INSIDE
Balancing demand in the space and
financial markets ...
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Retail ...
2
Office ...
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Industrial ...
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Multifamily ...
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Senior Care ...
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Hospitality ...
7
Chicago Metro Report
Winter 2011
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Homeownership rates in the Chicago MSA went from 55.3 percent in 1993 to 64.6 percent in 1995. Ownership rates then climbed further to 71.2 percent in 3q06. Was there a fundamental change in demographics or household formation? No. The first jump in ownership was triggered by movement of down payment requirements from 20% to 10% while the second jump was due to the rise in subprime (or no doc) loans. Demand was created by changes in the capital markets with no underlying change in property market fundamentals. The results are clear.
Stability in real estate pricing, across all property types, occurs when there is balance in both the space and capital markets. This principle is apparent in the multi-family market. Space demand is increasing due in part to a movement back to balance in the homeownership rates and capital remains available through agency money as well as HUD. Insurance companies and some banks are also returning to the market. Of all property types, multi-family pricing has retained stability due to both space demand and availability of capital. This cannot be said of most other property types.
Capital remains elusive for most deals. While equity is coming back to
the market, the ability to leverage real estate remains limited. The banks are lending more – but it is a trickle in comparison to where the markets were even before the most recent run up. Some institutions are simply investing in mortgage backed securities for return rather than taking on the risk of a single asset loan. Until capital returns to the property markets, stability in pricing for real estate will remain problematic.
Where should capital move at this time? As we note in the Industrial overview, the Purchasing Manager’s Index has improved dramatically. Vacancy has leveled off and recently declined indicating improvement in underlying demand in a market where no new construction is on the horizon. The space market fundamentals appear to be returning to balance and the outlook for industrial property is solid.
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Balancing demand in the space and capital markets
Chicago Metro Rep ort Winter 2011
Market 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 Market Employment Kansas City 6.2% 8.4% 8.6% 8.9% 8.4% 9.1% 8.3% 8.8% 9.0% Kansas City 962.9 Des Moines 4.2% 5.6% 5.0% 5.6% 6.0% 7.0% 6.1% 6.5% 6.1% Des Moines 316.9 Minneapolis 5.4% 8.0% 7.9% 7.9% 7.0% 7.6% 6.3% 7.0% 6.5% Minneapolis 1718.7 St. Louis 7.2% 9.7% 9.5% 10.4% 10.0% 11.0% 9.2% 9.9% 9.5% St. Louis 1303.3 Milwaukee 5.4% 8.2% 8.8% 9.3% 8.4% 9.6% 8.3% 8.4% 7.6% Milwaukee 803.9 Chicago 6.5% 9.3% 10.2% 10.1% 10.3% 11.4% 10.3% 9.8% 9.0% Chicago 4221.8 Indianapolis 5.8% 8.4% 8.6% 8.4% 8.2% 9.4% 8.9% 9.1% 8.7% Indianapolis 877.7 Detroit 10.0% 13.8% 14.9% 15.9% 15.0% 15.3% 13.7% 14.4% 12.0% Detroit 1707.0 Cincinnati 6.3% 8.9% 9.1% 9.6% 9.6% 10.9% 9.7% 9.3% 9.2% Cincinnati 992.4 Columbus 6.0% 7.8% 8.0% 8.6% 8.7% 9.7% 8.7% 8.3% 8.1% Columbus 902.4 Cleveland 6.9% 9.4% 9.4% 9.2% 8.9% 10.6% 9.1% 9.6% 8.5% Cleveland 1008.0 Source: Bureau of Labor Statistics Note: Employment is non-farm, non seasonally adjusted in thousands
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Retail posted its strongest performance since 2004. The Economics and Statistics Administration of the US Department of Commerce reports sales rose 7.9 percent on a December over December basis with Motor Vehicle sales making up a large portion of the gain. Sales of Building Materials were also up, indicating strength in the home renovations market. Sales of Electronics and Furniture however, lagged the market. After rising steadily since 2006, vacancy has finally taken a downward movement in 4q10, closing out the year at 10.8 percent for the Chicago MSA. Some of the biggest improvements were recorded by CBRE in the Far Northwest suburbs, West and Southwest suburbs, Kane county and City South submarkets.
The personal savings rate (PSR) has followed the vacancy pattern in the market with a modest decline from 5.94 percent in 2009 to 5.75 percent in 2010. With consumers spending less, retail sales have suffered (with the exception of motor vehicles) and employment in the retail sector remains weak.
CO N S T R U C T I O N
While the CBRE data indicates just under 4M sf of space is under construction (3q10 data), other data suggests this includes many stalled projects. Inventory of space is expected to remain flat and there are no large scale starts scheduled which bodes well for supply in 2011.
RE N T S
Face rents continue to fall with significant concessions remaining in the market. Eight of eleven submarkets recorded declining rents in 4q10 but as previously noted, vacancy has also declined. It appears a rebalancing in the market may be occurring with prospective tenants moving back given current rent levels. Brokers indicate a rise in tours of well located vacant space.
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R A N S A C T I O N SWillow Festival in Northbrook was sold by Hamilton Partners and included a Lowe’s, Whole Foods and Best Buy. The cap rate was reported proximate to 6.5%. Prairie Market in Oswego included a Dick’s Sporting Goods, Kohl’s and Best Buy. Cap rate was reported in excess of 8.25%. Joffco Square on Roosevelt was anchored by Best Buy and Bed Bath & Beyond.
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R A N S A C T I O N HI G H L I G H T SProperty Purchaser Seller Size (sf) $/sf
Willow Festival Northbrook Regency Centers Hamilton Partners 405,227 $158 Prairie Market Cole Credit Property Trust III KDR Oswego 158,724 $252 Joffco Square Chicago Inland Joffco Properties 200,000 $119
ARC Index - 4Q10 Retail Rents Occupancy Pricing
R
ETAIL
Chicago Metro Rep ort Win ter 2011
Source CBRE, Bureau of Economic Analysis, and Appraisal Research Counselors
0 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Retail Data Trends
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The Chicago MSA unemployment rate was 9.0 percent in November 2010 – down from 10.3 percent a year ago. Employment of late for office users (finance, professional/business, informational, and government) appears to have stabilized after two years of decline. Because vacancy rates are a lagging indicator, vacancy will stabilize for the next few quarters.
CO N S T R U C T I O N
Trammell Crow, Fifield and Alter Group among others are actively seeking anchor tenants for proposed buildings in the West Loop. The ability to finance a new project without significant pre-leasing is minimal. While there is typically 2-5 million sf of office space under construction in the city and 1-4 million sf in the suburbs, there was no reported construction in the city for 2010 and a mere 750,000 sf in the suburbs. Increases in demand going forward will result in positive absorption and a drawing down of vacant space.
RE N T S
Face rents (including sub lease space) are down 2.6 percent in the suburbs over the past year. Downtown the decline in face rents has been less ($27.15 net in 4Q09 vs. $26.75/sf in 4Q10) - a drop of 1.5 percent. Concessions including free rent and TI’s remain in the market with actual deals being done below these reported levels. Access to capital for ownership to fund TI’s remains critical to managing occupancy.
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R A N S A C T I O N SThere was a flurry of institutional activity at the close of 2010 with several large trades taking place in the downtown market. With Kirkland & Ellis occupying just over half the Hines building, the cap rate was proximate to 6.5%. The Hyatt Center at 71 S Wacker was sold by the Pritzker family. Riverside Plaza, built in 1983, includes JPMorgan as a tenant in over 50% of the building. The cap rate was reported at just over 7.5%. Triangle Plaza in the O’Hare market sold at a reported 6.5% cap rate. There were several smaller transactions in the $75 to $100 per square foot range in late 2010.
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R A N S A C T I O N HI G H L I G H T SProperty Purchaser Seller Size (sf) $/sf
300 N LaSalle, Chicago KBS Real Estate Hines 1,302,901 $503 Hyatt Center, Chicago The Irvine Company Pritzker 1,490,825 $419 Riverside Plaza, Chicago Mizrachi Brookfield 1,048,357 $181 Triangle Plaza, Chicago Commonwealth REIT Buck 631,445 $152
ARC Index - 4Q10 Suburban Office Rents Occupancy Pricing City Office Rents Occupancy Pricing
O
FFICE
Chicago Metro Rep ort Winter 2011
Source CoStar, Bureau of Labor Statistics, and Appraisal Resear ch Counselors
0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 18.0% 20.0% 3900 4000 4100 4200 4300 4400 4500 4600 4700 1 9 9 7 4 Q 1 9 9 8 2 Q 1 9 9 8 4 Q 1 9 9 9 2 Q 1 9 9 9 4 Q 2 0 0 0 2 Q 2 0 0 0 4 Q 2 0 0 1 2 Q 2 0 0 1 4 Q 2 0 0 2 2 Q 2 0 0 2 4 Q 2 0 0 3 2 Q 2 0 0 3 4 Q 2 0 0 4 2 Q 2 0 0 4 4 Q 2 0 0 5 2 Q 2 0 0 5 4 Q 2 0 0 6 2 Q 2 0 0 6 4 Q 2 0 0 7 2 Q 2 0 0 7 4 Q 2 0 0 8 2 Q 2 0 0 8 4 Q 2 0 0 9 2 Q 2 0 0 9 4 Q 2 0 1 0 2 Q 2 0 1 0 4 Q
Office Vacancy vs Employment
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After hitting a low point in 4q08, the Purchasing Manager’s Index (PMI) has improved dramatically to the current level of 68.6 (above 50 indicates expansion). The PMI is a composite index made up of new orders, production, employment, inventories and supplier deliveries. In short, manufacturing is up which is consistent with vacancy flattening near 12 percent over the past year. While the current level of the PMI is likely not sustainable for the longer term, we expect vacancy to improve in 2011.
CO N S T R U C T I O N
Historically there is 10-20 million square feet of space under construction at any time in the Chicago MSA. In 4q08, construction activity fell below 5M sf and in 4q09 activity fell below 500,000 sf. As of 4q10, less than 100,000 sf was under construction. In 4q10 absorption turned positive for the first time since 3q08. A nominal increase in demand will begin to produce notable net absorption.
RE N T S
Face rents are lower across virtually all submarkets. Free rent of one month per year of lease term is common. After
peaking at just under $5 psf in 1q08, average net rents (including sublet space) have declined for 11 consecutive quarters to the 4q10 level of $4.39 psf – a drop of 11.1 percent. More notably, the rate of decline appears to have slowed and rents may have bottomed out.
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R A N S A C T I O N SThere was an uptick in transaction activity in the last part of 2010 with High Street, Duke and LaSalle purchasing multiple assets from various sellers. The larger assets were leased at sale. LaSalle’s acquisition of the Kimberly-Clark facility in Romeoville was at a reported 6.5% cap rate while the Mecalux facility in Melrose Park was reported at a 7.5% cap rate. There were numerous smaller transactions of predominantly owner user space in the $40-$50 price psf range throughout the MSA.
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R A N S A C T I O N HI G H L I G H T SProperty Purchaser Seller Size (sf) $/sf
7 Property Portfolio High Street Equity Advisors TA Realty Associates 465,757 $68 3 Property Portfolio High Street Equity Advisors Centerpoint 399,669 $79 740 Prologis Pkwy Romeoville LaSalle Inv Mgt Colony Realty Partners 895,912 $37 1600 N 25th Ave Melrose Park Duke Realty Ohio Teachers 458,620 $62 175 Ambassador Naperville Duke Realty Sentinel 331,089 $59
ARC Index - 4Q10 Industrial Rents Occupancy Pricing
I
NDUSTRIAL
Chicago Metro Rep ort Winter 2011
Source CoStar, Institute of Supply Management, and Appraisal Research Counselors
30 35 40 45 50 55 60 65 70 4.0% 5.0% 6.0% 7.0% 8.0% 9.0% 10.0% 11.0% 12.0% 13.0% 1 9 9 7 4 Q 1 9 9 8 2 Q 1 9 9 8 4 Q 1 9 9 9 2 Q 1 9 9 9 4 Q 2 0 0 0 2 Q 2 0 0 0 4 Q 2 0 0 1 2 Q 2 0 0 1 4 Q 2 0 0 2 2 Q 2 0 0 2 4 Q 2 0 0 3 2 Q 2 0 0 3 4 Q 2 0 0 4 2 Q 2 0 0 4 4 Q 2 0 0 5 2 Q 2 0 0 5 4 Q 2 0 0 6 2 Q 2 0 0 6 4 Q 2 0 0 7 2 Q 2 0 0 7 4 Q 2 0 0 8 2 Q 2 0 0 8 4 Q 2 0 0 9 2 Q 2 0 0 9 4 Q 2 0 1 0 2 Q 2 0 1 0 4 Q P M I I n d e x V a c a n c y R a te
Industrial Vacancy vs PMI Index - Chicago
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DO W N T O W N
CH I C A G O
Absorption of downtown apartments continues to expand at a record pace. There are 2,022 more occupied rental units downtown in 4Q10 vs. 4Q09. Over the past three years the number of occupied rental units has increased by 33 percent. In 2010 there were 2,529 rental units yet the total inventory of rental units has remain virtually unchanged over the past 20 years due to the number of conversions to condo The market will transition to an overall shortage of rental units downtown by 3Q11.
Uncertainty in the employment market, pricing instability in the condo market, unbundling of households and the desire of the younger renter wanting to retain location flexibility for career growth, are contributing to increased demand for rental units. Net effective rent for Class A product is $2.23 psf – an increase of 7.2 percent over the past year. Class B rents have risen 7.0 percent. Occupancy has improved in each segment and the market is currently at 93.7 percent overall.
SU B U R B A N
CH I C A G O
Our current survey shows a gain of 7.4 percent year over year for net effective rent with the current level standing at $1.15 psf. 9 of 10 submarkets posted year over year gains. Submarket leaders were Northwest Cook, Naperville/Aurora and Will County with 7.7, 7.7 and 7.2 percent gains respectively. Occupancy is at 92.9 percent – up from 92.2 percent in 4Q09. Rents and occupancy in Class C properties have lagged. Renting is a preferred choice at this time.
IN V E S T M E N T
M
AR K E TAfter a relatively long drought of sales downtown, several large transactions occurred in 2010. Burnham Pointe in the South Loop was acquired by Behringer Harvard in June and then a flurry of closings occurred in December including Aqua, Astoria and Mod. Aqua included apartments a large commercial garage operation, retail and office space. Astoria in the South Loop and Mod in the West Loop were broken condo deals sold by their construction lenders. Both are expected to remain rental for the near term.
In the suburbs, there was almost $400M in sales in 2010 of major properties. Lakeview Townhomes in Naperville was acquired by Home Properties and AMLI completed the second sale to TA Associates with the closing of AMLI at Canterfield (West Dundee) and AMLI at Osprey (Gurnee).
Cap rates are proximate to 5 percent downtown and 6+ percent in the suburbs. With the recent rise in Treasuries however, upward pressure is inevitable for buyers utilizing leverage.
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R A N S A C T I O NH
I G H L I G H T SCommunity Buyer Seller Units Price/Unit
Lakeview Townhomes Home Properties Marquette 120 $118,750
AMLI at Osprey TA Associates AMLI 487 $113,039
Aqua JPMorgan Magellan 474 “$400,000”
Astoria Crescent Heights Lender 205 $218,239
Mod Sam Zell Lender 56 $236,607
ARC Index - 4Q10 Suburban Multi Family
Rents
Occupancy
Pricing
City Multi Family
Rents
Occupancy
Pricing
M
ULTIFAMILY
Chicago Metro Rep ort Winter 2011
$0.50 $0.75 $1.00 $1.25 $1.50 $1.75 $2.00 $2.25 $2.50 2Q04 4Q04 2Q05 4Q05 2Q06 4Q06 2Q07 4Q07 2Q08 4Q08 2Q09 4Q09 2Q10 4Q10
Downtown vs Suburban Chicago
Net Rents PSF
Downtown Suburban
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We continue to view senior care facilities as better suited to weathering the current economic downturn than other property types due to stable, or growing, demand and constricted supply additions. Within that general statement, there are differences between sectors.
LI M I T E D
C
A R E –IN D E P E N D E N T
&
AS S I S T E D
The independent living segment appears to be the most affected by the housing downturn. This is more of a lifestyle change type of housing that can be delayed if the resident won’t get the desired price for a family home. Within this segment, the impact on Continuing Care Retirement Communities (CCRC) and strictly independent living is similar as homeowners delay a move. Nationally, statistics show a decline of only approximately one percent in average occupancy over the last year.
Assisted living is more a need driven housing unit and so it has fared better. Nationally, average occupancy has increased over 2009 by a little less than 100 basis points. The expansion of services so as to appeal to residents longer continues to be a trend. Assisted living facilities now can offer care that, as little as ten years ago, would have required a skilled nursing facility. Within Assisted Living the specialty of Memory Care or Alzheimer’s Care has been the faster growing segment.
SK I L L E D
N
U R S I N GThis is the most stable of the classifications of senior care. Almost entirely driven by need rather than choice, demand has been basically stable over the last twelve months. The mix of residents/patients is skewing more and more toward government assistance, through Medicaid and Medicare. Private pay patients are staying at assisted living facilities longer, or are those that exit the short term Medicare program and are not ready for release to home. Long term private pay is becoming a small segment of total nursing home demand.
IN C O M E
Medicare continues to be profitable segment of nursing home census mix. As of October 1, 2010 the latest version of Medicare’s payment system, RUGS IV, went into effect. The program expanded the classification of patients for standardized levels of care and so standardized reimbursement rates. RUGS IV expanded the classifications from 53 to 66. To date, the information we are getting is that the new program is, at worst, neutral as regards total reimbursements to operators, and they may see a slight average rate increase for 2011.
With regard to Medicaid, which is largely a state reimbursement program, state budget deficits nationwide have created worries of reimbursement rate cutbacks or freezes. To date there has not been anything like that in Illinois. Operators report that the State continues to process reimbursements within no more than a 120 period. Less than 90 days payment is common. The basic reimbursement rates through Medicaid did see modest cost based increases in 2010. This appears to be the trend for 2011 as well.
With regard to ILF and ALF facilities, lower occupancy rates or more competition for residents has resulted in flat rates for these segments.
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R A N S A C T I O N S – SK I L L E DNU R S I N G
Experienced operators continue to pursue opportunities. However, successful properties are rarely exposed to the market. The sale of Southpoint, shown below, was the exercise of a prior purchase option by the operator.
There are also a number of former nursing homes on the market statewide. These are typically 1960’s or early 70’s construction facilities that were lagging their local markets in physical plant and so profitable hospital discharge referrals. Asking prices are a fraction of what it would be with an operating license and stable place in the local market. The sales from the second half of 2010 were:
Property Buyer Seller Size (Beds) $/Bed
Elmbrook Health Care - Elmhurst Legacy Health Care Lancaster Health Group 180 $69,000
Southpoint N & RC - Chicago Southpoint Realty (Gubin & Blisko)
Washington Heights LLC (Rothner) 228 $105,000
ARC Index - 4Q10 Nursing Facilities
Rents
Occupancy
Pricing
Assisted Living Facilities
Rents
Occupancy
Pricing
Independent Living Facilities
Rents
Occupancy
Pricing
S
ENIOR
C
ARE
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Occupancy has registered growth in every quarter of 2010, while ADR declined in the first two quarters, followed by a constant increase since. Consequently, the hotel market has experienced significant increases in Revenue Per Available Room (RevPAR) during the second half of 2010. Rising occupancies at Chicago-area hotels show that a recovery in business and leisure travel is under way.
OC C U P A N C Y A N D A D R
For the fourth quarter of 2010, the Chicago market generated an ADR of $120.42 (up 4% from the same period in 2009), with an average occupancy level of 59.4% compared to 55% in 4q09. The RevPAR for the fourth quarter 2010 was $71.53, up almost 13% from 2009’s fourth quarter RevPAR of $63.29.
2010 STR data showed some signs of growth in the Chicago hotel market, with most of the recovery taking place in the second half of 2010. On a yearend basis, the market finished 2010 with a RevPAR at $68.66, up 9% from the 2009 level, and similar to its 2005 level, with most of the gain resulting from the increase in occupancy, while the ADR stayed flat.
FO R E C A S T
The trends for 2011 continue to show increased strengthening in demand, occupancy, and rate. The recovery is expected to be stronger in the Downtown market than in the suburban market, as the suburban market had been more adversely affected by the recession
CO N S T R U C T I O N
As a result of the economic recession and tighter lending standards, supply growth in the Chicago market has stalled, with only one new hotel opening in the second half of 2010, the 610-room JW Marriott Chicago Downtown (November). Only three hotels are expected to open in 2011: the 42-room independent Wrigleyville Hotel (spring), the Hampton Inn & Suites in Mount Prospect and the Radisson Blu in the mixed-use Aqua building near Millennium Park (both late 2011). With a very limited amount of completions in 2011, the expected increase in demand will begin to produce notable results in occupancy growth.
IN V E S T M E N T MA R K E T
Even though most of the transactions involved distressed properties, buyers have returned to the market, with more activity in the market than in 2009. A Hong Kong real estate company has acquired from LaSalle Hotel Properties the lower floors of the former One IBM Plaza at 330 N Wabash Avenue for $58.8 million, with plans to open the upscale Langham Hotel.
Many investors are buying debt on the hotels and then taking title through foreclosure or a so-called deed-in-lieu of foreclosure. For instance, the Blackstone Group has taken over a 417-room downtown Wyndham hotel at 633 N. St. Clair St as part of a 14-property distressed deal, including several Extended Stay America hotels. The following is a summary of recent transactions:
Property Name City Units Price Price/Room Buyer Seller
Hyatt Lilse Lilse 316 $15,131,952* $47,886 Aimbridge Hosp. JV Area Prop. Ptners Hyatt Hotels
Hyatt Deerfield Deerfield 301 $26,460,000* $87,907 Aimbridge Hosp. JV Area Prop. Ptners Hyatt Hotels
Hyatt Rosemont Des Plaines 206 $9,408,027* $45,670 Aimbridge Hosp. JV Area Prop. Ptners Hyatt Hotels
The Park View Hotel Chicago 194 $11,400,000 $58,763 AJ Capital JV Angelo Gordon Amalgamated Bk/Wextrust Cap
Hilton Garden Inn Warrenville 135 $22,000,000 $162,963 Apple REIR Nine Inc. White Lodging Services
Hilton Garden Inn Schaumburg 166 $20,500,000 $123,494 Apple REIR Nine Inc. White Lodging Services
*Portfolio transaction with allocated amount
ARC Index - 4Q10 Suburban Hotel Rents Occupancy Pricing City Hotel Rents Occupancy Pricing
H
OSPITALITY
Chicago Metro Rep ort Winter 2011
$30 $50 $70 $90 $110 $130 $150 55.00% 65.00% 75.00% 85.00% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Chicago Area Hotel Market Trends
ADR ($) RevPAR ($/Room) Occupancy (%)
R e a l M a r k e t F a c t s , R e a l M a r k e t S o lu t io n s
For more information, contact: Appraisal Research Counselors 400 East Randolph, Suite 715 Chicago, IL 60601-7388 T 312.565.0977
F 312.565.3436
www.appraisalresearch.com
Ron DeVries, MAI, FRICS
Vice President Multifamily & Industrial 312.565.3432
rdevries@appraisalresearch.com
Steven Kelley, MAI
Manager Office & Retail 312.565.3429
skelley@appraisalresearch.com
Gail Lissner, CRE, SRA
Vice President
Residential Condo & Subdivision Projects / Hospitality
312.565.3423
glissner@appraisalresearch.com
William Miller
Vice President
Research & Special Projects 312.565.3421
wmiller@appraisalresearch.com
James Kutill
Vice President
Senior Care & Neighborhood Properties 312.565.3420
jkutill@appraisalresearch.com
Eugene Stunard, MAI
President 312.565.0977
estunard@appraisalresearch.com
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