A room of one's own

A hotel guest room at Mandarin Oriental Tower, planned for 215 N. Michigan Ave.

City’s fledgling hotel condo market sees homeruns, strikeoutsÂ

by Kate Hawley

Ken Costanzo had practical reasons for wanting a second home in Chicago, but one sentimental thought stood out. A little more than 24 years ago, he proposed to his wife while riding down Michigan Avenue in a horse-drawn carriage – on their second date. Costanzo, who now lives in Greenville, South Carolina, recently bought a hotel condominium at The Elysian, under construction at 11 E. Walton, mere blocks from that fateful spot.

Since Costanzo, president of Greenville, North Carolina-based Gary Player Real Estate, can’t often get away from work, he plans to use his hotel condo about two weeks each year, sampling Chicago’s restaurants and watching the Cubs at Wrigley Field, where he’s a season ticket holder.

When he’s not in residence, The Elysian will rent out his room as a hotel suite, and he’ll share in the revenue. “If you were lining up the top 10 investments in the world, it wouldn’t be on it,” he says. Still, the hope of at least breaking even, while getting to use his vacation home, appeals to him. “I think then it’s a homerun,” he says.

Uncharted territory

Costanzo is one of a pioneering group of buyers leaping into Chicago’s still largely untested hotel condo market. Better known in vacation destinations like Aspen, South Florida and Las Vegas, the hotel condo concept has only filtered into Chicago in recent years, led by high-profile projects like Trump International Hotel & Tower, now rising from the former site of the Chicago Sun-Times building, at 401 N. Wabash Ave. Currently, at least seven hotel condo projects are either proposed or under construction in downtown Chicago, with about 1,700 units slated to be built within the next three years.

From new boutique hotels like The Elysian to internationally-known chains such as Mandarin Oriental and Shangri-La to tested brands like Trump, each of these projects is aiming to capture part of an upscale niche dominated by well-heeled baby boomers looking for second (or even third) homes.

The gathering lounge at Canyon Ranch Living-Chicago, planned for 680 N. Rush St.

Only one hotel condo project – The Raffaello Condominium Hotel, 201 E. Delaware – has opened for business in Chicago, so most industry watchers say it’s too soon to say when or whether the market will gain critical velocity here. Of the at least 14 projects announced during the last several years, half a dozen have bowed out, and several have been among the city’s most successful recent developments. “I don’t think we have a very deep history,” says Gail Lissner of housing analyst Appraisal Research Counselors. “The book’s still being written.”

Big bucks

In some ways, hotel condos function much like traditional condominiums – owners can buy or sell these deeded units at any time. But owners also have access to the hotel’s amenities – cleaning services, room service, 24-hour concierges and high-end spas – usually for additional fees.

Owners also pay property taxes and assessments, and contribute to the cost of running the hotel. Those who choose to place their units in the hotel’s rental pool when they’re not in residence share in the revenues. Some developments restrict the number of days per year owners can use their units, while others allow owners unlimited use.

Prices at Chicago’s hotel condo projects are generally higher on a per-square-foot basis than conventional condos. The Mandarin Oriental Tower, 215 N. Michigan Ave., has hotel condos priced at $1,000 to $1,300 a square foot, and Trump’s units clock in at $1,000 to $1,600 per square foot.

The Raffaello, by developer Crescent Heights, occupies the most affordable end of the spectrum, with whole prices starting in the $260s. But like most of its competitors, The Raffaello also has units above the million-dollar mark. Several remaining three-bedroom units at Trump International Hotel & Tower are selling for about $3 million. “I tell people it’s like buying a sports car,” says Nicole Postman, a sales executive with Mandarin Oriental Tower, where units start in the $570s and top out at $7 million. “It’s expensive.”

The glamorous life

With its world-class culture, shopping and sports, Chicago has much to offer a vacation homebuyer. And the booming convention and tourism trade bolsters the hotel industry. But a big city – especially one with bitter winters – doesn’t attract the hordes of vacationers who flock to beaches and ski slopes. “If you’re on the beach in Miami you can sell anything,” says David Pisor, CEO of Elysian Hotels and Resorts, developer of The Elysian. “And they do. And it’s often pretty hideous.”

Waterview Tower / Shangri-La, 111 W. Wacker Drive.

In Chicago, developers need to work harder to reach a discerning batch of wealthy buyers, he says. On that front, he touts the two Charlie Trotter’s restaurants planned for The Elysian and “the very best Pilates studio in the city.” Luxury will permeate the new hotel’s smallest details, he says, right down to the embossed stationery.

Other projects have similarly luxurious touches. The Mandarin Oriental Tower is offering not only the Mandarin Oriental Spa, featuring “amethyst steam rooms” and “experience showers,” it also has a full-service pet spa. Postman, the Mandarin’s sales executive, also plugs the hotel’s steel-and-glass construction and its proximity to downtown attractions such as Millennium Park.

Trump aims to live up to its glitzy reputation with outdoor dining at a five-star restaurant on the 16th floor and a spa and health club that encompasses two full floors of the 96-story building, says Sales Director Tere Proctor.

The Elysian, 11 E. Walton St.

Canyon Ranch Living-Chicago, a 67-story glass tower planned for 680 N. Rush St. with 119 hotel condos, is best known for its first hotel and resort in Tucson, Arizona, which has attracted a loyal coterie of spa-loving customers since the late ’70s. But don’t call the 75,000-square-foot “wellness facility” at Canyon Ranch Living-Chicago a spa, says Kerry Dickson, Senior Vice President of Related Midwest, which is developing the project. Besides its lap pool, fitness classes and massage rooms, it will also offer a team of doctors, nurses and therapists, and a space for residents to gather for talks on health and wellness issues. The concept goes beyond “pampering,” he says. “Canyon Ranch is deeper than that. They’re experts in wellness.”

Risks and rewards

A big part of the appeal of hotel condos, beside these perks, is the opportunity to ease the pain of the hefty price tags by sharing in rental revenues. But developers can’t market the investment potential of hotel condos without registering them as securities, subject to regulation by the Securities and Exchange Commission. Buyers are left to do their own research about whether or not a hotel condo has real investment potential.

Ted Mandigo, of Elmurst-based hotel consulting firm T.R. Mandigo, advises potential buyers to look closely at whether or not the overall market for hotel rooms will be sustainable in the long term.

They also should make sure they understand all of the costs and fees associated with ownership, Mandigo says, to see whether rental income and tax benefits are likely to outweigh assessments, property taxes, management fees and capital costs (repairs, refurbishment, etc.). Hotels wear out quickly, he says, and owners are often obligated to keep the rooms in top shape.

A deluxe suite at The Raffaello Hotel Condominiums, 201 E. Delaware Place.

To help prospective buyers, the Web site of the National Association of Condo Hotel Owners includes a calculator to estimate likely costs. The nonprofit organization sprang up in 2006 in part to help buyers and industry professionals tackle the vagaries of the hotel condo business.Â

In Mandigo’s view, the rates commanded by hotel rooms aren’t rising fast enough in the Chicago market for hotel condo owners to see quick returns on their investments. But, he adds, strong projections for Chicago’s hotel market through 2011 or 2012 mean that hotel condo owners may see gains over time. Over the next two years, he predicts, occupancy levels will rise 2 percent, and the Average Daily Rate, a key statistical measure of hotel pricing, will rise 8 to 10 percent.

“It’s a good hotel market and I expect it to continue,” Mandigo says. “That in itself helps to encourage the performance of hotels with condominium elements.”

However, in his view steady performance over the long term isn’t likely to boost the number of hotel condo units for sale, and he says that the properties on the market now will pretty much satisfy demand. “There is not an unlimited market for condominium hotels in Chicago,” he says.

Others are more hopeful. “I think there’s a very deep market for hotel condos in Chicago,” says Bob Waun, founder and CEO of Vacation Finance, a second-home lender. Waun, who says he has been involved in almost every condo hotel project in Chicago other than Trump, concedes that the frenzied pace of new hotel condo development has ebbed in the last several years.

“We’re in a bit of a lull right now,” Waun says. But he believes this pull-back will probably be temporary and that a new wave of hotel condos will again fill the pipeline. How soon that happens depends on how current projects fare in the public’s perception, he says.

An uncertain market

After the slump in the hotel industry following 9/11, when occupancy and room rates sagged, many developers had trouble securing financing for hotel projects. Hotel condos provided an alternative route for developers, who could use pre-sales of hotel condo units to boost lenders’ confidence.

As the hotel business began to rebound in 2005, some developers dropped their hotel condo plans, figuring they could make more money operating traditional hotels. Hostmark Hospitality Group decided against converting the Amalfi Hotel, 20 W. Kinzie St., into a condo hotel, and The Harp Group nixed its plans to convert a portion of the hotel rooms at The Ambassador East, 1301 N. State Pkwy. The James Group put its plans on hold for hotel condos at The James Chicago, 55 E. Ontario St.

The Raffaello Hotel Condominiums, 201 E. Delaware Place.

At the end of February, Strategic Hotels and Resorts, which operates Fairmont Chicago, 200 N. Columbus Drive, also dropped plans implemented in September 2005 for 88 hotel condominiums, says Cory Warning, Senior Director of Acquisition and Development. “The hotel is so successful in per-room value, so it’s hard to start selling off inventory,” he says.

Two notable flame-outs came from developer Robert Falor: The Aldens Hotel, planned for North State Street, landed in bankruptcy court, and Hotel Blake, 500 S. Dearborn St., prompted several lawsuits from investors alleging that Falor cheated them. And in early March Crain’s Chicago Business reported that Falor’s Solis Hotel Condominiums, 71 W. Wacker Drive, had also landed in bankruptcy court after defaulting on a $27 million loan, casting doubt on the project’s future.

Other hotel condo developments, though, are selling well and progressing. At press time, The Raffaello was nearly sold out, with only about 15 of 175 units available, and 78 percent of hotel condo units at Trump International Hotel & Tower had sold, according to sales director Proctor. The Elysian was 70 percent sold after weathering several major delays in the project, according to CEO Pisor. After opening sales in August, the Mandarin Oriential Tower was about 30 percent sold in early March, according to Postman. The Shangri-La is 35 percent sold, according to Dorrie Frieman, director of sales and marketing for Waterview Tower and Shangri-La Hotels. Canyon Ranch Chicago will open a sales center in mid-April, says Dickson, of developer Related Midwest.

“The units that are out there now will move,” says Mandigo. “They’re not moving real fast, but they’ll sell.”

Vaulting ambition

The challenges of hotel condos aren’t stopping some developers from dreaming big. See Wong and Peter Siu of Emerald Homes, LLC recently announced plans to build the Grand Imperial hotel condominium just east of Chicago’s Chinatown neighborhood at 2150 S. Clark St. The 15-story hotel will feature decorations from the Tang, Sung and Ming dynasties, following the principles of feng shui.Â

“Chinatown needs a hotel, that’s for sure,” See Wong says. He’s betting that conventions at nearby McCormick Place and visitors to Chinatown will provide him with a steady stream of customers. “I think there’s a good demand,” he says.

The project isn’t off the ground yet. It still needs zoning approval from the city before it can break ground, which Wong says would happen at the earliest this summer. Still, he’s already thinking about a bigger picture. “My plan is, this is not just one hotel,” he says. “I want to put this hotel in every Chinatown in North America.”

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