The Real Deal Chicago

Downtown hotels saw huge revenue boost in 2018: report

Record summer tourism and convention visits “blew the doors off” hotels last year, one expert said
By Alex Nitkin | January 22, 2019 04:07PM

From left: The Moxy Chicago Downtown and Hotel Julian

Downtown hotel room prices bounced back in 2018 after flagging for two years, as operators seized on record tourism to fill up space even as some 1,500 new rooms came online.

Hotels in the city’s central business district raked in about $2.7 billion in revenue last year, a 9 percent jump over 2017, according to a report by hotel data-tracker STR. The average daily rate for a room hit $210.54 last year, a nearly 5 percent bump year over year.

Downtown occupancy also inched up to 75.2 percent, a 0.8-point bump, according to the report, which tracks 184 hotels with about 47,000 combined rooms in the area.

“Demand outpaced supply growth by a very healthy margin,” said Jan Freitag, senior vice president of STR. He added occupancy peaked around 90 percent in June, pushing the average room rate that month to $278 that month, he said.

“When you’re talking about 47,000 rooms where nine out of every 10 rooms is occupied, that’s a very strong performance, and it gives [hotel owners] pricing power,” Freitag said.

Chicago’s average revenue per available room, a metric that measures hotel income against room vacancy, jumped nearly twice as fast in Chicago last year as it did on average in the nation’s top 25 markets, he added.

The city saw more than 57.6 million visitors last year, beating its 2017 tourism record by 4.3 percent, according to Choose Chicago. An uptick in summer tourism, combined with Chicago’s already-solid reputation as a convention destination, “blew the doors off” hotel revenues last year, hotel consultant Ted Mandigo said.

“Our convention business continues to be strong, to the point that there are some days the city is so full that we spill out into the suburbs,” said Mandigo, whose TR Mandigo & Company has studied the Chicago hotel market for 35 years.

New hotel construction last year also cooled off slightly from 2017, when the 1,205-unit Marriott Marquis contributed to the roughly 3,000 rooms that entered the Downtown market that year, Mandigo said.

And most of the new hotels that opened in 2018 were relatively small, boutique operations catering to wealthy visitors, which helped account for much of the revenue growth last year, he added. They included the Hotel Julian, which added some 218 rooms to the Magnificent Mile, and the 156-key Moxy Hotel in River North.

Mandigo also chalked up the revenue surge to a “learning curve” for some of the larger hotel operators who felt bold enough to raise their prices a few years after they opened.

“A lot of these developers were charging three-star prices for four-star hotels, because they were trying to capture market share,” he said. “Once they got established, they were able to get up to a more appropriate rate.”

But Mandigo added he expects hotel prices to cool off again in 2019, when new projects like S.B. Yen Management Group’s hotel at 1101 South Wabash Avenue and Sterling Bay’s 200-key Hyatt House hotel combine for some 2,000 total new units Downtown.

STR also reported 7.2 percent revenue growth for hotel operators across the entire Chicago area during 2018, with average daily room rates jumping by 3.6 percent to hit nearly $149 per night. Occupancy nudged up to 69.3 percent, a slight improvement from earlier in the year.