TR Mandigo & Company 2010 Forecast for the Chicago CBD Presented to: Council of Chicago Hotel General Managers By Ted Mandigo – Director of TR Mandigo & Company 8/3/2010
2010 U Update an nd Outlook k Nothing g gets better un ntil the rates m move up. Rate com pression has resulted in a loss of 7.9% in room reve enue in down ntown Chicag go over the pa ast 12 months. That, in turn has caused r rooms depart tment costs t to rise from h historic levels of 25% to a profit bleeding 2 28% of rooms s revenue, ta king 3 full po oints off the b bottom line. The drop has s also impact ed on Food and Beverage op perations wh here departm mental operat ting costs we ent from 72.1 1% to 75.3%, from drops in d dining room r evenue, shift s to complem mentary break kfasts and ren negotiated m meetings contr racts. On top o of reduced d epartmental margins, the e revenue dr rop also resu ulted in a 3 point increa ase in undistribu uted expense es and a 1 p point increas se in fixed ex xpenses, for an overall d drop in cash h flow available for debt serv ice of 9 perce ent from the 2 2008 level. The statis stics indicate a a recovering market. In 9 of th he past 12 m months the n umber of ro ooms occupie ed in downto own Chicago were up, wi ith an increase o of 181,500 m more rooms so old than in th he same 12 m month period d last year. I In 6 of the pa ast 12 months th he occupancy y in downtow wn Chicago w was greater th han during th he comparabl e period last year, and the R evPAR was u p in only 2 ou ut of those 12 2 months. The bad n news is the 1 11.2% decline e in ADR with h every single e month repo orting a decre ease, ranging g from 23.7% in S September co ompared to th he prior year to a nominal l 3% decrease e in May. Recovery in ADR is s slow because e of contract t room pricin ng and grou up sales that t were book ed or renegotia ted during bo ottom of the market. Thi is combined w with the cont tinued impac ct of OTA boo okings keeps pric ce resiliency i n check. Some of t this rate imp act is a resul lt of shifts in demand, wi th drops in g group sales o off ‐ set by cap ptured leisure de emand and le isure group a at lower rates s. Commercia al demand ap ppears to hav ve been off by y only a nomina l 2% over the period, and t tended to be booked at st tronger but st till discounted d rates. With appr roximately 30 0% of the bus siness for the remainder of f the year alre eady commit tted through g group pricing, co ontract pricin ng and on ‐ the e ‐ books rese rvations, the prospects fo or a significan nt improveme ent in ADR are s slim.
An interes sting compar ison shows th he average 10 0 year change e in GDP, Hot tel Revenue a nd Hotel Exp enses over the past four dec cades, reflect ting a surge i n hotel reven nues in the 1 1990’s a perio od of expansi ion of supply an nd aggressive rate increas ses, followed by a crash in n revenues d due to rate d discounting a nd an increasing gly competitiv ve market du ring the 2000 0 decade. H istoric G Growth P Pattern GDP P Hote l Revenue Hotel Expe enses 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 1970's 198 80's 1990's 2000's ‐ 2.00% Because o of the recess ion, a numbe er of hotel pr rojects were delayed or c cancelled in t the last two y years. The Shan gri ‐ La and St taybridge Sui ites still rema ain as shells, , and won’t be complete d for many y years, assuming both their le egal and finan ncial problem ms can be solv ved. Several other redeve elopments, su uch as the Mode ern in the IB BM building, remain vaca ant. In one breath, her e’s the carn age from th e last recession : 300 N. Mi ichigan Hotel ‐ Cancelled Block 37 7 ‐ Cancelled Edition ‐ Cance E elled Franklin P Point Hotel ‐ Ca ancelled Gansevo oort ‐ Cancelle ed Graves Hotel ‐ G Cancelled Mandarin n Oriental –Ca ancelled Modern n ‐ Cancelled Old Post Offic O e ‐ Cancelled Sears Tow wer Hotel ‐ Can ncelled Shangri ‐ ‐ La ‐ Cancelled d Staybridge Su S ites ‐ Cancelle d Union Sta ation Hotel ‐ Ca ancelled W Waldorf Astor ria ‐ Cancelled While the ere are alway s plans for ne ew hotels in C Chicago, the ones in deve elopment tha t we feel are most likely to b be completed are: The H Hyatt Place at Clark and Gr and, 216 roo ms, 2012 Th he Pritzkers w will eventually y put up a Hy yatt Place dow wntown so th at they have representatio on. If it ’s not this loc cation, it will be somewhe re else in the city. The A Aloft, at Clark and Illinois, 1 165 Rooms, Ju une 2012 Th his hotel is al ready listed o on the aloft w website as a fu uture site, wh hile previous attempts at p utting an alof ft in Chicago n never were. The G Grand Imperia al Hotel, locat ted in Chinato own, 170 roo ms, Supposed dly Fall 2011 Th hough the ho otel is likely to o open later t han their pla nned date, th he developme ent group alre eady h as the money y lined up ma king this proj ject likely to b be completed d.
The Mondrian at 300 N. Wabash, 335 rooms, late 2012 When the Modern hotel project was cancelled, the Mondrian project stalled on State Street was proposed for this location. According to sources familiar with the project, Bovis construction recently bid on this project, slated to start in fall 2010. On the side of trends: Hotel brands are once again in a period of growing pains, trying to appeal to gen ‐ Y as they become part of the consumer base. The brands to a certain extent are taking their cues from boutique and lifestyle hotels around the country but particularly in New York City. In short, boutique hotels are generally small upper upscale or greater hotels, which offer a high level of amenities and services. Lifestyle hotels specialize further, focusing on spa services or more frequently, nightlife. Aloft and Indigo are essentially lifestyle ‐ lite. To the extent that they have succeeded, they’ve done so because they’re edgy, but underneath it, they’re basically normal brands. The rooms aren’t very different aside from the paint color and the look of the furniture. Basically, the pool table in the aloft isn’t really there for people to play pool on, it’s there because it’s part of the image of the hotel. Traditional brands have also learned some important lessons from lifestyle hotels. If you look at new construction or brand renovation standards, they look similar to a boutique hotel. Hotels today use more interesting furniture and bolder colors. They’ve already integrated most of the latest technology into their rooms. The average new or renovated hotel no longer looks like someone’s grandma designed it. A few lifestyle hotels in a market represent an alternative to traditional properties and capture guests from a theoretically untapped market. When one lifestyle hotel opens, it takes business away from say, a Courtyard by Marriott. When a second one opens, it takes business away from the first, and both need to compete to induce demand from traditional sources. When they reach critical mass, they’re more likely to cannibalize each other than they are other hotels – and they may just give up the edgy image and become a normal hotel. To an extent, it should be a somewhat self ‐ correcting trend, because when the first rounds of major renovations are needed, we’ll see how dedicated these hotels are to staying on top of the trends if it means a higher cost. Perhaps the most surprising trend is that “Green” hotels really haven’t taken off, given how much hype was behind them initially. Most of that can be chalked up to the fact that greening occurs on a hotel ‐ by ‐ hotel basis and there’s no real consistency to it. In other words, it’s a bonus, not a brand standard, and there just aren’t enough people yet who base their decisions on where to stay solely on that requirement.
Moving on to forecasts: We believe that the occupancy levels will continue to increase, resulting in an improvement of more than 2 full points over the 2009 level, to 69.5% for the full 2010 year. Rate is expected to lag considerably but the picture is improving. Pundits have projected rate decreases for the year on a national level. Based on the reduced decrease (if that is a direction) I think we will be slightly above last year, or finishing the year at $166, a nominal growth of 1.3%. Without the impact of pre ‐ booked business, group rates and contract rates the ADR growth could conceivably have recovered by 5 % to 8% in the last half of the year, paralleling the recovery level experienced after the 2002 recession. In the prior recession we then saw an increase in ADR of 12 to 15% in the subsequent year. This level of rate increase is possible over the 2011 year but will require an aggressive pricing stance and control over the OTA inventory. Charts and graphs are presented as a part of this handout to illustrate the historic trends, including the 50 year recap for the Chicago metropolitan area that clearly indicates the cyclical pattern of business and the ever deeper impact on ADR in recessions starting with a slight hiccup in 1987, to the 15% impact of the most recent downturn in the economy.
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