Hotel Boom in Chicago Raises Fears of Room Glut

Four luxury hotels have opened in downtown Chicago in the last year, and three more are set to open over the next 18 months, but some industry officials fear a glut of high-priced rooms could turn the city’s hotel boom into a bust.

Since last October, the Nikko, the Fairmont, the Swiss Grand and the Hotel 21 East have opened their doors, adding 2,000 rooms to the city’s total. Three more hotels--the Four Seasons, the Intercontinental and the Hyatt Suites--are set to open by March, 1990, with 1,000 more rooms.

All are priced at the upper end of the market, with room rates starting at $160 a night.

“Obviously, it’s going to have a serious impact on the hotel industry in the Chicagoland area,” said Arnold Karr, executive director of the HotelMotel Assn. of Illinois, which represents 260 hotels throughout the state.

“The market is not capable of absorbing all the new rooms,” he said. “That doesn’t mean the new hotels won’t succeed, but there may be a shakeout among the other hotels.”

Increase of 16%

Karr said there was little new hotel construction in the city between 1981 and 1987, but the expansion of the McCormick Place convention center in 1986 helped spur the current boom.

He said the city’s hotel industry would be able to handle a normal 4% to 5% yearly increase in the number of rooms, but the recent boom has suddenly caused a 16% increase, from about 18,000 before 1987 to 21,000 at present.

Occupancy rates were about 70% last year and could drop by two points this year due to the hotel expansion, Karr said. He estimated that it would take three to four years for the market to absorb the new rooms.

He said the new hotels should have “some staying power” because they are part of major chains with strong financial backing and extensive reservations and marketing systems.

But he said the glut could hit older downtown hotels as well as suburban hotels, which previously could count on spillover bookings when the downtown hotels were fully booked.

Jerry Roper, president of the Chicago Convention and Visitors’ Bureau, conceded that some older or suburban hotels could suffer some fallout. But, he said, “I don’t see it as a glut. I see it as an opportunity for economic development in the city, for providing new jobs, because we do have the demand.”

The new hotel rooms would make it easier for Chicago to attract new business, said Mark Albian, the convention bureau’s market research manager.

Gearing for Competition

“Unlike New York, Chicago has a lot of potential left for tourism and corporate business,” he said.

Meanwhile, around Chicago hotel managers are gearing up for the increased competition.

Don DePorter, regional vice president for the Hyatt Corp., said it is normal for a new hotel to lose money for the first two to five years as it tries to find its market niche.

But he said, “I don’t think it’s going to be a bust . . . because the city has been starving for rooms,” he said. “It’s only a glut if we don’t do anything about it.”

DePorter said Hyatt would try to book more small group business into its suburban hotels to make up for the expected lost bookings.

At the Swiss Grand Hotel, which opened in August, general manager Costas Vafopoulos, said its links to Swissair should help generate business and the hotel would offer “European-style service” catering to international travelers.

“We see great prospects and opportunities in the downtown Chicago area,” he said. “We feel the competition is healthy.”

Victor T. Burt, general manager of the 67-year-old Drake, one of Chicago’s oldest luxury hotels, said he expects the recently refurbished hotel “will hold its own” because it has a loyal clientele.

“I think next year is a big question mark,” he said. “No one really has the answer to whether Chicago can support all these new hotels.”