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Luxury hotels dominate downtown Chicago

The 311-room Le Meridien Hotel will open it doors this month above the Shops at North Bridge, a new Nordstrom-anchored retail center at 520 N. Michigan Ave. The upscale Le Meridien, part of London-based Forte Hotels, hopes to carve out part of the luxury market by charging rates slightly below that of Chicago's highest priced inns, namely Ritz-Carlton and Four Seasons.

The careful attention to positioning shows just how competitive the high end of Chicago's hotel market has become. “The downtown market is getting a number of upscale rooms,” said Ted Mandigo of consulting firm T.R. Mandigo & Co., Elmhurst, Ill.

Luxury hotels are either under way or just about ready to open. The Park Hyatt, across the street from Water Tower Place, on Michigan Avenue, opened in June with 192 rooms. The Peninsula Chicago, atop a retail complex at 730 N. Michigan Ave., will open in April with 340 rooms. Also, Paris-based hotel company Accor SA is building a 415-room Sofitel hotel at the northwest corner of Chestnut Street and Wabash Avenue.

“It's easy to get concerned about the luxury end of the market,” said Art Buser, executive vice president and head of the West Coast region of Jones Lang LaSalle Hotels. “Chicago is still very inexpensive compared with New York, Boston and San Francisco,” he said.

Currently, the average daily rate (ADR) in the luxury segment is $168.55, up 6.2% since 1999, according to a report from T.R. Mandigo. Occupancy in the luxury category is at 74.7%.

Overall, the downtown market has an occupancy rate of 74.2%, up 4.5% for the year 2000. “These are the highest occupancy figures we have had in 25 years,” noted Mandigo. About 550 rooms have been added downtown in the past 12 months.

In the Chicago metro area, occupancies increased 2% in the past year. Occupancy stands at 70.6%. ADRs increased 4.6% to $116.42. Revenue per available room (RevPar) was up 10.7% for the year. About 3,000 rooms were added to the market.

The most difficult submarket is the south suburban sector with a number of older, limited-service properties. Occupancies there are currently about 57.3%. The average daily rental rate is $56, according to T.R. Mandigo.

Investors will find fierce competition for premium properties. Not many hotels are trading hands either. The Westin River North was purchased last December by THR Chicago LLC for $118.7 million. “The international competition for this fee-simple unencumbered asset was intense, which resulted in one of the highest price-per-key transactions on an existing hotel in the Chicago marketplace,” said Thomas Fisher, a New York-based senior vice president of Jones Lang LaSalle Hotels.

Though 2000 was a banner year for hotels, experts don't expect a repeat performance in 2001. Chicago's convention cycle peaks in even years, so conference business will be off this year. A sluggish economy won't help either. But 2002 looks like it could be another winner with convention bookings already exceeding those in 2000.

One positive trend is that Chicago has become a destination for international tourists. “Tourists come in the summer and that helps when convention business is down,” Buser said. He expects convention business to be strong in 2002.

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