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Will ‘Staycations’ Bolster Midwest Hotel Market?

Although the Midwest continues to be hammered by the economic slowdown and heavy losses in manufacturing jobs, there may still be reason for optimism in the hotel sector.

With gas prices escalating, many travelers are choosing to vacation at local resorts near their homes. The trend has even spawned a new word: “staycation.”

“We're holding pretty steady,” says Matt MacLaren, Ohio Hotel & Lodging Association executive vice president. “There's been an uptick in leisure travel, a downtick in business travel. It seems like even though people aren't taking that huge vacation, they're still taking a vacation, and Ohio has a lot to offer that is less expensive and closer to home.”

Hotel values are also holding steady across Midwest urban markets, according to Tom Fisher, a Chicago-based managing director with Jones Lang LaSalle Hotels. However, in some secondary and tertiary markets, including some Chicago suburbs, he has seen a slight decline in value. Fisher will serve on a panel at the Midwest Lodging Investors Summit that will discuss the outlook for hotel acquisitions.

Three years ago, investors were looking at a price per key of $200,000 for a Chicago hotel in the four-star plus category, Fisher says. Two years ago, the price rose to $300,000. At the high water mark late last year, the price per key was $400,000.

As gas prices and news of a recession escalate daily, nationally, the hotel industry faces many challenges. The credit crunch and rising costs have limited transactions and development, while occupancy and in some cases revenue per available room (RevPAR) have flattened or worse as leisure and business travelers scale back. A wave of fresh supply is coming on line after years of prosperity, just as demand begins to dip.

Still, most Midwest hoteliers say they aren’t pessimistic. “The Midwest seems to be steadier,” says Tim Benolken, Hilton’s senior vice president of operations for Central Canada, the U.S., Mexico and South America. “It's proving to be more insulated from the ups and downs than New York or the West Coast. Maybe it's the conservative nature of the business and society here. We don't have as much volatility.”

Despite pockets of growth, occupancy has generally declined throughout the Midwest. Kansas City had the smallest drop in occupancy year-to-date at the end of March (2.7 %), while Columbus (6.4 %) and Cleveland, Ohio (6%) took the steepest falls. Importantly, however, rates have held.

The average daily rate (ADR) increased in eight locations, meaning RevPAR held close to even from March 2007 through the end of March 2008. Chicago’s occupancy rate was down 3.2 % through the first quarter compared with the year-ago quarter. But the Second City was up $5.07 in ADR and off less than $1 in RevPAR.

Peter Psihas, director of sales and marketing at the recently restored Blackstone hotel in Chicago, says he's seen a significant drop in the convention business. The 332-room Blackstone, a Renaissance Hotel, reopened in March after a $128 million restoration. Psihas believes revenue will make a “pretty good comeback” next year, but he'll continue to chase group sales, “erring on the side of occupancy.”

An upcoming convention in Chicago sponsored by National Real Estate Investor and its sister publication, Lodging Hospitality, the Midwest Lodging Investors Summit, will address many of these issues. The conference runs July 14 through July 16 at the Sheraton Chicago Hotel & Towers. Panel sessions will be arranged around four tracks, including hotel development and construction, operations, financing, and specific segments such as limited service and extended-stay hotels. Keynote speakers will include Laurence Geller, president and CEO of Strategic Hotels & Resorts, and Peter Yesawich, chairman and CEO of Ypartnership, an advertising and public relations agency that targets the travel industry.

Walker Geyer, managing director of capital markets for Paramount Lodging Advisors, says the bottom fell out for hotel financing when the commercial mortgage-backed securities market dried up. “A whole portion of the debt market stopped,” he says. “So really what we're left with is banks, life insurance companies and non-bank lenders. And some lenders have fallen out of the market completely.”

Loan-to-value ratios, as high as 80% in recent years, are down to 65% as lenders tighten their belts. Mortgage rates have risen as well, making the cost of doing business higher for those who can land financing. “It's a totally different finance environment than it was a year ago,” Geyer says. The end result, not surprisingly, is that development has slowed in many markets.

On the supply front, Lodging Econometrics reports, the Midwest — Michigan, Wisconsin, Illinois, Indiana, Ohio, Minnesota, North and South Dakota, Iowa, Nebraska, Missouri and Kansas — has seen 181 hotels open in the last 12 months, with another 253 under construction. Chicago, by total volume, has the fourth highest number of rooms in the pipeline behind only Las Vegas, New York and Washington.

Only time will tell if many of these announced deals come to fruition. But it's a sign that developers can find money. “Developers remain positive,” says Patrick Ford, president of Lodging Econometrics, a global lodging real estate specialist based in Portsmouth, N.H. “Terms are higher, but they're returning to normal. The period we came out of was very loose excess.”

So what happens when the record levels of construction come online during an economic slowdown, with dipping demand?

“That all would have been acceptable and would have been easily absorbed if we had not had this surprise financial crisis,” Ford says of the 133,000 rooms projected to open in 2008 and 170,000 in 2009. “With guestroom demand softening and expected to continue softening, [those numbers] may look a bit problematic. What happens this summer from an operating statistical point of view might alter developers' attitudes.”

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