UPDATED, Aug. 10, 2022, 11:45 a.m: Suburban Chicago’s hoteliers are ready to move on from their properties, even when it means cutting a long-sought listing price or taking a loss on their investment.
Schaumburg-based BASK Development sold a three-hotel, 262-room portfolio in Chicago’s collar counties this summer for $19.2 million, brokerage Marcus & Millichap said. BASK took a loss of about $150,000 on one of them, a 98-room Elgin Country Inn & Suites at 2270 Point Boulevard.
That hotel was valued at $5.85 million, down from the $6 million BASK paid for it in 2019, said Marcus & Millichap broker Ebrahim Valliani, who represented the seller.
“They came out with probably a slight loss, but that was a better play for them than doing the renovation and keeping it long term,” Valliani said. Hotel property values are “still making their way” back to pre-pandemic marks, he said.
Sellers are increasingly willing to swallow small losses and slash listing prices of assets that have sat on the market. Chicago-area hotel sales rose in the past year, offering owners a window of opportunity to make a deal since volume still lags pre-pandemic norms, according to brokerages.
In June, Rana Rehan Zaid’s investment firm, Schaumburg-based Prominence Hospitality, sold a 206-room Hyatt hotel in Rosemont, at 6350 River Road, for a loss, according to public records that reveal at least $4 million was paid as part of the deal. The hotel last sold in 2017, when Prominence bought it for $11 million. The company wanted to move on from the Hyatt because the brand was outside its focus on limited service hotels, it said when the property was listed.
Prominence, which works with and shares an address with BASK, didn’t return a request for comment.
The owner of a suburban Hyatt House-branded hotel with 134 rooms at 1251 American Lane in Schaumburg also cut its asking price this summer after marketing the asset for months, to $11.5 million from $13 million. The property, owned by Phoenix-based investor NewGen Worldwide, last fetched $10.5 million in 2018, public records show. It needs a renovation that would cost about $6 million, weighing on its value, Valliani said.
“There is demand but it’s at different levels than it was pre-pandemic,” said Andrew Rubin, a Frontline Real Estate Partners broker who’s marketing the 155-room Aloft Hotel in suburban Bolingbrook. That property went into receivership after its owner, Virginia Beach-based LTD, stopped making loan payments on a $14.2 million mortgage that it received just prior to Covid.
While the Aloft listing doesn’t include a price, Rubin said sellers making deals at this stage of the recovery tend to be motivated. The price cuts are “factoring in the adjusted risk and the state of the world right now,” he said.
“There is still a long path for a lot of this stuff,” Rubin said. “A lot of these were hit hard and are going to have a difficult time recovering.”
Distressed hotels are also roiling downtown Chicago. The Hotel Felix in River North is heading for the auction block after its owners, Oxford Capital Group and Gettys Group, defaulted on $70 million in debt tied to the property. Palmer House, the city’s second-largest hotel, was hit with a foreclosure judgment earlier this summer. In addition, the 610-room JW Marriott in the Loop was bought at auction after its Orlando-based owner, Estein USA, defaulted on a $204 million loan.
In addition to the risk presented by Covid, there are fewer buyers chasing downtown’s larger, pricier hotels because of this year’s spike in borrowing costs, an effect of federal policymakers working to tamp down inflation.
Investment sales in 2022 have valued Chicago-area hotel rooms at about $130,000 each through May, down from about $180,000 in 2019, according to a Marcus & Millichap report. After a surge that started this summer, average daily rates are up almost 25 percent compared with last year and may hit $151 by the end of the year — $5 more than the pre-pandemic average, the brokerage said in a report.
While sellers are adjusting their pricing in order to make deals, there’s still money to be made. That’s especially true for assets outside Cook County, reflecting lower taxes and a relative lack of supply.
“There are less buyers out there, but if things are priced appropriately, there is still capital out there,” Frontline’s Matt Tarshis said, adding his brokerage hasn’t experienced a slowdown in deal volume this year. Likewise, Valliani said his three-person team this year is on track to surpass its record number of closed hotel deals in Illinois, Indiana, Wisconsin and Michigan set at 28 in 2019.
The other two hotels that Valliani sold for BASK were the 86-room Holiday Inn Express in Algonquin, which fetched $6.9 million after last being sold for about $5 million in 2010 and renovated for an undisclosed cost. He also helped the firm sell a 78-room Comfort Suites, at 2480 Bushwood Drive in Elgin, for $6.45 million as part of the portfolio sale. BASK developed the property in 2006.
Wisconsin-based investor Nilkanth Hotels bought the Comfort Suites and Holiday Inn Express, and a local investor bought the Country Inn and Suites in a 1031 exchange, Marcus & Millichap said. Attempts to reach the buyers for comment weren’t successful.
Schaumburg, Elgin and Algonquin are all within Chicago’s northwest suburban submarket, which Marcus & Millichap called an area “where investors are ramping up activity, following an increase of more than 100 percent in hotelier revenues” from earlier in the pandemic.
Valliani said his team persuaded BASK that it was getting a fair price, based on the recovery from Covid. These days, “you either sell and unload or hold onto them for another five to seven years.”
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CORRECTION: An earlier version of this story misidentified the name of BASK and had an incorrect number for the loss in the second paragraph.