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Blackstone Hotel

Chicago,

Project Type: Hotel

Volume 39 Number 07

April–June 2009

Case Number: C039007

PROJECT TYPE

A 23-story, 332-room luxury hotel located in downtown , Illinois, underwent a two-year renovation and reopened in March 2008. Built in 1910, the hotel has hosted 12 presidents and its Vice- Presidential Suite is the original “Smoke-Filled Room” from which the phrase originated. Developer Sage Hospitality Resources worked to ensure that historic details were repaired or replaced when necessary, yet the hotel also includes modern conference and event facilities, as well as a coffee shop and full-service restaurant. Listed on the National Register of Historic Places and designated a city of Chicago landmark, the rehabilitation of the structure was funded in part through state and federal historic tax credits as well as tax increment financing (TIF). The hotel is now part of the Marriott Renaissance brand.

LOCATION Central Business District

SITE SIZE 0.44 acre/0.18 hectare

LAND USES Downtown Hotel, Restaurant, Convenience Center

KEYWORDS/SPECIAL FEATURES

 Adaptive Use  Boutique Hotel  Historic Preservation  High-Rise Building

PROJECT ADDRESS

636 South Michigan Avenue Chicago, Illinois

WEB SITE

www.marriott.com/chirh

DEVELOPER

Sage Hospitality Resources

Denver, Colorado 303-595-7228 www.sagehospitality.com

ARCHITECT AND PLANNER

Lucien Lagrange Architects Chicago, Illinois

312-751-7400 www.lucienlagrange.com

INTERIOR DESIGN

The Gettys Group, Inc. 312-836-1111 Chicago, Illinois www.gettys.com

GENERAL CONTRACTOR

James McHugh Chicago, Illinois 312-986-8000 www.mchughconstruction.com

HISTORIC PRESERVATION CONSULTANT

Heritage Consulting Group Portland, Oregon 503-228-0272 www.heritage-consulting.com

GENERAL DESCRIPTION Part of the Marriott Renaissance brand, the Blackstone Hotel is a historic 332-room luxury hotel with conference and event space, a Starbucks coffee shop, and a full-service restaurant. Since its construction, the 23-story building has had a long and storied history as a luxury hotel, and is known for hosting 12 U.S. presidents. It fell into disrepair in the late 20th century and was closed in 1999. Sage Hospitality purchased the structure in 2005, performed an extensive renovation, and reopened it in March 2008.

Based in , Colorado, Sage Hospitality Resources is a developer and manager of hotel projects across the United States. It has developed approximately 20 hotels, seven of which are renovations of historic buildings.

BACKGROUND AND SITE

The Blackstone Hotel was built in 1910 by the Drake family—the developer of Chicago’s famous —and was designed by firm Marshall & Fox. A notable example of beaux arts classical design in the city, the hotel is named after , one of the founders of the .

For many years, the Blackstone was one of the premier luxury and business hotels in Chicago, and, as mentioned earlier, 12 presidents stayed there—with being the last. In 1986, it was listed on the National Register of Historic Places and in 1998 was listed as a city of Chicago landmark. Before Sage Hospitality bought it, the structure was owned by the Maharishi Mahesh Yogi—best known as the spiritual adviser to the Beatles—who planned to open the hotel as one of many meditation centers around the United States. The yogi’s plan did not come to fruition, however, and the building was not substantially updated or renovated. It finally closed in 1999. Around that time, a couple of hotel developers (including Sage Hospitality) considered renovating the building, and later a redevelopment fell through. Finally, in December 2005, Sage Hospitality purchased the edifice with the intention of restoring it as a luxury hotel.

The Blackstone is located in downtown Chicago, just outside the Loop, at 636 South Michigan Avenue, and at the northwest corner of Michigan and Balbo Drive, across Michigan Avenue from Grant Park. The Chicago Hilton is situated across Balbo Drive to the south, and Columbia College and its Museum of Contemporary Photography are north of the Blackstone on Michigan. The Merle Reskin Theater sits immediately to the west of the Blackstone.

The closest competition for the Blackstone is the aforementioned Hilton and also the historic Palmer House, located approximately one half mile (0.8 km) north in the Loop. Both of these historic luxury hotels are substantially larger, each with more than 1,000 guest rooms, whereas the Blackstone has 332 and is somewhat more intimate as a result.

Indeed, intimacy is a key part of the Blackstone’s appeal. The hotel’s direct competition is considered to be similar- sized, style-oriented products that are in and near the Loop. Hotels such as the W Chicago City Center, and both the Allegro and the Hotel Monaco (Kimpton hotels) offer upscale accommodations with an independent feel. Major brands such as Marriott, Hilton, Sheraton, and other commonly recognized franchises tend to rely on a standard formula for systemwide consistency and mass appeal. Whether operating as “soft-branded” affiliates or completely independent hotels, properties like the Blackstone and its competitors hope to lure guests with style, personalized service, and unique features such as architecture or location.

Licensing the Blackstone as an affiliate of Renaissance Hotels and Resorts gives the owner and operator access to Marriott’s powerful sales resources, including its global marketing, reservations sales system, and customer loyalty programs. Guests can book a room at the Blackstone through Marriott Worldwide Reservations and on the Marriott Web site, and members of Marriott Rewards (the frequent-guest club for Marriott brands) receive points and perks while staying at the Blackstone. Under the Renaissance flag, owners and operators typically have greater flexibility with the brand’s style and design requirements, allowing distinctive properties like the Blackstone to maintain their unique character.

DEVELOPMENT, DESIGN, AND CONSTRUCTION Construction (which started in March 2006 and ended in March 2008) lasted longer than it would have for new- construction hotels of similar size due to the attention to detail necessary to restore the numerous portions of the hotel that were deemed historic. The interiors of most guest floors were extensively renovated to optimize the layout and allow for more functional modern conveniences.

As noted, the hotel stands at the northwest corner of Michigan Avenue and Balbo Drive. The main entrance to the lobby is on Balbo, although another entrance is located on Michigan Avenue that accesses the retail spaces and the lobby. Retail spaces on the street level facing Michigan Avenue include a Starbucks coffee shop, and an entrance to the main hotel restaurant.

Building plans list the ground-level retail space along Michigan Avenue and the lobby to be on the same level, although the lobby is located approximately ten steps—a half-story—above the street level. The lobby contains reception desks and a lounge area for guests and visitors. It is accessible from the stairs at the main entrance off Balbo Drive and interior stairs from the street level on the Michigan Avenue side. As part of Sage’s redevelopment and modernization, an elevator was installed to allow for greater accessibility between the lower-level half-floors.

The concourse level is below the lobby/street level. It contains the hotel’s executive offices, a business center, three meeting rooms, and the historic barber shop, which is now used as event space.

Located directly above the street-level entrance and Starbucks is the main dining room of Mercat a la Planxa, the hotel restaurant. During the day, Mercat is accessible via the original broad staircase from the hotel lobby, but this entrance is sealed during the busy dinner service. Guests then use the restaurant’s Michigan Avenue entrance into Mercat’s street-level lounge before ascending to the dining room.

The third floor is a mezzanine level with a private dining room and a club room for Marriott Rewards members to access during breakfast and happy hour times. The fourth floor contains the historic ballroom and a meeting room, and the fifth floor comprises the Art Hall, the English Room, and an additional meeting room.

Floors six through 23 contain guest rooms. The sixth floor features guest rooms and a fitness center. Floors seven, eight, and 11 through 17 are nearly identical, with 22 guest rooms each. Floors nine and ten are similar, with the exception of the Presidential and Vice-Presidential suites, which are located above one another. Both suites were restored to their original condition as part of the project’s historic certification.

Floors 18 through 22 are similar to other guest room floor plates, but guests on these floors pay premium room rates and receive additional services such as airport pickup and drop-off as well as room and concierge service; they also are granted access to the Hubbard Place Lounge, located on the 23rd floor. Formerly a maintenance shop, the 23rd floor was renovated and converted into the Hubbard Place Lounge, two boardrooms, and several larger guest suites. This portion of the hotel is housed under the building’s distinct mansard roof, giving the lounge and boardroom guests views through the porthole windows.

All guest room floors were extensively renovated. Corridors were shifted and widened so that room layouts could be repositioned for modern functional hotel layouts. For example, in the original hotel, all bathrooms were located next to the exterior wall of guest rooms. They are now next to the corridors, as is the case with most contemporary hotels. However, this required extensive work to properly align the new plumbing stacks, optimize room size, and maximize the overall “key count” (total number of rooms).

Guest rooms range in size from 300 to 500 square feet (28 to 46.5 sq m). They typically include a king bed, valet stand (for keys, wallet, phone, etc.), small bookshelf, desk, reading chair, and minibar. Bathrooms feature walk-in showers. Upgraded Hubbard Place rooms and suites (on floors 18 to 22) may have double vanity sinks, and a large bathroom mirror with a small inset flat-screen television. The desks, minibars, and bathroom counter surfaces are marble. Included on the bookshelf in every room is a small selection of books with a local Chicago flare, which is an effort at numerous Renaissance hotels to provide guests with a connection to local history and folklore. HISTORIC PRESERVATION

The historic preservation of the Blackstone Hotel is the most significant aspect of the project and includes the preservation and restoration of several features of the building’s interior and exterior. The developer had to work with four different entities to either gain historic preservation status or secure historic tax credit financing for the project.

Sage worked with the Chicago Landmarks Division of the city of Chicago Planning and Development department and the National Trust for Historic Preservation for local and national landmark status. Sage also worked with the Illinois State Historic Preservation Office and the for state and national historic tax credits.

The historic consultant on the project, Portland, Oregon–based Heritage Group, played a key role in tax credit compliance for the Blackstone. It assisted early in the process in determining whether the project was even eligible for tax credits. Once it was established that the Blackstone was indeed a likely candidate for tax credits, Heritage was responsible for working with the Illinois State Historic Preservation Offices and the National Park Service to pinpoint exactly what historic features and elements were to be preserved or restored and how. Once the project was complete, the Heritage Group documented that the developer had indeed followed through on the historic elements.

As noted, Sage also worked closely with the Chicago Landmarks Division, which was responsible for the historic designation of the property. In its experience renovating historic hotels around the country, the developer notes that the Chicago Landmarks Division was stricter than its peer agencies in other cities.

The Blackstone Hotel contains eight specific historic elements that were required to be preserved or renovated to their original condition. The eight historic features include the following:

 the exterior facade;  the main lobby;  the Presidential Suite;  the Vice-Presidential Suite (aka “the Smoke-Filled Room”);  the English Room;  the Art Hall;  the Crystal Ballroom; and  the barber shop.

The exterior facade was by far the most difficult portion of the hotel to restore. Nearly a century of exposure to the elements had resulted in the weathering of the exterior. Extensive restoration was completed, including the recasting of countless pieces of terra-cotta.

Historic features of the main lobby include dark wood paneling, fireplaces that are no longer functional, chandeliers, and an ornate plaster ceiling.

Located on the tenth floor, the Presidential Suite comprises an entry foyer and parlor, a master bedroom and bathroom, and a large living/dining room. As mentioned earlier, the Blackstone hosted 12 presidents from its original opening through the 1970s.

Also known as the Smoke-Filled Room, the Vice-Presidential Suite is similar in layout to the Presidential Suite, but is located one level below it on the ninth floor. It is called the Smoke-Filled Room because it is where, in 1920, delegates of the Republican Party, which was hosting its convention in Chicago, met in private to select a candidate. They chose Warren G. Harding. When they emerged from the Vice-Presidential Suite with their decision, a reporter waiting outside was met with a cloud of cigar smoke as the door opened. The reporter described the decision as having been made in a “smoke-filled room.” The phrase has stuck through the decades when one is referring to important political or business decisions that are made behind closed doors.

The English Room, located on the fifth floor, consists of wood paneling and ceiling beams that belonged to an unspecified English aristocratic family. The materials date to the 17th century, and were disassembled from an original building in England in 1908 and moved to the Blackstone.

Also located on the fifth floor, the Art Hall is a large hall and event space outside the English Room and an additional meeting room. True to its name, it has always been a venue for paintings and other art. In fact, the art on display in the Art Hall is part of the financing agreement with the city of Chicago that features art created by local artists.

Located on the fourth floor, the Crystal Ballroom is the main hotel ballroom. It features an ornate ceiling and chandeliers, as well as a balcony that wraps around the room. The 1936 wedding reception of Richard J. Daley, who served as mayor of Chicago from 1955 to 1976 and is the late father of the current Mayor Richard M. Daley, was held there. A scene from the 1987 movie The Untouchables was filmed in the Crystal Ballroom.

The aforementioned barber shop, located on the concourse level below the lobby, was originally the hotel’s barber shop. Numerous presidents got haircuts there prior to local appearances. Al Capone also is known to have patronized the barber shop, and another scene from The Untouchables was filmed there.

The eight historic elements were restored to their original or as close to their known original condition as possible. It took longer to address some elements—for instance, the building’s overall exterior, which was in worse shape than its appearance had indicated. As noted, countless pieces of the terra-cotta exterior had to be removed and recast, a process that added cost and time to the project.

FINANCING, MARKETING, AND PROGRAMMING

Financing for the Blackstone Hotel came from a variety of sources, including historic tax credits, tax increment financing (TIF), traditional debt, mezzanine financing, and equity. Of the $128 million total project cost, $47.6 million came from tax credits and public incentives. Of that, $14.9 million was new markets tax credits, $14.7 million was federal rehabilitation tax credits, and $18 million was from TIF and other city of Chicago grants.

Ranging from $199 to $469 per night, room rates are projected to average more than $300 nightly once the hotel is fully stabilized in the market. The upgraded Hubbard Place rooms and most of the east-facing rooms with Grant Park and views earn a premium.

Introducing a new hotel into a highly competitive market like downtown Chicago requires an allowance of time for business activity to ramp up. Generating awareness and repeat business among customers, corporate clients, and meeting planners begins with a strong preopening sales effort and continues well past the hotel’s opening date. Typically, hotels reserve at least three full years in their pro forma modeling to reach stabilized performance levels. The Blackstone’s local recognition as an iconic hotel, coupled with sales distribution systems through its Marriott affiliation, will help accelerate the pace of stabilization. Those are also key advantages for Blackstone, as the local market and the entire hotel industry face unprecedented challenges in a slowing economy.

Sage anticipates that three-year stabilization will show the Blackstone positioned evenly with its direct competitors in terms of occupancy, expected to be in the mid–70 percent range. By comparison, hotels in downtown Chicago collectively average 70 to 72 percent occupancy for the year. The hotel anticipates garnering a substantial premium over the competition in average daily rates (ADRs), earning more than 40 percent over the composite average of its direct competitors. Revenue per available room (RevPAR) is a function of both rate and occupancy and serves as a key industry metric. Sage projects that the hotel’s RevPAR could reach a point that is 40 to 50 percent over the competitive average. This is a compelling premium in the asset’s earning potential, making the Blackstone particularly attractive to future potential investors.

Occupancy, ADR, and RevPAR are key performance measures for the rooms division of hotel operations, which in the case of the Blackstone represent roughly two-thirds of total revenue. The hotel generates additional revenue through its three-meal restaurant and lounge, banquets and catering service, and extra guest services and in-room charges like laundry, movies, and rentals.

Since opening, Mercat a la Planxa has proven to be an enormous critical and financial success. The design of the restaurant in relation to the hotel has been essential to its popularity among visitors and locals for destination dining. The space is defined so that the busier dinner crowd enters through the lounge, providing animation and activity at the Michigan Avenue entrance. For the convenience of the hotel’s breakfast and lunch patrons, the dining room is accessed directly from the lobby. Mercat was listed in 2007 by Food + Wine Magazine as one of its Most Anticipated restaurant openings for 2008; Mercat then earned distinction from Esquire Magazine as one of the country’s Top New Restaurants in 2008.

EXPERIENCE GAINED

The renovation of the historic Blackstone Hotel has been a success. The developer’s advice to others seeking to do a historic renovation is to set aside more money for contingency as well as more time to complete the project. Unanticipated costs and delays will always arise.

Typical contingency in development is around 10 percent, which developers add to a pro forma to address unexpected cost increases due to materials or time/labor issues. Sage Hospitality recommends 15 or 20 percent contingency for a historic renovation. For the same reason, Sage suggests adding a few months to the development schedule. The additional cost and time required to address the exterior of the Blackstone lend credence to this guideline.

The developer also emphasizes the importance of having good drawings. Particularly for historic buildings, a set of original drawings is a start, but historic drawings are not always right. It is also important to have more recent drawings that may show minor and major changes to the building’s structure; that may save time and money, as they can account for changes over the years. It is also crucial to have your architect know the building inside and out.

The developer indicates that you cannot do enough forensic research, meaning it is impossible to know everything about a building until you own it. A seller is not likely to let you in and allow you to start peeling back carpet, ripping holes in walls, and investigating other elements. Thus, historic renovations automatically bring additional risk to a real estate deal, but the developer believes that the additional risk, time, and cost, in the case of the Blackstone, were worthwhile.

PROJECT DATA LAND USE INFORMATION Site area (acres/hectares): 0.44/0.18 Gross building area (square feet/square meters): 314,666/29,233 Percentage building site coverage: 72 Floor/area ratio (FAR): 16.4 Floors above grade: 24

BUILDING USE INFORMATION Net Area Use (Square Feet/Square Meters) Lobby/reception area 13,850/1,286 Guest rooms 211,121/19,613 Restaurant/lounges 7,500/696 Health/fitness 13,850/1,286 Administrative offices 8,500/789 Back-of-house (services) 22,000/2,044 Circulation 25,340/2,354.2 Meeting rooms 12,500/1,161.3 Total 314,661/29,233

GUEST ROOM INFORMATION Number of rooms: 332 Standard room size (square feet/square meters): 400/37 Luxury room size (square feet/square meters): 1,300/121 Presidential Suite size (square feet/square meters): 1,300/121 Range of room sizes (square feet/square meters): 300–1,300/28–121 Average room rate per night: $344 Range of rate per night: $199–$469

DEVELOPMENT COST INFORMATION Site acquisition: $22 million Construction costs: $72.9 million Furniture, furnishings, and equipment (FF&E): $10 million Soft costs: $23.1 million Total Development Cost: $128 million

DEVELOPMENT SCHEDULE Site purchased: December 2005 Construction started: March 2006 Project completed: March 2008

DRIVING DIRECTIONS

From Chicago O’Hare International Airport: Take Interstate 190 east to Interstate 90 headed east toward Chicago. I-90 will merge with Interstate 94. After approximately 18 miles (29 km) on I-94, take the Congress Parkway exit and continue traveling eastward. After going a quarter mile on Congress, make a right onto Michigan Avenue heading south. The hotel will be on the right four blocks later at the intersection of Balbo Drive and Michigan Avenue. The hotel is at 636 South Michigan Avenue.

Driving time: 25 minutes in nonpeak traffic.

From Chicago Midway Airport: Head north on South Cicero Avenue (IL-50) and continue for nearly two miles (3.2 km). Turn right onto Interstate 55 heading north toward Chicago. Stay on I-55 for just under six miles (9.6 km), then merge onto Interstate 90/Interstate 94, continuing to travel north. Merge onto Interstate 290 (the Eisenhower Expressway), which then becomes Congress Parkway. After going a quarter mile on Congress, take a right onto Michigan Avenue heading south. The hotel will on the right four blocks later at the intersection of Balbo Drive and Michigan Avenue. The hotel is at 636 South Michigan Avenue.

Driving time: 17 minutes in nonpeak traffic.

Clair Enlow, report author Jason Scully, editor, Development Case Studies David James Rose, copy editor Colleen DiPietro & Jamie McAfee, online production Ted Thoerig, editorial associate

This Development Case Study is intended to serve as a resource for subscribers in improving the quality of future projects. Data contained herein were made available by the project’s development team and constitute a report on, not an endorsement of, the project by ULI–the Urban Land Institute.

Copyright © 2009 by ULI–the Urban Land Institute 1025 Thomas Jefferson Street, N.W., Suite 500 West, Washington, D.C. 20007-5201

A historic 23-story building just outside the Loop in downtown Chicago, the Blackstone Hotel is a 332-room luxury hotel developed by Sage Hospitality Resources and managed under the Marriott brand.

Listed on the National Register of Historic Places and designated a city of Chicago landmark, the hotel, in its heyday, was visited by 12 U.S. presidents and notable Chicago-area politicians and personalities.

The interiors of most guest floors were extensively renovated to optimize the layout and allow for more functional modern conveniences while the exterior was restored to its former glory.

The Blackstone is located at the intersection of Balbo Drive and Michigan Avenue and its lobby fronts both streets. Also accessible from Michigan Avenue is the hotel restaurant, Mercat a la Planxa, as well as a Starbucks café.

Rooms range from 300 to 500 square feet (28 to 46.5 sq m) in size. Guests staying in the accommodations on floors 18 to 22 pay premium room rates and receive additional services such as airport pickup and drop-off as well as room and concierge service.

The building is known as the place where the phrase “smoke-filled room” originated. In 1920, during the Republican Party Convention, delegates met in the hotel’s vice-presidential suite to choose a vice-presidential candidate. When they emerged from the suite with the name of their chosen candidate—Warren G. Harding—a reporter waiting outside was met with a cloud of cigar smoke as the door opened. The reporter described the decision as having been made in a “smoke-filled room.”