Suburban Chicago Hotel Market Begins to Stir

Hotel sales in the Chicago suburbs are expected to pick up this year after a long slog back from the downturn.

A smattering of trades in the past several months shows that investor interest has revived, and that’s expected to prompt more owners to list their properties. Buyers are attracted by relatively high capitalization rates on hotels that have potential for revenue growth, as room rates are beginning to rise.

Adam McGaughy, a managing director at Jones Lang LaSalle, anticipates “a continued acceleration of larger hotels being taken to market” in the suburbs this year. Including downtown Chicago, where several large properties are on the market, the brokerage projects as much as $1 billion of Chicago-area hotels will trade in 2014.

The markets surrounding the city were among the hardest hit by the crash, as an oversupply of new rooms combined with cutbacks in travel to send occupancy rates, and revenue, plunging. Numerous hotels were seized by lenders, and several were shuttered.

Since then, demand for rooms has slowly come back into balance with supply. For example, in the O’Hare Airport submarket, the occupancy rate reached 73.8% for the first 10 months of last year, up from 55% at the market bottom, in 2009, according to research firm STR. Meanwhile, there is little construction in the suburban pipeline.

“The perception of the market is that demand continues to be strong, there is stability and new supply is in check,” said Rick Rogovin, vice president of hotel investments at Dow Hotel Co.

Dow was on both sides of trades in the area last year. The Seattle firm was part of a joint venture that sold a 248-room Marriott Suites in Deerfield, Ill., for $30 million to Archon Group of Dallas. Jones Lang brokered the October sale. In June, Dow partnered with Carlyle Group of Washington to pay $37 million for the 369-room Hilton Hotel Orrington in Evanston, Ill. CBRE was the broker. Rogovin said the Orrington property offered both stable cashflow and opportunities for boosting revenue.

That combination is drawing attention from buyers that have raised substantial capital for hotel investment but don’t want to bid against the REITs and institutional buyers that tend to pursue properties in core markets, said McGaughy of Jones Lang. In the Chicago suburbs, buyers can get capitalization rates of 7-8% on hotels that are throwing off cash, yet still performing below peak, leaving room to grow revenues as fundamentals continue to improve.

And that, in turn, has fueled competition for assets there. “What we have found is that when [hotels] start to trade, we have been priced out,” said Chad Cooley, a managing partner at AWH Partners, an opportunistic hotel investment shop in New York. “People see it as a great opportunity to get in on a market that was hit particularly hard,” Cooley said.

Local pros expect more owners to list properties this year — including lenders. Jones Lang soon will begin marketing the 556-room InterContinental O’Hare Hotel in Rosemont, which opened in 2008 and was seized by its lender in 2011.

After a record $386.9 million of hotel sales in 2007, suburban Chicago saw only a handful of trades over the next five years. Activity began to stir last year, with three deals totaling $127 million, according to Real Estate Alert’s Deal Database, which tracks transactions of $25 million and up.

That came as hotel revenues rose in six of the seven submarkets surrounding the city. The growth ranged from 2.2% in the DuPage County submarket to 5.8% in Chicago South, with the airport submarket notching a 4.9% gain, according to STR. The exception was the Chicago Southwest submarket, which saw a slight decline in both occupancy and revenue.