CHICAGO—The commercial real estate sectors in Chicago may not have the vibrancy of gateway cities like New York or San Francisco, but local experts remain optimistic about the prospects for 2014. Yesterday, for example, at a breakfast meeting of Chicago Real Estate Professionals at the East Bank Club, an event hosted by Brown, Udell, Pomerantz and Delrahim, Ltd., Jeffrey J. Preston, vice president of HREC Investment Advisors, said “Chicago is a very dynamic and resilient hotel market” and he expects that the worst fears about overbuilding will prove groundless.
“Last year we opened about 1,500 rooms,” the Chicago-based Preston said, making 2013 one of Chicago’s busier years for production and usually taken as a sign of robust health. But he acknowledged that some in the business have gotten worried.
“The hotel business is very cyclical, and the new rooms do scare the existing hoteliers,” he said. “But I think they will eventually be absorbed.”
The performance of the city’s hotel market over the past year certainly bolsters that belief. Even with the expansion of supply, hotel occupancy hit a new high in 2013, surpassing marks set before the onset of the recession. According to the mayor’s office and the city’s tourism agency, occupancy was 75.28% in 2013, only a slight increase over 2012, but higher than the 75.18% reached in 2007.
“The mayor is putting a lot of capital into tourism,” he added, and if the national economy continues its modest pace of improvement, leisure travel should keep pace and buoy the city’s hotel market. Last year, for example, leisure room demand grew by 5.6%, setting another new record and more than off-setting a decline in group room demand, according to data from the city’s tourism agency.
HREC has arranged the sale of about 700 hotels, and Preston said that the strength of the Chicago market has not gone unnoticed by investors.
“Everybody is flocking to Chicago because it’s been ignored for the last 10 years,” he said, including REITs and other institutional institutions.
Preston pointed to the recent sale of the 122-room Hotel Burnham, 1 W. Washington St., as a good illustration of the city’s attractiveness. Although a loan servicer repossessed the hotel in the aftermath of the recession, Dallas-based Lone Star Funds still paid more than $35 million, or about $288,000 per key, for the property.
“There’s a lot of dollars chasing deals these days,” he added. “It’s almost getting cheaper to build than to buy.”
Still, in many ways the Chicago market does not match its gateway counterparts.
“We don’t see sovereign dollars coming into Chicago like it does on the east coast and west coast; we haven’t seen the offshore money flow into Chicago just yet.”