Sunstone Hotel Investors has sold two hotels in Chicago’s River North neighborhood for almost $130 million, becoming the second real estate investment trust to complete an exit from the city in recent months.
Irvine, California-based Sunstone last week announced the sale of the 368-room Embassy Suites Chicago at 600 N. State St. and the kitty-corner property, the 361-room Hilton Garden Inn Chicago Downtown/Magnificent Mile at 10 E. Grand Ave., for $129.5 million, less than the REIT paid for the hotels in separate deals several years earlier.
The two-hotel sale to Magna Hospitality Group comes about a month after Sunstone sold the 419-room Hyatt Centric Chicago Magnificent to Northwestern Memorial HealthCare for $67.5 million.
With the three sales, Sunstone joined Orlando, Florida-based REIT Xenia Hotels & Resorts in pulling out of Chicago because of concerns about the city’s hospitality business since the onset of COVID-19, rising property taxes and other problems.
“We are pleased to announce the sale of these two hotels as it marks our exit from the Chicago market, which has been hindered by excess supply and an inability to drive meaningful rate and profitability growth,” recently promoted CEO Bryan Giglia said in the statement announcing the sale. He said the Chicago deal “largely completed our non-core disposition program,” allowing the firm to focus on higher-growth areas.
Sunstone’s announcement of the sale of the two River North hotels did not identify the buyer, which according to CoStar data is Magna.
The privately held investor from Warwick, Rhode Island, has been gobbling up Chicago hotels that have lost value during the pandemic.
In June, Magna bought the 208-room St. Clair Hotel in the nearby Streeterville neighborhood for an amount close to the $19.9 million that previous owners Westmont Hospitality Group and Five Mile Capital Partners owed on a loan that was about to mature, Crain’s Chicago Business reported last year.
Magna did not respond to a request for comment from CoStar News.
Real Estate Alert late last year reported that Sunstone was looking to sell the two hotels in River North, and Crain’s earlier this year reported the deal to sell the Hyatt Centric to the hospital, which plans to keep it as a hotel.
Sunstone bought the River North hotels for about $142 million in separate deals in 2003 and 2012.
The sale price to Magna was about $178,000 per room.
The two hotels were expected to have a net loss of $3.1 million to $3.6 million in the first quarter, not factoring in the sale, Sunstone said in the deal announcement. Sunstone said the hotels generated an annual return of about 9% over the lifetime of the investment.
Last month, during a call with analysts, Sunstone executives explained their reasons for wanting to cash their chips in Chicago rather than wait for a recovery of conventions and other drivers of the city’s hospitality industry.
Sunstone Chief Investment Office Robert Springer cited property taxes as a reason for looking to leave the city, saying it makes more sense to reinvest money from Chicago sales “in a market where we’re going to see faster growth and better ultimate recovery in fundamentals,” according to a transcript of the earnings call.
The concerns were similar to those expressed by Xenia as it left the city.
Just south of the Chicago River, Xenia sold the 191-room Kimpton Hotel Monaco Chicago at 225 N. Wabash Ave., which was its last remaining property in the city. The deal was for $36 million, well below Xenia’s purchase price of more than $53 million in 2013. South Korean buyer Lotte Hotels & Resorts plans to rebrand it as its first L7 lifestyle hotel in the United States.
Magna’s other Chicago-area hotels are a DoubleTree by Hilton in Skokie and a Hilton Garden Inn in Evanston.
Chicago-area hotels had 35.4% occupancy in January, trailing the national average of 47.7%, according to CoStar research. Revenue per available room in the city is expected to increase 20% this year, but it’s not expected to return to pre-pandemic levels until 2024, because the city is dependent on group and business travel.