Investing in luxury hotels is not a timorous pursuit. It calls for a level of intrepidness, of boldness: there is a risk to it all, sure, but the upside can be remarkable.
For Gencom, the Miami-based investment firm, acquiring and repositioning luxury hotels is almost prosaic: they’ve been doing it for more than two decades now, becoming one of the indomitable forces in the luxury investment space.
Its latest acquisition fits snugly into its strategy. The St. Regis Chicago, which opened in May, is impressive and massive. The hotel, located in the city’s Lakeshore East Loop community, occupies the first 11 floors within three interconnected towers comprising guestrooms and branded residences. It is Chicago’s third tallest building and the 10th tallest building in the U.S. and was designed by American architect Jeanne Gang, who also designed Aqua in Chicago, and her architectural firm Studio Gang Architects.
Karim Alibhai founded Gencom in 1987 and in its nascent years the firm focused on the limited-service, full-service and extended-stay segments. It pivoted in the late 1990s and began to lean into luxury and branded residences, with successful investments in such assets as The Ritz-Carlton, Key Biscayne, The Ritz-Carlton Philadelphia and The Ritz-Carlton, Bachelor Gulch in Colorado. Since then, it’s put together a formidable portfolio that includes other luxury hotels such as Four Seasons Papagayo in Costa Rica and Rosewood and Fairmont properties in Bermuda. Its portfolio is valued at around $7 billion, which includes real estate holdings and operating platform interests. (Gencom is an investment partner in management company Pyramid Global Hospitality and also the Provenance Hotels portfolio.)
“Our team always has its eyes peeled for unique opportunities and situations where we can step into something relatively quickly given our overall understanding of all the pieces,” Alibhai told HOTELS.
The St. Regis Chicago was a quintessential deal for Gencom, which teamed up with fellow real estate company GD Holdings to acquire a majority stake in the 192-room property. The acquisition price was not disclosed, but as part of the deal, Chicago-based Magellan Development Group, the original developer of the hotel, née the Wanda Vista Hotel before the flag change, retained an ownership interest. JLL Capital Markets arranged a $76-million loan for Gencom, GD Holdings and Magellan through lender Värde Partners.
Despite the volatility of the financing markets, Gencom’s track record in the luxury hotel space was an ace in the hole when it came time to source debt. In fact, according to Alibhai, they received six bids to finance the project. The loan with Värde was completed in only 30 days, with Alibhai calling it one of the fastest financing closings its ever done. “The terms were pretty fair,” he said. “One of the things that you can’t help are that base rates have gone up so much in this last couple of months.”
FIRST RATE SECOND CITY NUMBERS
Downtown, urban core markets were rocked by the pandemic, but are inching back to optimal performance as leisure travel remains strong and is complemented by a return of corporate transient and group business. The Windy City didn’t escape the muck, but as Alibhai said: “We are big believers in Chicago.”
According to STR, Chicago’s luxury hotel market ran hot prior to the pandemic and is getting back to health. The four-week RevPAR average to May 20, 2023, was $230.66, compared to $239.94 at the same time period in 2019. Average daily rate in the 2023 period hit $324.55, complemented by an occupancy rate of 71%. In the 2019 period, occupancy was a whole 12 percentage points higher, but ADR was some $36 less.
On an annual basis, for full-year 2022 luxury hotels recorded RevPAR of $183.84 ($6 less than in 2019) with ADR of $307.48 ($264.82 in 2019) and occupancy of 59.8% (71.7% in 2019).
The data make it clear: luxury rates in Chicago continue to hit highs, but occupancy still has room to grow, enervated by the still lack of demand from the corporate and group sector.
The sector’s rather uneven performance numbers up to now made no matter to Gencom’s decision to invest in The St. Regis Chicago; in fact, they, combined with the state of current luxury supply, made the decision a rather easy one for Alibhai. “If you look at over the course of 20 to 25 years, luxury hotels and resorts have the best RevPAR growth over long periods of time and the best [real estate] appreciation,” he said.
The Chicago market’s high barriers to entry was another reason the deal was attractive, said Alibhai. According to him, The St. Regis Chicago is the first luxury new-construction hotel built within the last 10 years in the city. As such, luxury competition is limited, Alibhai argued, which allows luxury hotels to yield up. He specifically cited The Langham, Chicago, Four Seasons Hotel Chicago and The Peninsula Chicago as the hotel’s competitive set. (Other luxury hotels in the city include Waldorf Astoria Chicago, The Ritz-Carlton, Chicago and Park Hyatt Chicago.)
“This was part of the attraction,” Alibhai said. “Of course, it is not for the faint of heart because the beta of these projects can be very volatile. You have to be able to get through capital cycles because it takes a lot longer to get these developments underway. You could easily have started in a boom period and end up in a recession period.”
FAST TO THE FINISH
There is a long timeline when it comes to building a hotel from scratch as opposed to buying one. In the case of Gencom, the hotel was already erected, obviating some of the risk.
As Alibhai recounted it, the deal came about, like many do, through knowing the right people. This was 2020, and as he explained it, Gencom’s people knew Magellan’s people, Wanda Group (a Chinese conglomerate that in recent years plowed massive amounts of capital in U.S. businesses, from AMC Theatres to real estate) pulled out and there was space for a partner. This was in the throes of the pandemic; a pall of fear existed.
Magellan partnered with JP Morgan and Goldman Sachs on the project; subsequently, Gencom came in with its partner, GD Holdings. “It created a transaction structure that allowed Magellan to take Wanda out and then with our relationship that we enjoy with the Marriott luxury group, we were able to get them to support us,” Alibhai said. (Marriott International operates the hotel.)
A large component of the project is residential sales, which typically complement a luxury hotel build. There is some 1 million square feet of residential space within the development and Magellan has spearheaded the sale of it.
“Having the alignment between hotel owner and residential was important to Magellan and it was very good for us,” Alibhai said. “We were able to enter the acquisition at a very attractive basis, which gives us very good long-term holding power while the city recovers.”
Chicago-based Lettuce Entertain You is responsible for operating the food and beverage at The St. Regis Chicago, including Japanese restaurant Miru and Tuscan steakhouse Tre Dita.
Alibhai is a staunch believer in luxury hotel investment; it’s gotten him this far. His lodestar, curiously, is not a hotel brand; rather, it’s a retailer, LVMH, which he said has done an impeccable job harnessing and growing a massive stable of luxury brands.
“They are the best teacher in the world,” he said. Alibhai is a good pupil.
