Chicago Illinois Real Estate Blog

Facing a slowing hotel market, the owner of the Fairmont Chicago may delay a 225-room expansion of the hotel in an 87-story tower being built across the street.

Chicago-based Strategic Hotels & Resorts Inc. has a contract to pay $84 million to acquire about 15 floors in the Aqua building, a mixed-use high-rise under construction at 225 N. Columbus Drive, just east of the Fairmont. But the project could be pushed back as part of a broader plan by the Chicago-based real estate investment trust (REIT) to conserve cash and protect profit margins.

“Although this acquisition is under contract, given the current market conditions we are evaluating our options to defer or modulate this project to better time its delivery into a recovering market,” Jim Mead, the REIT’s chief financial officer, told analysts in a conference call Thursday, according to a transcript.

Designed by Chicago architect Jeanne Gang, Aqua also will have 474 apartments and 264 condominiums. Buyers have signed contracts for all but five of the condos in the tower, which stands 50 stories tall now and will be completed in 2009, says Joel Carlins, co-chief executive office of Magellan Development Group LLC, the building’s developer.

Magellan agreed in 2006 to sell the Aqua hotel space to Strategic Hotels, which backed the contract with $28 million in letters of credit. Magellan is willing to work with Strategic Hotels but “we haven’t gotten to the point where there’s been a formal request” from the REIT to renegotiate the deal, Mr. Carlins says.

The Aqua hotel space, which would consist entirely of suites, would function as an annex to the Fairmont, connecting to the existing hotel by a passageway underneath Columbus Drive. Including construction of the interior space, the project is estimated to cost about $125 million.

Yet Strategic Hotels is bracing for a downturn in the hotel market by deferring capital expenditures. Mr. Mead told analysts that the REIT had lowered its profit projection for the year due to “recent weak demand indicators” and “uncertainties in the economy.”
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The REIT is considering “evaluating or amending the (Aqua) contract with the help of the developer to delay the fit-out or delay in taking the contract,” Laurence Geller, the company’s chief executive officer, told analysts. “It is not optimal to put a project on in the face of declining demand.”

The occupancy rate at the Fairmont, which has 687 rooms, fell to 69.0% in the second quarter, down from 78.7% in the year-ago period, according to Strategic Hotels’ supplemental earnings report. The Fairmont’s average daily room rate, meanwhile, rose 5% in the quarter, to $243.73.

The company also owns the 792-room InterContinental Chicago on Michigan Avenue, which had an occupancy rate of 91.7%, up from 86.2% in second-quarter 2007. The hotel’s average daily rate fell 0.5% to $235.39.
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