Operating performance is up and there’s hope for the future, but some hotels in Chicago’s O’Hare Airport market still struggle with lingering financial problems. Several properties closed and several more have new owners or will soon:

• The three-year-old InterContinental Chicago O’Hare is the poster child for distressed hotels in the market. The 556-room, $180-million property opened in 2008, just days after the collapse of Lehman Brothers and the start of the nation’s financial meltdown.

The developers, led by Chicago-based Harp Group, were forced to file bankruptcy just a year after opening. Until recently, the developers battled with lenders and the bankruptcy court over a reorganization plan. In July, the court ordered the property turned over to the lenders.

• One of the hotels that closed during the downturn may see new life in an alternative use. The Sheraton Chicago Northwest closed in late 2009 and was recently purchased for $7.7 million by Argent Realty, which plans to convert the 426-room hotel into a multi-phase mixed-use project anchored by 200 to 250 luxury apartment units.

Argent recently told Arlington Heights city officials it also plans to develop retail and restaurants at the site and perhaps construct a 100-unit extended-stay hotel. The group hasn’t said what it plans to do with an adjoining CoCo Key indoor waterpark, which also closed in 2009.

• A joint venture led by Chartres Lodging recently purchased the 525-room Westin O’Hare from Ashford Hospitality Trust for $53 million, less than half of what Ashford paid for the property in 2006.

• Two Wyndhams in the market — the 467-room Wyndham O’Hare and the 160-room Wyndham Drake — closed in late 2009 and early 2010, and neither has reopened.

Improving performance
Occupancies for the nearly 50 hotels and 11,000 rooms in the O’Hare market have improved dramatically since the dark days of 2009, when occupancy bottomed out at 55.4%, according to Smith Travel Research. Through July of this year, occupancy topped 64%, still down from the 72.5% mark in 2006. The market hasn’t had any additions to hotel supply since the 2008 opening of the InterContinental property.

After falling 10.3% in 2008 and 30.7% in 2009, revenue per available room (RevPAR) is on the rise again, up 17.2% last year and 9.8% year-to-date through July (see table).

“Business is definitely picking up again, and we’re seeing strong signs of a recovery,” says Robert Habeeb, president and CEO of Chicago-based First Hospitality Group, operators of four hotels in the O’Hare market.

He cites a number of factors contributing to the upturn. One is a general improvement in the business climate, with more people traveling. Passenger traffic at O’Hare was up 3.7% last year after four years of decline and is projected to rise 2.3% this year.

More than 67 million passengers pass through O’Hare each year, and hotels in the market capture anywhere from 3% to 7% of them, says local hotel consultant Ted Mandigo.

“Also, sadly for travelers but beneficial to us, we’ve had a lot of volatile weather this year, which meant more stranded passengers who needed accommodations,” says Habeeb.

While occupancies and rates are creeping up, the wave of financial distress that swept through the O’Hare market has had an effect on all properties in the market.

“As distressed hotels fight their way through foreclosures or bankruptcies, their strategy has been to put heads in beds at any cost, which has contributed to the rate depression in the market,” says John Jameson, veteran Chicago-area hotel broker and president of Jameson and Co.

“But once these properties flow through the process and gain new owners, they’ll be refreshed and able to push rate higher again,” emphasizes Jameson.

Hans Detlefsen, managing director of HVS Global Hospitality Services based in Chicago, says O’Hare’s recent slump and rebound follows a familiar pattern.

“The O’Hare submarket was the first to feel the negative impact of the recession, and it has been the last to rebound, compared to downtown and the Midway Airport submarket,” he says. “Downtown usually rebounds first, then Midway, then O’Hare, so this isn’t unusual.”

Signs of hope
Besides anticipation of an upturn in its traditional demand generators, hoteliers in the O’Hare market have a few other reasons for hope. One is a $445-million, 150,000-square-foot casino that opened last month in the airport area.

The new Rivers Casino includes 1,050 slot machines and 48 table games. While it will primarily serve gamblers from the Chicago area, Mandigo believes it could eventually add between two and five percentage points of occupancy for airport hotels.

“It will mostly serve the day-tripper market, but there will be some hotel guests who decide to tag on another day to their trips to visit the casino,” he says. “And it gives meeting planners another reason to book meetings at O’Hare instead of downtown or elsewhere.”

It took developer Neal Bluhm nearly a decade to get the facility approved, financed, constructed and open. His advantage may be short-lived, as Illinois lawmakers recently passed legislation that could fast track five more casinos in the state (the O’Hare project is the 10th in Illinois) in the next few years. At least two of the proposed new casinos will be in Chicago or its suburbs.

In addition to the casino, a new entertainment district with restaurants, bars, an upscale bowling alley and an outlet mall is being developed in Rosemont, which Jameson says “makes O’Hare a destination for locals but also creates another marketing tool for Rosemont, its convention center and the hotels.”

Perhaps further down the road are the long-discussed building of a west entrance to the airport and the redevelopment of a former military base into commercial or office space. All these positives may even lead to some new hotel development.

Mandigo believes the potential exists for another hotel next to the casino, in addition to the Courtyard by Marriott and Hilton Garden Inn, which are nearby.

“There is some talk now about hotel development at two or three sites in the O’Hare area,” says Mandigo. “As occupancies improve, I believe one or more new properties will be announced some time next year.”