As Hilton departs Mag Mile Conrad Chicago hotel faces foreclosure

The move comes almost 16 months after the Geller-Wanxiang venture was hit with a foreclosure complaint alleging they defaulted on their $70 million loan tied to the property, according to Cook County court records. That complaint is still pending, court records show, while the owners and their lender, Washington DC-based Union Labor Life Insurance, have been quietly shopping the hotel to prospective in an effort to resolve the dispute, sources familiar with the offering buyers said.

The property is one of the highest-profile examples of distress in a local hotel market that has been pummeled by the COVID-19 pandemic. The slow recovery of the downtown hospitality sector from the public health crisis has decimated the value of hotel properties, leaving many owners underwater, meaning their properties are worth less than the debt tied to them. The Palmer House Hilton and JW Marriott Chicago are among the major downtown hotels whose owners were hit with foreclosure lawsuits early in the pandemic.

Luxury hotels like the Conrad have also been especially slow to bounce back from the pandemic, weighing down local hotel performance. Average revenue per available room at downtown hotels in 2021, a metric that accounts for both occupancy and room rates, was 40% below 2019 levels, according to hospitality data and analytics firm STR. That underperformed the average among the nation’s 25 largest markets, which were down by an average of 33% compared to 2019, STR data shows.

It’s unclear how much capital Geller and Wanxiang invested turning a former block of offices in the Erie Street building into the Conrad, which opened in 2016. Their venture paid more than $34 million in 2014 for what was then the offices of advertising agency DraftFCB, then took out the $70 million loan in 2015, according to Cook County property records.

Based on prices paid for other downtown hotels in recent months, their equity in the property has likely been wiped out, and a sale of the hotel today would almost certainly result in a major financial haircut for Union Labor Life Insurance. A handful of hotel investor sources estimated the property might trade today for less than 75% of the debt balance, if a buyer were to continue to operate the property as a hotel.

But Hilton’s departure also opens up the prospect of a buyer picking up the property to reposition it as something else, especially as business travel and conventions and trade shows on which downtown hotels rely are slow to come back. Demand for downtown apartments, meanwhile, has already surpassed pre-pandemic levels.

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