Hotel occupancy in Illinois remained flat during the past four quarters, according to a Marcus & Millichap research report. But the sector might get a boost in Chicago from, of all places, tech firms.
The city of Chicago passed a short-term rental/housing ordinance two years ago to regulate booking sites like Airbnb from turning residential neighborhoods into de-facto hotels. The bill came due last month when the city sent notices to more than 2,400 Airbnb owners who were deemed to be in violation of that ordinance.
The potential for hefty fines and the Byzantine process that owners have reported when registering in Chicago may mean that the disruption that sites like Airbnb have had on the hospitality industry may slow down. Declining listings could bode well for hotels, particularly during large, city-wide events.
Tech firms may have another impact on increased hotel stays within the city as they have been a major part in Chicago’s run of corporate expansions and relocations. The city has been linked to a number of high-profile, high-tech leases in the last few months including Facebook, Google and Salesforce—all of which will mean more business travelers coming to Chicago.
In July, Facebook leased 263,000 square feet in 151 N. Franklin Street, the John Buck Company’s recently completed, 35-story office building. Google plans to add more than 100,000 square feet of office space in the trendy Fulton Market district, where the tech giant already has a large Midwest headquarters.
San Francisco-based Salesforce is also in talks with Hines to lease upwards of 500,000 square feet in Wolf Point West, now under construction along the Chicago River. If the plan falls into place, the software and cloud computing firm would expand its Chicago workforce from 1,500 up to 5,000. This growth could boost hotel occupancy in the market, particularly downtown.
According to the Marcus & Millichap report, annual occupancy in the Upper Midwest—a region that consists of Illinois, Iowa, Minnesota, Nebraska, North Dakota, South Dakota and Wisconsin—ticked down 20 basis points to 59.8 percent during the year ending in the second quarter.
For Illinois, annual occupancy plateaued at 64.4 percent, a 50-basis-point decline from the prior year. While statewide occupancy remained flat, healthy room demand in Chicago ticked up 10 basis points during the past 12 months to 68.9 percent after it registered a 40-basis-point decline in the previous annual period.
That demand is fueling development as well. Chicago leads the Upper Midwest with more than 3,000 rooms underway as of June 2018. Minneapolis and Omaha lead the region, however, by percentage of existing rooms under construction
The decline in occupancy slowed revenue per available room (RevPAR) growth during the year ending in June. The average daily rate ticked up 1.0 percent to $110.09 after a 2.1 percent increase was recorded the prior year, resulting in a modest 0.6 percent RevPAR increase to $67.47.
Throughout the Upper Midwest, transaction velocity held steady year-over-year through June. Thought the overall market was flat, more full-service and independent hotels changed hands during this time, elevating property values considerably as buyers picked up bidding for these assets. These properties traded with average prices of between $160,000 and $180,000 per room. The St. Clair, Wheelhouse and Moxy are among the recent independent hotel developments to open in Chicago this year.
Approximately half of all transactions were within Illinois and Wisconsin during the past four quarters, largely in Milwaukee and Chicago. Hotels in Illinois changed hands with returns in the high-8 percent band, on average. Many of the buyers came from out of state, with New York, California and Texas investors driving much of the activity.