Chicago Market Sees Occupancy Up, Average Rates Down

Plans were announced last month for Chicago's first condominium hotel, the 126-suite Elysian Hotel, located in close proximity to the Michigan Avenue central business district. While the project is not scheduled to be completed until early 2006, the announcement still came as a shot in the arm for the Chicago lodging business, which, along with other major U.S. business destinations, has been adversely affected by the prolonged downturn in business travel.

Along with New York and possibly Atlanta and Los Angeles, Chicago figures prominently in most travel buyers' hotel programs. The downtown business district also is unusual for the breadth of its hotel inventory with rooms available at a range of price points, including many midprice properties. Consequently, buyers under pressure to contain costs in the present economy have ample opportunity to trade down in their preferred hotels in this market.

Through April, the average daily rate at Chicago hotels was down 1.4 percent, compared with the same period in 2002, while occupancy rates were flat year over year, according to Smith Travel Research. Relative to New York and Atlanta, however, the Chicago market performed well. ADR for the same period, for example, was down 6.4 percent, and 4.6 percent in New York and Atlanta, respectively, while occupancies were off 5.5 percent and 5.9 percent.

Another indicator of the health of a market is how closely supply growth matches demand growth. On this count as well, Chicago fared relatively well. STR reported a 1.7 percent increase in supply growth for April, while demand rose a compatible 1.9 percent. In contrast, New York experienced a 4 percent drop in demand, while supply growth increased 1.4 percent. Atlanta also saw a wide gap, with demand sliding 4.9 percent, while supply growth went up 1.1 percent.

As a condominium hotel, the Elysian will be a mix of units that are part of the hotel inventory when their owners are not using them, plus sponsor-owned units that are used solely as hotel rooms. In addition, some units at the top of the 40-story tower will be full-time private residences. "Accordingly, the hotel suites will have a highly residential feel, most with terraces, which is rare in Chicago hotels, and fireplaces," said David Pisor, president and CEO of Elysian Development Group.

Given the high-end service levels planned for the project, Pisor said he considered the Four Seasons, Peninsula and Park Hyatt, all of which are within blocks of each other on North Michigan Avenue, to be the Elysian's competitive set. "Cities such as New York have small, exclusive hotels like The Carlyle and The Pierre, but we don't have much of that type of product in Chicago, so we see ourselves filling that niche," he said.

For existing hotels in the market, the road to recovery has been uneven. "You have to look at the market two separate ways right now," said Kevin Kelly, director of marketing at the 347-room Omni Chicago. "From an occupancy standpoint, a number of hotels in the North Michigan area are doing pretty well. The aspect we as an industry still are struggling with is the average rate. ADR is down significantly, compared with last year, and most of that is economy driven."

The booking window, which had been growing shorter, has become narrower still, especially on the meetings side. "When I talk to my peers in the downtown neighborhood, the trend that continues to amaze us is how last-minute the booking window has become for group business," Kelly said. "It's not uncommon to book 75 peak rooms for two or three nights three or four weeks out. On the transient side, the window is probably a little more short term, though it's not as noticeable as it is with group."

The rise in popularity of the Internet booking sites—for business as well as leisure travel—has accentuated the problem.

"The Internet has become such a dominant player that we see business travelers booking three or four days out," said Ian Nicholson, general manager of the 454-room Hotel 71, which opened late last year on East Wacker Drive along the Chicago River. "As a result, it's more important than ever that there be parity among rates being offered through the different channels and, even more important, that the Web rates be credible vis-à-vis the way we've positioned the hotel."

In terms of meetings, Nicholson said he was most frustrated when other hotels dropped their rates on the Web to draw attendees away from the hotel where the meeting was being held. "In the past, people coming to Chicago for a convention would book their room for the following year at the conclusion of the meeting. That window now has completely closed," he said.

Chicago is particularly vulnerable in this regard because there is so much midprice product in the market from which travelers can choose, according to Kelly. "Especially in the downtown area, we've got a little something for everyone," he said. "There are economy and midprice hotels right in the midst of North Michigan Avenue, all the way up to deluxe and upper upscale properties."

Being an independent hotel opening in a down market hasn't been as much of a challenge for Hotel 71 as some might have assumed. "There are very few independent hotels in Chicago, so the product is a bit of a different offering," Nicholson said. "Being new, we also have the advantage of people wanting to try us out."