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Chicago's Suburban and O'Hare Hotel Markets
 in a Rebranding and Remodeling Mode

By Kathy Bergen, Chicago Tribune
Knight Ridder/Tribune Business News

Nov. 12, 2004 - Since its completion in early 2003, the 362-suite Renaissance Chicago O'Hare Hotel has been standing empty, a towering testament to the persistent weakness of the airport and suburban hotel markets.

Now, the hotel has been sold to new owners who plan to open it in February 2005.

This transaction along with other recent hotel acquisitions, groundbreakings, and property upgrades are sending signals that the hotel market may be strengthening, if slightly and slowly.

"When big players . . . get involved, it's so positive for the market," said Brian Flanagan, president of Property Valuation Advisors Inc. "It means they see good things and are placing bets before a full recovery takes place."

To be sure, a full recovery remains a distant dream in outlying markets. The lag stems in part because the meeting and convention business has not been robust enough to send ample overflow business to the suburbs, said Ted Mandigo, president of T.R. Mandigo & Co., an Elmhurst-based hotel consulting firm.

"It certainly looks dismal from an occupancy and average daily rate standpoint," he said.

Historically, the O'Hare hotel market has been the region's strongest, with occupancy rates in the mid 70 percent range, he said. Through September, the average this year was 67.1 percent, up from 62.3 percent in 2003, according to Smith Travel Research.

"While there's strength in the market, it's nothing like the historic levels," he said.

For the entire region, minus downtown, this year's average occupancy rate, through September, was 60 percent versus 66.4 percent in 2000, while average daily room rates were $77.42, compared with $86.82 in 2000, according to Smith Travel.

And because of such weakness, the hotel real estate market remains tipped toward buyers, with properties selling at discount to their replacement value.

O'Hare Chicago Hotel LLC, a partnership between affiliates of Tishman Realty Corp. and JP Morgan Fleming Asset Management, last week closed on the purchase of the Renaissance Chicago O'Hare Hotel, located on the Northwest Side, three miles from the airport and the Donald E. Stephens Convention Center in Rosemont.

Terms of the deal were not disclosed, but observers estimate the price was in the low $40 million range. Several previous potential buyers had backed out of higher-price deals.

The upscale 15-story hotel was developed by a joint venture that included Wheeling contractor Kenny Construction Co. and two Chicago firms, developer Lakeland Enterprises and real estate firm Wexford Bancgroup. The cost of development has been estimated at nearly $57 million.

"What the sale signals is that there are people are out there who are expecting the market to recover," said John Karver, senior vice president of the hotel group at CB Richard Ellis, which represented the sellers in the deal.

"But the property was sold below replacement cost," he said. "That would suggest people are willing to . . . invest in the suburban market, but they associate risk with it."

New construction remains muted, though a few projects are under way.

A 206-room La Quinta Inn & Suites-O'Hare is scheduled to open next fall, and a 253-room Hilton Garden Inn Chicago-O'Hare is to open next summer, both in Des Plaines.

"We see other hotels re-branding and remodeling, so we don't think we're alone in recognizing the future is now at O'Hare," said Bob King, head of sales and marketing at Raymond Management Co., which is developing the Hilton Garden Inn. "The slump of the last few years--with 9/11 and the economy--we don't pretend to know if it's ending, but we see enough activity at O'Hare that we're excited."

The Radisson Hotel O'Hare was sold this summer and has been recast as a Wyndham. As well, the Doubletree Hotel Chicago O'Hare Airport-Rosemont was sold this summer.

Among those remodeling and switching brands is the Crowne Plaza Chicago O'Hare in Rosemont, which until a month ago the Holiday Inn O'Hare International. Both brands belong to the InterContinental group.

About $7 million is being spent on the image upgrade, said Kevin O'Brien, general manager.

"The market was rather depressed and we recognized the key to future success is in the meetings end of the business," he said.

Some observers expect recovery in the suburban markets to proceed slowly.

"I think it will be gradual, over two, three years," said Mandigo.

Convention centers with associated hotels are being planned in Schaumburg and Lombard, and this will add to supply, he noted.

Those corridors have average occupancy rates slightly below 60 percent, he said.

"And I'm just not seeing the dynamic growth in office, and in the telecom industry and high-tech, that spurred growth five years ago," he said.

Still, those taking risks in the market are undaunted.

"Yes, the market has been somewhat soft over the last couple of years, but we're seeing now, particularly at O'Hare, a good improvement in 2004 over 2003," said Timothy Haskin, executive vice president at Tishman Realty. "And we expect '05, '06 and '07 to be good. McCormick Place bookings are strong for '05 and '06, and I think the entire Chicago market will be improving."

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