Hotels, Office, Chicago, Oh My
Some cities are a fast fail in today’s lending environment. We’ve spoken at some length about some of the cities in California and how the new taxes and a difficult regulatory environment have made it nearly impossible to do business in once (and recently) great cities. But we’ve spoken a little bit less about Chicago and hospitality. Frankly, Chicago is a beautiful city. It’s a fantastic skyline filled with a great mix of gleaming new towers and artistic pieces of art deco history. But the banks HATE it right now. Some of this is about the same things that are making California unpleasant. Regulators have their fingers in investors’ and business operators’ pockets at every turn. On top of that, crime is through the roof having risen 41% in 2022 and another 43% on top of that in 2023. As an investor, or as a banker, what could possibly incent interest in a city with these characteristics? We believe the answer will eventually be price, but that will not be an easy process. Take for example the former home of the CBOE (Chicago Board Options Exchange), this former center of the options trading universe is currently up for sale and has been marked down by more than half in their regulatory filings. If they really wanted to move the building, it will likely take even further incentive. So the CBOE may see the equity value of their real estate shrink, but if another buyer were to come with more patient capital, or the ability to refresh the building, there is a potential for a reinvigorated interest in the property. The use is yet to be determined, but investors can get creative in a space this well located.
Similarly, there are several hotels in Chicago that are trying to figure out their future. Despite prime locations and relatively new build real estate, many of the hotels that are located in prime locations are planning an exit. Why? Because they can’t afford to refinance given their ability to draw traffic into the city. But on the flip side, the recently sold St. Regis Hotel is rumored to have been sold for less than half of what it would cost to build.
What will ultimately change the fortunes of the city may ultimately be cap rates getting high enough to entice investment, but given continued “Progressive” policies, it currently feels like there is no bottom to Chicago prices. We hope, for their own sake, that whoever is left in Chicago when this bottoms out figures out how to vote for a change that would incent businesses to return to this once great city.
