Months into a pandemic that devastated the hospitality industry, two high-end hotel investors placed a calculated bet on a property in a city where they weren’t even looking to buy: Chicago.
Fast-forward to this week and the purchase of the newly opened St. Regis Chicago hotel by Gencom and GD Holdings looks like a well-placed wager on a recovery of both the broader U.S. hotel industry and luxury spending throughout the country. Based on what is known about the financing of the deal, industry professionals interviewed estimate the hotel sold for less than what it would cost to build today. That could prove to be a big payoff potentially for the buyers that took a risk during a turbulent time for the economy.
The long-awaited 192-room hotel, part of Marriott International, opened Monday within the 101-story, Jeanne Gang-designed tower.
By that night, Miami-based Gencom and Denver-based GD Holdings had completed a purchase that was agreed upon in late 2020 but hadn’t been made public until it closed this week, according to Gencom Chief Investment Officer Alessandro Colantonio.
Monday’s closing wrapped up a relatively unusual type of hotel transaction, a forward purchase agreement, between Gencom and GD Holdings and the supertall residential and hotel tower’s developer, Chicago-based Magellan Development Group.
The buyers, which own hotels in places such as Costa Rica; Bermuda; Miami; Nashville, Tennessee; and Beaver Creek, Colorado, signed a contract about 2 ½ years ago to buy the Chicago hotel for a predetermined price when it opened.
Those investors weren’t looking for their first deal in Chicago when the opportunity arose during the trying moments of late 2020, Colantonio told CoStar News. He described both buyers as opportunistic firms.
“Chicago may not have been on our radar,” Colantonio said. It’s more about the opportunity that emerged. For us to be able to step into arguably the best hotel real estate in that market, this was just too great an opportunity to pass up. It was a strategic opportunity to enter Chicago with a best-of-class, generational asset.”
The sale price has not been disclosed by the buyers or Magellan, which said it is maintaining a small ownership stake in Chicago’s first new luxury hotel in a decade.
Based on the disclosed $76 million loan to finance the deal, real estate professionals estimate the sale price is probably around $130 million or more. The Real Deal Chicago on Wednesday reported that the price is about $134 million.
“It was at the height of the pandemic, and my sense is that they got a pretty good price for it,” said Romy Bhojwani, a CoStar director of hospitality market analytics. Referring to those estimates, he said “it’s a really good price point to acquire a luxury hotel in Chicago, particularly a new build that has no capital expenditures required. This could be a great long-term deal for them.”
Rare Type of Purchase
Though these types of deals are relatively rare, the buyers and seller have been involved in forward sale agreements before.
That includes GD Holdings, a U.S. affiliate of Mexican textile giant Grupo Denim, paying $165 million for the 235-room hotel portion of a 40-story Four Seasons tower that opened in Nashville last year.
In Chicago, Magellan and joint venture partner Sterling Bay struck another such deal to help finance a 47-story apartment and hotel tower at 300 N. Michigan Ave., which was one of the few U.S. high-rises to go under construction in the early months of the pandemic. To help the developers secure almost $175 million in construction financing, Dutch hotel chain citizenM agreed to buy the hospitality portion of the tower when it opened.
That $75 million sale was completed last year, soon after the 280-room hotel opened.
The Michigan Avenue deal differed in two key aspects from the St. Regis sale, Magellan CEO David Carlins told CoStar News, including that Magellan is keeping an ownership stake this time around.
The other distinction is that Magellan agreed to sell the St. Regis around the time the entire 1,191-foot-tall tower was completed and condo residents were moving in.
“The unusual part of [the St. Regis] deal is that it didn’t help us finance construction,” Carlins said.
Selling the hotel allowed Magellan to lower its overall investment in the project around the time it was changing names from Vista Tower in a deal to bring in St. Regis Hotels & Resorts.
“Reducing our risk was one of the considerations, but the main thing was the quality of Gencom and GD as operators,” Carlins said. “We’re going to learn from these guys and we’re looking forward to it.
“While they’re not involved in the condo portion, we feel like the better the hotel is, the better the entire property is. That will help us with existing owners and potential purchasers.”
About 65% of the 393 condos, mostly multimillion-dollar units, have been sold, with a few more under contract, Carlins said. He said the developer expects residential sales to accelerate with the hotel now opening, making new Lettuce Entertain You-operated restaurants and other luxury hotel amenities available to residents.
The tower at 363 E. Wacker Drive is within Magellan’s 28-acre Lakeshore East mixed-use project that runs along Lake Michigan and the Chicago River. St. Regis Chicago is the city’s third-tallest skyscraper, behind only Willis Tower and Trump International Hotel & Tower.
Debt Viewed ‘Favorably’
The hotel buyers were backed by a $76 million loan from a debt fund of Varde Partners, according to JLL. The loan was arranged by JLL brokers Eric Tupler and Jeff Bucaro. That is about $396,000 per room.
Despite an overall challenging market for financing real estate deals nationally amid rising interest rates, bank failures and worries about the broader economy, the St. Regis deal was well received by lenders, particularly debt funds that are now active in hotel deals, Bucaro said.
Bucaro declined to comment on specifics of the St. Regis loan. For similar deals, though, he said lenders are offering to provide debt for 55% to 65% of the sale price at interest rates ranging from 6.5% to more than 10%, depending on factors such as the hotel’s past performance and whether the borrower is providing any personal guarantees.
The St. Regis had no financial history for lenders to consider. Even so, Bucaro said the deal was “viewed very favorably” by lenders.
“It’s the best product in the market with very strong sponsorship, which has an amazing portfolio of luxury assets and was coming in and buying this at what most people would view as a discount to replacement cost,” Bucaro added. “It would be $1.4 million per key to replace this today.”
The hotel portion of the tower was laid out with plans for Chinese co-developer Dalian Wanda Group to bring its first Wanda Vista hotel to the United States. It was built with an average room size of 640 feet, the largest among all Chicago luxury hotels, Bucaro said.
“It was extremely overbuilt with no expense spared,” Bucaro said of the hotel portion of the tower.
Wanda Group sold its 90% interest in the tower to a Magellan-led venture in late 2020 as the firm faced pressure from the Chinese government to reduce oversees investments, helping put Magellan’s hotel sale in motion.
St. Regis could see modest results in the early going, Bhojwani said, as the Chicago hotel market continues to lag behind pre-pandemic occupancy levels by 8.7% through March. International travel to U.S. hotels remains at just 68% of pre-pandemic levels, he said.
The St. Regis brand is well known in many Asian and European countries, meaning the new Chicago hotel could benefit as international travel increases, Bhojwani said.
“It’s exciting news for Chicago that these sophisticated owners of luxury hotels are making a big bet on the market and a big bet on the return of luxury travel,” he said. “If the St. Regis establishes a new high-rate point in the city, all the other hotels can draft below the St. Regis. A rising tide raises all boats.”