Heartland Real Estate Business

FEB 2018

Heartland Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Midwest.

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12 • February 2018 • Heartland Real Estate Business www.REBusinessOnline.com M A R K E T H I G H L I G H T: C H I C A G O CHICAGO HOTEL SUPPLY GROWTH IS IN LINE WITH OTHER MIDWEST MARKETS Back in mid-2017, in a piece that was published right here in Heartland Real Estate Business, I talked about what might be in store for the remainder of the year. Specifically, I wrote that while "concerns about oversupply will likely persist in many [Midwest- ern] markets," the outlook was not as grim as some industry analysts had been forecasting — a "second wind in the hotel sector" was "helping to calm the waters." The general sense was that we would continue to see moder- ate growth. Happily for hoteliers across the Midwest, the market has played out fairly close to those predictions. A generally beĴer-than-expected second half of the year didn't allay everyone's concerns, of course. I participated in an investor call recently with some of our lenders and their local analysts, and they were still talking about the threat of oversupply. They expressed some concerns about the prospect of the hotel boom in my home market of Chicago turning into a bust. Oversupply is a valid concern. From where I stand, however, the paĴern over the past six to 12 months is not showing any real sign of changing. While the rate of growth has slowed slightly, the demand side of the equa- tion is keeping pace, which means that we've seen — and will likely con- tinue to see — more modest RevPAR growth, but are unlikely to experience a bust. STR and Tourism Economics project national RevPAR to increase by 2.6 percent for 2018, with even lower growth in the Midwest. Demand continues to grow at a pace sufficient to keep up with supply, and I expect that to continue for the short to medium term. Midwest markets and supply In terms of a market-by-market comparison of what that supply-and- demand tension looks like, the truth of the maĴer is that supply growth in Chicago — where projects tend to be more publicized — is generally in line with other Midwestern markets. Across the Midwest, the markets that have seen the most significant supply increases are Omaha, Min- neapolis, Columbus and Cleveland. While those cities all have some posi- tive aĴributes that make them an ap- pealing target for hotel owners, op- erators and investors, it's not easy to pinpoint exactly why those particular markets have seen their numbers go up while others, like St. Louis and In- dianapolis, have experienced supply decreases. I suppose there is an element of a "gold rush" fever to it. Once the hoteliers "discover" opportunities in those markets, everyone wants to stake their claim. Chicago is some- where in the middle in the Midwest, with approximately a 1.5 percent sup- ply increase over the last four years. Emerging Trends in Real Estate, an an- nual forecast compiled by the Urban Land Institute and Pricewaterhouse- Coopers, says that supply growth nationally is expected to overtake de- mand growth in 2018 for the first time since 2009. That has varied by market. In Chicago, for example, supply and demand growth have been neck and neck, which is fairly typical of many markets. The exceptions are Minneapolis and Omaha markets, which have seen supply-driven declines. Search for skilled labor Looking ahead to 2018 and beyond, some of the industry trends to keep an eye on are as relevant here in the Midwest as they are nationally. As an industry, we continue to expand at the exact same time that the labor pool continues to dwindle. There is a lot of buzz in the hotel business right now about the availability (or lack thereof) of qualified labor. I've heard and seen the extent to which hoteliers in mar- kets across the region are starting to have trouble finding talent. There's still some concern about cost creep, too. While that has slowed somewhat, wages in virtually every market are continuing to rise — and that will inevitably begin to impact margins. This double whammy of tal- ent scarcity and higher wage rates in increasingly competitive markets is definitely something to watch going forward. Technology will become a bigger factor as well. We are already seeing more brands convert to a keyless en- try via an app or digital key. What is even more fascinating is that we are in the early stages of an even more pro- found tech transformation: a move to what will soon be an increasingly in- teractive hotel experience curated al- most entirely through your phone or other mobile device. We are not far from the day when you do everything on your device, from reserving a specific room to pre- ordering extras to put into that room, to using your device as a personal TV remote. And this is not some futuristic fantasy; it's right around the corner. I expect that it will feel like the pace of tech adoption will be picking up no- ticeably in years ahead. More diversity needed In addition, cultivating diversity is a huge issue — and one that is particu- larly timely given the shrinking labor pool. Forward-thinking hotel compa- nies are already focused on catering to millennials, and are now moving for- ward to enacting policies to promote and support a more diverse work- place. We are seeing more programs and policies being implemented that are expressly designed to give women and minorities more opportunities — especially with respect to career paths that lead to senior leadership posi- tions. It's going to be a long, slow process, undoing generations of inertia. But it's encouraging to see companies begin- ning to knock down walls that have traditionally kept women and minori- ties out, and instead begin building bridges that will help bring people of diverse backgrounds into the hotel community. Ultimately, while I see some of the same general economic and industry trends continuing this year — and perhaps beyond — I do think 2018 has a higher-than-usual potential to be a year of surprises. Anyone who has been in this business long enough knows that you get those kinds of years occasionally. Sometimes that's a good thing, and sometimes that's not so good. The political climate is extremely volatile and contentious these days. At the same time, however, the economy remains fairly steady, and continues to show modest improvement. How those two factors play out will likely determine whether there will be any big surprises in store for 2018 — and whether hotel owners and op- erators are ringing their registers or wringing their hands at this time next year. Robert Habeeb President, CEO, Maverick Hotels and Restaurants First Hospitality Group is currently developing the first-ever hotel located directly on Chicago's Navy Pier. Slated to open in summer 2019, the 222-room hotel will operate under the Curio Collection by Hilton brand. Hilton's first triple-brand hotel will be lo- cated at Chicago's McCormick Place. The property will consist of a Hilton Garden Inn, Hampton Inn and Home2 Suites.

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