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Booming Chicago Hotel Market May Soon Face Rough Waters

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Coming off record occupancy in 2015, Chicago's downtown hotel market continues to see new growth as projects such as the London House, Viceroy Hotel, 108 N. Jefferson, 1101 S. Wabash, and Marriott Marquis McCormick Place all move forward. Neighborhood hotels located outside of downtown's buzzing convention scene have also enjoyed a recent uptick in popularity. Offering travelers a unique experience and providing investors with a product that is better insulated from downtown's market forces, current neighborhood projects include the Ace, Nobu, and an unnamed hotel for Fulton Market, the Northwest Tower hotel conversion in Wicker Park, and a proposed boutique project for Old Town. Even Hyde Park's recently revived Solstice on the Park proposal includes a hotel component in its revised planning application. While all of this growth in the hotel segment is obviously good for Chicago, some early indicators suggest a cooling market in 2016 and beyond.

[A room from the Chicago Athletic Association Hotel, one of 2015's most celebrated hotel openings. Photo: Nick Fochtman]

In addition to concerns about oversupply, external forces such as underperforming equity markets and erratic stocks have negatively affected the traditionally volatile hotel market. A number of Chicago hotels that have been put up for sale have been languishing on the market for longer than expected. According to a recent report by Crain's, the Blackstone, the Inn of Chicago, the Palmer House Hilton, the Public Hotel, and the Thompson have all failed to find buyers willing to shell out what the current ownership thinks each property is worth. Compounding investor uncertainty is the prediction that 2016 will likely see a downturn in mass hotel bookings due to an expected drop-off in convention reservations. Typically planned many years in advance, a number of large conventions and trade shows have naturally opted to steer clear of the Windy City this summer to avoid clashing with Chicago's ultimately unsuccessful bid to host the 2016 Olympic Games.

Real estate development is market-driven and therefore cyclical by its very nature. High rents and healthy demand have driven Chicago's apartment boom, but it will be interesting to see how the rental market will react when the nearly 7,000 new highrise units under construction are delivered over the next few years. Chicago's hotel scene will very likely face a similar challenge when a potential oversupply of rooms intersects with a lukewarm reception from both dwindling guests and uncertain investors in the midst of economic turbulence. While no one is predicting a fiery cataclysmic crash, a good old-fashioned market correction may certainly be in order.

·Downtown hotels wrapping up another record year [Crain's]
·Hotel Lincoln fetches more than $70 million as hot hotel market cools [Crain's]
·Previous Hotel Boom Town coverage [Curbed Chicago]