When we look closely at the hotel development dynamics in Chicago right now, the obvious headline is the continuing surge of development in the Windy City’s central business district.
The picture becomes a little more complex if we look beyond downtown, however, because the reality is that many of the significant pockets of unexploited demand in Chicago are outside the CBD—primarily in the city’s surrounding urban neighborhoods. To be clear, these are not suburban markets; these are urban communities inside the metro area such as Lincoln Park and Wicker Park.
More than a few of these “neighborhood hotel” opportunities are being snubbed because too many developers are committed to chasing the hot urban centers where, despite somewhat higher barriers to entry, development continues apace. In many Midwestern urban downtowns, the supply and demand curve might be flattening out. For example, there are approximately 8,000 rooms yet to open in Chicago’s central business district. With that amount of development on top of what is already in place, any drop in demand will lead to real challenges.
Neighborhood hotels in “bedroom” communities outside the city center, however, have a level of ambient demand that comes from guests who might be visiting family in the area or there for business travel related to local small businesses, or simply through tourist traffic looking for hotels outside the downtown core. In select urban neighborhoods like these in markets across the Midwest, there is a great deal of demand and almost no supply to accommodate it.
Consequently, there are opportunities for hotel owners, operators and developers, especially for properties such as Hampton’s Hometown hotel concept. The question is, as the industry continues to develop new properties and already crowded urban centers become full, will secondary urban opportunities pick up additional steam?
The high degree of variation we see from market to market makes that a challenging question to answer. Some peripheral urban markets are actually already overbuilt, whereas there are others where you cannot help but wonder why a hotel hasn’t been put in. Neighborhood development opportunities (and momentum) is perhaps most obvious in Chicago, but also is showing signs of picking up in places like Detroit, for example.
Urban an asset
There are a number of positives that make these urban neighborhood hotels an asset for owners and the surrounding community. They tend to be more easily integrated into the neighborhood, and, when developed thoughtfully, can offer more of an authentic local experience. Because they are often a welcome addition to areas that were in need of a hotel, they have the potential to ignite more local development and be a positive economic driver for local merchants.
Identifying where the next market and next opportunity will be can be a little more complex because these are the kind of neighborhoods where the need for a hotel is not always immediately obvious (which is one of the reasons why there are still opportunities out there).
Some of it is just instinctive, but it always boils down to the fundamentals: assessing the underlying demand generators. The difference between a peripheral urban community market that should have a hotel and one that shouldn’t can be subtle, but understanding those differences makes the difference between success and failure.
Strong residential and retail components are always appealing, but with these neighborhoods it is more about the mix and the ratio. If the ratio of residential to retail is too high, a hotel is unlikely to do well. Retail is great, but the overall demand picture needs to have more than that. Sufficient demand to warrant a hotel in these areas generally requires more dynamic demand generators woven in, such as schools and light industrial.
In a way, these secondary urban markets are like a patchwork quilt, and the more patches in the pattern, the better.
A classic example of an urban community that meets these criteria is Lincolnwood in Chicago. Lincolnwood has some heavy residential areas, but also features strong and steady business demand with a combination of retail, office and light industrial components.
The challenges
One of the downsides to hotel development in these submarkets is that they usually cannot sustain a lot of product. The rewards for the first hotels to enter can be significant, but success is far less certain for subsequent properties.
A great example of this phenomenon in action is South Bend, Indiana. The Hampton Inn & Suites in South Bend was putting up impressive numbers for many years. Today, however, there is so much more product there (and more coming in) that it just isn’t working.
On the bright side, rates for quality hotels in these neighborhoods can be competitive with even the best properties in the downtown core. While average rate and occupancy numbers might be slightly lower than those in a central business district, the difference is not dramatic.
Ultimately, I think many of these hotels will actually become a competitor to downtown locations. As many guests have discovered, a hotel just outside the core of a busy city can be an outstanding option for location and convenience. Not to mention the fact that visitors who are not tourists (visiting family members or business professionals, for example) will often be drawn to a quality hotel that is somewhere between downtown and the surrounding suburbs.
While it remains to be seen how quickly and to what degree these urban neighborhood hotels capture additional market share in the months and years ahead, there is little doubt that there are opportunities there for savvy and opportunistic developers.
Robert Habeeb is president and CEO of First Hospitality Group, Inc., a national, experienced, and established hospitality management and development company serving the investment and real estate industries. Since 1985, FHG has been an award-winning pioneer in the hospitality industry. FHG has successfully developed, marketed and managed more than 16 brands and 50 properties throughout the Midwest. Visit www.fhginc.com.
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