Chicago’s downtown hotels in distress as conventions, travel remain slow

Hotel revenue from business travelers is on pace to fall short of 2019 by 86 percent

Chicago Issue /
Oct.October 15, 2021 08:00 AM

McCormick Place

At Chicago’s McCormick Place, America’s biggest convention center, organizers had hoped the Sept. 13 return of Fabtech, the metal fabricating convention that had been canceled in 2020, would be a return to normal for the third-largest U.S. city’s hospitality industry.

Instead, it was a sign of the new normal 1,000 exhibitors occupying 500,000 square feet of the convention center, down from 1,700 in 850,000 square feet in 2019.

Still, it was one of the biggest events in a difficult year, with a total of 57 conventions scheduled for McCormick Place. In 2020, 214 events were canceled, with an economic impact on the city of about $3 billion, according to McCormick Place data.

Hotels in Chicago, a manufacturing and transportation center in the middle of the country, are dependent on business travel and conventions like Fabtech, and the pandemic has left them struggling to survive. This year, Chicago hotels’ revenue from business travelers is expected to drop by about $2.1 billion compared with 2019, according to the American Hotel & Lodging Association — an 86 percent decline from the $2.5 billion they made that year.

“The reason why we are in Chicago every other year is because it is the hub of the Midwest,” said Mark Hoper, senior vice president of Fabtech’s media and exhibitions. “There are still more machine tools sold in the Midwest than any other region.”

Resort cities such as Virginia Beach, Virginia, and Miami and Tampa, Florida, have done better, with Virginia Beach hotels expected to see revenue from business travel drop by about $280 million, Tampa by about $165 million and Miami by almost $500 million from 2019. Nationally, the lodging association doesn’t expect business travel revenue to return to pre-pandemic levels until 2024.

Hotel occupancy plunges

Hotel occupancy in downtown Chicago was 53.6 percent in the month ending mid-September, a drop from 82 percent from the same period in 2019, according to data tracking firm STR. For comparison, nationwide hotel occupancy came in at 61.4 percent in the month ending mid-September this year, a little less than the 66.8 percent occupancy rate from September 2019.

The average daily rate for Chicago hotels in the central business district dropped to $195 this month from $211 in 2019. Revenue per available room logged $104.47 in September 2021, dropping nearly 40 percent from $173 in 2019.

Those precipitous declines have meant increasing distress for Chicago’s hotels. As of Sept. 21, 62 percent of Chicago hotel loans packaged in commercial mortgage-backed securities had gone into special servicing, with a total unpaid balance of $1.2  billion. That compares with zero loans in special servicing at the end of 2019. Prominent downtown hotels that had CMBS debt include the 1,641-key Palmer House Hilton, the second-largest downtown hotel; Hilton Chicago Magnificent Mile; and JW Marriott Chicago.

The carnage could get much worse. It depends on how long lenders are willing to wait for some kind of recovery, said Jon Peck, president of Peck Hotel Consulting.

“The question will be lender patience, how patient lenders are going to be,” Peck said. Lenders “will have to make a decision on how much they are going to take on their note. What they want to sell that for and when is the right time to do that.”

The drop-off in convention and business travel has made the city’s lodging industry more dependent on tourism.

“Chicago has always been very reliant on convention business, in particular, major citywide conventions,” said Stacey Nadolny, managing director of hospitality consulting at HVS Chicago. Referring to the city’s hospitality industry as a three-legged stool consisting of leisure, commercial and group travel, Nadolny said leisure travel did the heavy lifting for hotel occupancy this year.

Lollapalooza a rare bright spot

Among the bright spots was the Lollapalooza music festival July 29 to Aug. 1, when room occupancy soared at 85 percent, according to Choose Chicago, the city’s official tourism organization. That was followed by a surge in the Covid-19 delta variant that slammed the brakes on leisure travel across the country.

Choose Chicago created an online “Seize Your Summer” campaign to lure travelers.

Officials said the campaign generated more than $79 million in hotel revenue between May 1 and Aug. 11 (Choose Chicago  gave no explanation for choosing this particular date range) and that summer demand for hotel rooms is expected to exceed 2 million room nights. For comparison, that number represents only 60 percent of the rooms booked in the summer of 2019.

“Leisure travel was good to have, and it really helped us get through the summer and there was good growth in that area,” said Michael Jacobson, president and CEO of the Illinois Hotel & Lodging Association. “But a market like Chicago cannot rely solely on leisure travel.’’

The Fabtech convention shows the challenges faced by the city’s convention industry. Hoper still recalls the endless meetings to decide how to make the convention center safe for visitors the masking and social distancing and testing. The planning started almost a year earlier, just after the 2020 convention was canceled.

“We definitely felt the effect of Covid for sure,” said Hoper. “We probably lost 15 percent of our audience when people were told they had to wear masks.”

With the pandemic still raging and travel still a fraction of its 2019 level, it’s not clear when or if the return to normal the city’s lodging industry has hoped for will come.

Even before Covid, conventions were on a downsizing trend, with technology enabling them to use less floor space.

Growing convention competition

“Conventions getting smaller and using less floor space means there’s more complications for Chicago,” said Ted Mandigo, a hotel analyst in Chicago. “Conventions that were held in Las Vegas, Chicago or Orlando could be held in Nashville, Tennessee, or Denver, Colorado. Competition has gotten stronger, and uncertainty has impacted the market.” Mandigo expects that even when conventions resume full-scale, they will be down 10 percent because of competitive factors.

No new hotels opened in Chicago between 2008 and 2013, while the city continued to grow, said Nadolny of HVS. From 2015 to 2018, 7,500 rooms were added, a growth rate of about 4 percent a year over the four-year period.

Even if the city sees resurging demand for lodging, it would remain a difficult place to build.

“The market was already showing signs that it was more challenging to develop here based on construction costs, high property tax, labor costs,’’ Nadolny said. “It became more difficult to bring in hotel projects.”

Even so, there are seven hotels under construction that are expected to be completed by 2022, according to Peck. Considering that there are about 50,000 hotel rooms in Chicago’s central business district, analysts say that’s statistically insignificant, but hospitality officials take it as a positive sign for the future.

“We are still seeing hotels break ground now,” said the Illinois Hotel & Lodging Association’s Jacobson. “These are savvy investors who are not taking risky gambles unless they know they are going to eventually succeed. I think there is still confidence in the future of Chicago tourism.”





    Related Articles

    arrow_forward_ios
    Kimpton Hotel Monaco at 225 North Wabash Avenue and Xenia Hotels & Resorts' Marcel Verbaas (Google Maps, Xenia)
    Kimpton Chicago hotel to be sold for $20M less than appraised value eight years ago
    Kimpton Chicago hotel to be sold for $20M less than appraised value eight years ago
    Photo Illustration of construction materials on an airport runway (Getty)
    British Airways files negligence suit against Chicago over O’Hare expansion
    British Airways files negligence suit against Chicago over O’Hare expansion
    AmTrust Realty to pump in $100M to spruce up Loop portfolio
    AmTrust Realty to pump in $100M to spruce up Loop portfolio
    AmTrust Realty to pump in $100M to spruce up Loop portfolio
    Angelo Gordon sells North Side retail assets for $46.3M
    Angelo Gordon sells North Side retail assets for $46.3M
    Angelo Gordon sells North Side retail assets for $46.3M
    Chicago’s Old Post Office nabs health care firm as new tenant
    Chicago’s Old Post Office nabs health care firm as new tenant
    Chicago’s Old Post Office nabs health care firm as new tenant
    Buckhorn Estates in Des Plaines (Google Maps)
    Denver firm buys two suburban Chicago mobile home parks for $43M
    Denver firm buys two suburban Chicago mobile home parks for $43M
    The WGN-TV building and Hines CEO Jeffrey Hines (WGN-TV, Hines)
    Hines pays about $31M for WGN-TV studio
    Hines pays about $31M for WGN-TV studio
    800 West Fulton Market and John Deere CEO John May (800 West Fulton Market, John Deere)
    John Deere set to bring jobs to Chicago with Fulton Market lease
    John Deere set to bring jobs to Chicago with Fulton Market lease
    arrow_forward_ios

    The Deal's newsletters give you the latest scoops, fresh headlines, marketing data, and things to know within the industry.

    Loading...