Chicago Hotel Market Supply Up; Development Pipeline Down

CHICAGO—The Chicago hotel market has seen increased supply come to market of late, but this sector is now experiencing a declining pipeline of new projects, according to a report released by Newmark Knight Frank.

In its third quarter report on Chicago’s hotel market, Bryan Younge, EVP and specialty practice leader of the Hospitality, Gaming & Leisure Group for Newmark Knight Frank, says “The acceleration of new supply over the past quarter is due to completions, while supply in the pipeline actually seems to be decelerating. The reason for the recent influx of new product is due to strong economic conditions two to three years ago when these projects were being conceptualized and/or entering into the planning phases.”

He adds that a few of these projects enjoyed abatement and incentives. The activity was fueled at the time by a recognition by developers of a lull in hotel construction activity relative to supply potential, which resulted in many of the hotel projects breaking ground in a short amount of time from one another.

Chicago’s hotel supply has accelerated over the past few months, due primarily to projects in the River North submarket, the report states. The influx of new product has caused occupancy to decelerate, but only slightly.

Younge notes that the recently completed Marriott Marquis Hotel by the convention center will have positive impacts on the city’s economy and its hotel sector. “While initially this hotel is known to impact the demand from the CBD, the hotel itself elevates the convention center to that of a stronger tier-one facility with a high-end flagship hotel attached to it,” he says. “This is expected to improve activity in the core of the city over time. The hotel’s presence is reported to be generating more citywide interest, which will be contributing to compression.”

Other key takeaways from the report include Younge’s belief that Chicago will emerge as a tier one convention center location and that the performance of the professional/business services and finance sectors will be critical to the hotel sector going forward.

He concludes that the Chicago economy has room for improvement and that the jobless rate will bottom out in the near future as private services leads the city’s job growth, while the manufacturing sector’s gains subside.

“Longer term, Chicago will generally lag other major markets and the nation because of its poor population trends and persistent state and local fiscal pressures,” the report concludes.

The hotel occupancy rate in Chicago in June was 83.5%, according to Newmark Knight Frank.