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November 18, 2017

The Investor sat down with Adam McGaughy, Managing Director, and John Nugent, Executive Vice President of JLL’s Hotels & Hospitality Group to talk about the state of Chicago’s lodging market and what the future holds for the city’s hotels.

How would you describe the current landscape of the Chicago lodging market?

Adam: Over the past few years, the downtown market has witnessed a significant influx of new hotels that have had a short term impact on occupancy growth. Despite this new supply, the Chicago market has witnessed continued demand growth and it is largely believed that the supply will be quickly absorbed. The convention booking pace for the next few years is robust, and there has been a rapid increase of Class A office development, which is garnering strong pre-leasing levels with the influx of major corporate relocations downtown including McDonalds, Beam Suntory, ConAgra Foods, GE Healthcare and Kraft Heinz.

John: Investors have been fixated on downtown Chicago’s lodging supply pipeline for the last several years. But earlier this year, we noted a shift in sentiment and willingness to listen to the remarkable corporate demand story that has emerged. We are tracking roughly five million square feet of office space under construction in the downtown core, in addition to the 2.5 million square feet of space that has delivered over the past year. Not to mention, the lodging demand fundamentals in Chicago remain very healthy with a three percent uptick in the number of hotel rooms sold within the city through year-to-date 2017. The mid-to-long term prospects for the market are very encouraging given the dynamic commercial development trends we are observing and an abating lodging supply pipeline.

Are there any submarkets in the Chicagoland area that have been standouts from a lodging perspective this year or are on the rise for the future? 

Adam: The downtown Chicago market’s major hotel stock is concentrated in the well-established Loop, River North, North Michigan Avenue and Streeterville submarkets, which have had a traditional office/medical/retail demand base.

What is interesting to me are what I would call new and emerging submarkets that are being re-imagined with exciting new lodging demand generators. McCormick Square is one example that includes the area surrounding McCormick Place Convention Center. In addition to the newly opened 1,205 room Marriott Marquis, this market is also home to Wintrust Arena, which will serve as home to DePaul University’s basketball program as well as major concerts and sporting events. The end goal is for the Market Square submarket to house 2.6 million square feet of exhibition space, over 2,400 hotel guestrooms and more than 28 dining destinations all connected by pedestrian bridges and promenades. This could have a huge impact on future demand and effectively allow Chicago to attract major multiple conventions at any given time.

Another exciting and emerging submarket that I would point out is the West Loop and specifically the Fulton Market district. West of I/90-94, Fulton Market has seen a remarkable growth story akin to New York’s Meatpacking district with a high density of Chicago’s award winning restaurants and home to Google’s 1K Fulton headquarters building. I would anticipate this area to remai hot as McDonalds completes its HQ move to the former Harpo Studios location in the submarket.

As residential, office and hotel growth continues its expansion westward it will ultimately fill in all the way to the United Center, which will really be a game changer for Chicago and future demand.

John: While the traditional submarkets Adam referenced will continue to experience the majority of Chicago’s hotel transaction volume, we have seen the reemergence of neighborhood hotels on Chicago’s North Side and expect the trend to continue. Hotel Lincoln is one example of a niche boutique hotel that has experienced tremendous success by serving the local Lincoln Park community and creating a memorable restaurant and nightlife experience. I expect the newly renovated Hotel Versey in Lakeview and the Hotel Zachary, opening in 2018 adjacent to Wrigley Field, will both be well-received by travelers looking for an authentic Chicago experience outside the downtown core.

Looking forward over the next five years, I think smart investors are monitoring the commercial development trends within the Goose Island/Clybourn Corridor. While this part of Chicago has been synonymous with significant retail growth over the last cycle, I think the submarket is poised for the development of a couple hotels to keep pace with the +/-20 million square feet of commercial density that has been proposed across a variety of projects including the Lincoln Yards and Tribune Freedom Center projects.

What other markets in the central U.S. are attractive to hotel investors right now?

Adam: We spend a great deal of time in the central U.S. and have seen several intriguing hotel market opportunities that investors should focus on. We’ve been following the expanding Ballpark Village area of St. Louis, the trendy historic 5th ward district of Milwaukee and the impressive restaurant scene of Short North in Columbus. The destination driver of North Loop in Minneapolis, the strong corporate and convention business of Indianapolis and the reinvention of downtown Detroit are also giving investors reasons to be excited about the Central U.S.

For the most part, all of these cities are seeing an influx of millennial residents looking for best-in-class housing surrounded by important work and leisure destinations that are easy to get to. This focus on walkability and transit-oriented development has transformed these traditionally conservative markets into 24/7 destinations.

John: In addition to the major urban centers that Adam mentioned, some investors are chasing yield and the stability that major medical centers, universities and other insulated demand sources create. We are also seeing some very attractive opportunities present themselves in suburban Chicago given limited supply deliveries over the past decade and a broad base of corporate users despite some of the recent corporate migration trends to downtown.

Crain’s Chicago Business just published its list of the most influential brokers in Chicago. Adam and John were the only two hotel brokers to make the list.

 

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Adam McGaughy

Managing Director, JLL’s Hotels & Hospitality Group

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