CHICAGO—Seven years ago, the trade in Chicago hotels was booming, with about $1.2 billion worth of transactions in 2006, up from less than $200 million in 2003. This trade crashed along with everything else in 2009, but researchers from Jones Lang LaSalle say the sector's profitability and profile has brought big investors back in a big way and the trade could soon approach those pre-recession levels. Since 2011, 87% of the buyer volume in the sector came from REITs and private equity, and based on deals in the pipeline, the city could see more than $1 billion in transactions between now and the end of 2014, according to JLL.

“The convention business in Chicago has always driven profitability,” says Adam McGaughy, managing director at JLL's Hotels & Hospitality Group. “But what I think has changed recently has been the visitation levels. In 2012, there were 46 million visitors to Chicago, which was up over 18% from 2010 levels. There is a goal to have 50 million visitors within the next five years. And a majority of that growth is coming from the international sector, so it's not just a convention destination, it's more of an international destination as well, which has created a more diverse mix in terms of demand generators.”

Other underlying trends should also bring investors back to Chicago. “The reason why there's so much activity is that occupancy levels are now above peak levels that were achieved in 2008,” McGaughy adds. Furthermore, he estimates, the city's overall ADR can still grow $12 before it hits $193, the peak level of 2008. “So the occupancy is there and the ADR is likely to bump back up again, so NOI is probably going to exceed peak levels at some point next year.”

“The REITs continue to be attracted to Chicago because they are yield-driven, and with the [current] NOI [levels], we're at a point where they can buy at a relatively attractive yield.” And “private equity has always liked Chicago because there is an opportunity from a value-add standpoint.” For example, “right now, I think private equity is certainly focused on the upside associated with that ADR improvement in the near-term.”

Over the next few years, JLL predicts, developers will add thousands of rooms to the city's hotel market, with about 1,700 rooms getting placed around McCormick Place, the main convention center, about 1,080 in the Loop, and about 1,200 in the stylish neighborhoods of River North and Streeterville. But the firm does not expect this activity will cause a glut, especially around McCormick Place. The nation's 15 largest convention centers have an average of 11,500 rooms within a 1-mile radius, but McCormick will only have 3,200, even after the new supply is finished.

Of the other proposed additions to the market, McGaughy points out that “the majority are lifestyle hotels,” such as the 40-room Soho House on the Near West Side, set for a 2014 completion. These represent a “new kind of upscale boutique sector that Chicago has never had before,” and are one of the big factors pushing up the ADR. “You don't see a lot of cookie-cutter-type hotels going up. It's a game-changing moment.”