in construction. Madison has 10 hotels with 1,008 rooms under contract. Three hotels with 401 rooms are under construction.

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