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Three Questions for Hotel Market Expert John Nugent

Earlier this month, real estate news outlet ReJournals.com cited a new report from Marcus & Millichap Real Estate Investment Services that conveyed some promising findings in the Chicago hotel market. So in keeping with this week's hotel theme, we caught up with Jones Lang Lasalle's Hotels & Hospitality Group Vice President John Nugent to hear what these developments could mean for the city. (Warning: Things got a little technical).

Curbed: At 78.8 percent, Chicago hotel occupancy in April was the highest it's been in Chicago's history, what factors contributed to that?

The Chicago lodging market has roared back over the past three years driven by corporate and leisure demand reemerging in the absence of significant new hotel development. While there are a handful of hotel development projects in the downtown Chicago pipeline, outsized demand growth has become pronounced over the past couple years and is expected to translate into strong Average Daily Rate (ADR) gains over the foreseeable future now that occupancy is above prior peak levels. The ten year Compounded Annual Growth Rate (CAGR) between 2002 and 2012 for lodging supply increases in downtown Chicago was 1.1 percent relative to a 2.7 percent demand CAGR over that same period. Assuming the demand growth trend line persists at the same clip over the next few years, it appears the market is well-positioned to absorb the anticipated new supply deliveries in the near term.

Curbed: The Chicago suburbs haven't seen the same boom in hospitality that the city has, why is that?

The growth story in the Chicago suburbs, in many respects, is more impressive when compared to the downtown recovery given that the suburbs fell further during the downturn, have recovered almost at parity with the downtown market in terms of percentage RevPAR (Revenue Per Available Room) growth and do not benefit from the same extensive leisure amenities when compared to downtown, which help drive weekend business. When looking at the suburban recovery, the midweek corporate demand is keeping pace with the midweek growth in downtown Chicago, which represents the most lucrative segment of business for suburban hotels. Unlike downtown, where a handful of new hotels are under construction or have been announced, there are very few new hotel developments anticipated in the suburbs suggesting strong and sustained ADR growth over foreseeable future.

Curbed: Where do you see the Chicago hotel market going from here?

While hoteliers will applaud any form of RevPAR growth, there is little debate that ADR growth is the more profitable variable in the equation (Occupancy*ADR=RevPAR). Looking at the Chicago lodging market performance over the past 25 years, the 72/73% occupancy threshold tends to represent the tipping point where ADR growth really starts to accelerate. The downtown market over the past twelve months is running an occupancy rate in excess of 75% and ADR growth is starting to take hold, ticking up 5.2% over that same period. The best accelerant for ADR growth in downtown Chicago is a robust convention calendar, which creates compression throughout downtown with citywide sell-outs. The City of Chicago's investment in the Choose Chicago and McPier organizations, in conjunction with the recently announced Elevate Chicago campaign, is starting to pay dividends in the form of an improving convention outlook. It is clear people want to visit our dynamic city and the 6.1 percent increase in visitation last year, nearly reaching prior peak levels, is just the start of an exciting new chapter for Chicago's tourism industry.
·Hospitality sector advances with increased business travel, leisure stays [REJournals]
·Jones Lang Lasalle [official]
·Hotels Week 2013 [Curbed Chicago]