“And All That Jazz”: The Chicago Accommodations Market Is No Longer so Simple

I remember my first time watching Chicago the Musical. I was a credit analyst at Morgan Stanley. We had just finished our summer training and as a treat, the firm paid for our tickets to see the Broadway hit. The seats were terrible. I think our seats were so high up that I was sitting behind one of the ceiling stage lights. Bebe Neuwirth (Lilith from Cheers) played the starring role of Velma Kelly, the nightclub singer who is accused of murdering her husband and sister and is sent to Cook County Jail. Who knew that Lilith could sing.

For those interested in a little mythology lesson, Lilith is one of the most notorious demons of Jewish and Mesopotamian mythologies. In some events, she is conceived as the first woman (created before Eve) and often represents terror and unbridled freedom. We love Lilith! So, what does any of this have to do with the city of Chicago? Well, Lilith, as a rebellious character and one to buck norms, is a sort of harbinger for the departure from traditional thinking. The Chicago accommodations market is seeing unprecedented growth and the old way of doing things is well, old. So how does one adapt to this rapid change? I would say we might be able to learn a thing or two from our friend Lilith.  

The number of Airbnb listings and short-term vacation rentals has reached an all-time high of more than 5.76 million listings globally (this is a net number and takes into consideration all overlap between the various providers). Chicago itself has over 4,500 active listings and over 2,400 de-active listings. The city has seen significant growth with over 1,500 listings added since January, which is a 51.5% growth from 2016 to 2017. Chicago’s short-term vacation rental market generated over $92.2 million in gross revenues over the past year. The impact on the local economy is real. While the hotel market continues to dominate the Chicago landscape with over 130 hotels in Chicago representing over 42,000 rooms, short-term vacation rentals have become an important piece of the equation, representing over 10.5% of the market.

The impact is real and visible. Hotel ADRs and Occupancy rates have seen a year-over-year downward trend. Average Hotel ADRs are down $4.80 with occupancy rates down 1.36%.  

While ADRs and occupancy rates are down for the Chicago hotel market, ADRs and occupancy rates for Airbnb and the vacation rental market are up. Vacation Rental occupancy rates reached an all-time high in June 2017 at $165.50 per night with a 73.9% occupancy rate. June, July and August 2017 were the most profitable months for the Chicago short-term vacation rental market, generating an aggregate $37.0 million in gross sales for the three month period alone.  

– Significant growth in the short-term vacation rental market is having a direct impact on hotels.

– There is a shift in consumer sentiment and an increased appetite for alternative accommodations.

– The total number of vacation rental listings is at an all-time high and growing.

– Short-term vacation rental ADR and occupancy rates are at an all-time high.

– There is a weakness in hotel ADR and occupancy rates.

The Chicago short-term vacation rental market generated over $92.2 million in gross sales from 2016 to 2017 with June 2017 reaching an all-time high of $12.8 million. This is an increase of over 212% growth this year alone. The number of active units also reached an all-time high of 4,373 listings. The supply has kept up with the demand.

 

The growth is most evident in Airbnb ADR and occupancy rates and the short-term vacation rental market which are up year-over-year and have not experienced the same compressions experienced by the hotel industry. The Chicago short-term vacation rental ADRs and occupancy rates are at all-time highs, even when taking into account the increase in total supply of both hotel and short-term vacation rentals. While hotel ADRs and occupancy rates are up 56.1% and 36.8% since January 2017, vacation rental ADRs and occupancy rates are up 37.7% and 27.0%.

While the 2017 average ADRs for Chicago hotel inventory is $199.79 (low of $130.79 and high of $267.39 with an average delta of $68.57), vacation rental inventory average ADRs are $137.78 (low of $122.00 and high of $165.50 with an average delta of $26.50). The average lower price point, combined with quality alternatives and a shift in consumer sentiment and attitude towards staying in a vacation rental has lead to an increase in vacation rental supply, robust occupancy rates, and significant revenue generation for the market.

How exactly is the market being impacted?

We took a look at a real life example and analyzed the direct impact that the new entrants (hotels, Airbnbs, other short-term rentals etc) to the market were having on the Hilton Garden Inn in Chicago’s North Loop located at 66 E Wacker PL 60601-7202.

You can see from the following analysis, that within a ½ mile radius of Hilton Garden Inn there are over 321 active short-term rentals with an ADR of $210.91 per night and an occupancy rate of 52.5%. These properties directly compete with the Hilton Garden Inn for market share and bookings.

When you expand the radius to 5 miles and 10 miles, the impact becomes more prevalent with over 3,290 and 4,932 active listings, an ADR of $166.97 and $145.00, and occupancy rates of 63.5% and 64.3%.

The volume of inventory that is instantly bookable (note: this is inventory that acts like a traditional online travel agent and does not require the hosts’ approval before a booking can take place) is predominant at over 1,793 listings, an ADR of $137.61, and an occupancy rate of 66.7%.

The volume of revenues generated by the vacation rental market within a ½ mile, 5 mile, and 10 mile radius of the Hilton Garden Inn is $6.9 million, $70.8 million, and $94.6 million. Again, these are dollars that traditionally went to the hotel market but are now being allocated to the alternative accommodations (non-hotels) market.

When you compare the inventory at this level and detail, you can immediately see how the alternative market is having a direct impact on hotels — in this particular case, how the Hilton Garden Inn is being directly impacted by the alternative accommodations market.

The old days of hotels dominating the accommodations market are fading. As alternative options continue to carve out an increasingly larger share of the market, those willing to abandon the old way of thinking will be ahead of the curve. Lilith would be pleased.

Joseph DiTomaso is the co-founder and CEO of AllTheRooms.

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