Hospitality Midwest

Hospitality sector advances with increased business travel, leisure stays

  
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The national and local hospitality sectors continue to advance as strong corporate profits support increased business travel, and the broadening economic recovery inspires more leisure stays.

The national and local hospitality sectors continue to advance as strong corporate profits support increased business travel, and the broadening economic recovery inspires more leisure stays.

Be­hind a 1.8 percent jump in room demand, national occu­pancy will rise 60 basis points to 62.0 percent in 2013, according to a hospitality research report by Marcus & Millichap Real Estate Investment Services. Average daily rates (ADR) and revenue per available room (RevPAR) also will rise 4.8 per­cent and 5.8 percent, respectively.

Locally, hotel occupancy in April was the best it has ever been in Chicago's history, at 78.8 percent, eclipsing the previous high of 78.2 percent occupancy in 2008, according to data from Choose Chicago.

“I would characterize the Chicago hotel market recovery as having been robust over the past few years and I think that all signs point to a positive future,” said John Nugent, vice president with Jones Lang LaSalle’s Hotels & Hospitality Group. “We’re coming off of a three-year run where the compound average RevPAR growth rate is just approaching 10 percent. I think that’s definitely indicative of a strong and improving market. From 2010 through year-end 2012, the RevPAR hit about 9.5 percent, so that’s definitely a nice little run up.”

Choose Chicago also reported that ADR for April was up 4.2 percent year over year, to $183.21 per night, and RevPAR was up 7.3 percent, to $144.05. This means that direct hotel revenues in Chicago went from about $139 million in April 2012 to approximately $151 million in April 2013.

“Last year the occupancy for the metropolitan area as reported by Smith Travel Research was 66.8 percent,” Nugent said. “By comparison, at the peak of the market, 2007 occupancy levels were actually 67.6 percent. So again, we’re quickly approaching those prior peak levels and now it’s just a function of catching up in terms of ADR. We’re still about $4 to $5, depending on the submarket, below prior peak ADR levels.”

All of the key indicators for the month of April demonstrated that the industry is back to pre-recession numbers, according to Choose Chicago. The occupancy rate is the highest April ever; the ADR and RevPAR statistics are the highest since 2008.

“I think occupancy levels have rebounded nearly to prior peak levels,” Nugent said. “I think we’ll probably get back to prior peak occupancy in downtown Chicago at some point later this year. Now it’s a function of catching up a little bit as it relates to average daily rates and really pushing those ADRs going into the next few years.

“Overall, I think the health of the market is strong. Everybody that is either looking at it from an investment perspective or currently owns assets has been pleased with the run-up in performance over the past few years.”

Neil Freeman, chairman of Aries Capital, agreed the health of the Chicago hotel market is improving.

“I think supply and demand are in balance. Chicago is a city that has multiple demand generators – convention, business travelers, leisure travelers and some international tourists,” he said. “I think everybody got a little smarter with their costs when the nationwide and Chicago hotel market suffered back in 2009 and 2010. Now the occupancies are good, the rates are improving and the financing markets are very favorable. It’s a good time and there seems to be still some room to improve.”

Year to date numbers are also outstanding so far, according to Choose Chicago. Total occupancy has hit 64.2 percent, up 1.7 percent from last year and challenging 2007 for the best numbers Chicago has seen. For the year, the ADR is $158.70, a 2.9 percent increase from last year, and total revenue from the hotel industry is the highest year to date that it has ever been, at $427 million.

Freeman added that select service hotels are doing particularly well.

“I think occupancies now are relatively strong,” he said. “Some of the select service hotels that we looked at are running 85 to 90 percent occupancy year-round, which is close to New York levels.”

Nugent attributed the Chicago hotel market’s success to an increase in transient visitors, such as corporate and leisure travelers.

“As corporate profitability continues to improve, we’ve seen a very strong rebound in the individual business traveler and corporate segment overall,” he said.

Freeman also noted that Chicago has become a destination city.

“Chicago is becoming a better destination with more things to do,” he said. “There are a lot more people around at night and on weekends and there are more restaurants and theaters. Those are good things and people like to come to Chicago to shop and just visit.”

While the downtown Chicago hotel market has been vibrant, the suburbs have lagged a bit, according to Nugent.

“I think downtown has recovered a bit more quickly relative to the suburbs,” he said. “There are a lot of investors who are more comfortable building in an urban environment where barriers to entry are a little bit higher relative to a suburban environment. As with every cycle, development starts at the urban core and then eventually the outlying suburban markets pick up steam. I think we will see development emerge, but predominantly in the limited service space as opposed to larger full service hotels in the suburbs over the next few years.”

Nugent added that another factor helping Chicago is that it is the third largest lodging market in the United States. Choose Chicago notes that occupancy rates are increasing at the same time that there is dramatic increase in the number of hotel rooms available in the city. At present there are approximately 35,000 hotel rooms in the city, and more than 2,500 additional rooms are currently under construction.

“In terms of development, it’s definitely a tale of two markets,” Nugent said. “I think downtown development is starting to pick up and is somewhat robust. The suburban hotel development pipeline has not really seen much of an increase comparable to the downtown supply pipeline.”