One of Northwest Indiana’s largest and best-known hotels, the Radisson at Star Plaza in Merrillville, will get torn down early next year and replaced with a more upscale hotel with about 100 fewer rooms.
But despite the downsizing of one prominent property, developers have not been at all reserved about booking new hotel projects across Northwest Indiana.
Three new hotels opened in Northwest Indiana this year, and more than a dozen additional hotel projects are planned or already under construction. Developers have announced more than $73 million in investment in new hotels and more than 1,200 new rooms across the Region.
Horizon Bank Lake County Market President Rob Gardiner said the hotel industry is cyclical and has benefited from a strong economy. The Michigan City-based bank has financed local hotel projects in recent years.
“A strong economy drives both personal travel for recreational purposes and business travel for employees to do jobs and market their business,” Gardiner said.
“In addition, in good economic times travelers look for better quality places to stay and are willing to pay extra for nicer, more convenient or more interesting places to stay. I think you are seeing the combination of good economic times and a desire for more choices.”
New hotels currently are planned in Hammond, Munster, Crown Point, Highland, Merrillville, Portage, Whiting, Chesterton, Michigan City and LaPorte. The proposed hotels don’t have the conference space the Radisson did and don’t aim to bring in conventions for out-of-towners.
Instead, they’re more targeted at leisure travelers seeking respite just off the interstate, or business people who might be in town long enough for a sojourn in an extended-stay room.
Total investment in new hotel projects, some of which are still in the early planning stages, is on pace to easily surpass $100 million in Northwest Indiana over the next few years. The boom in new hotel construction also should mean a boost in employment, since the average hotel in Lake County employs around 25 workers, according to Bureau of Labor Statistics figures.
To put the current hotel boom in context, Lake County added six new hotels in the 11 years between 2004 and 2015, according to the Bureau of Labor Statistics. Nine new Lake County hotels opened or were announced in 2016 alone.
“You have noticed a trend toward construction of hotels nearer to medical facilities and neighborhoods to serve out-of-town visitors for when family members need medical services or weddings, parties for special events or holiday gathers,” Gardiner said.
“These travelers like to have options away from the major interchanges. Workers traveling from out of town generally prefer some of the extended-stay choices.”
Northwest Indiana, long plagued by negative perceptions, also is drawing more visitors from the greater Chicago area and beyond, said Micah Pollak, assistant professor of economics at Indiana University Northwest.
“Visitors are being attracted by everything from the Indiana Dunes National Lakeshore, major festivals like Pierogi Fest, apple orchards, the growing microbrewery industry and more,” he said. “There has also been a rise in general interest in the Region as property taxes continue to increase in Illinois.”
Northwest Indiana is a major economic region with a dynamic convention and visitors bureau that’s drawing visitors with youth sports, leisure travel and business meetings, said Patrick Tamm, president and CEO of the Indiana Restaurant and Lodging Association.
All the hotel projects are a vote of confidence in the local economy and also a reflection of a broader trend, Tamm said. New hotels have been springing up across the state, especially in metro areas like Indianapolis, Evansville and New Albany-Jeffersonville.
“Over the last couple of years, hotel investment has kicked into high gear,” he said.
“The cost of money is low. Developers often see hotels as complementing a big office park, a lifestyle center or a mixed-used development. They develop hotels, oftentimes with a restaurant. ... Hotels are key stakeholders in spurring new economic development.”
Showing a fresh face
Hotels need to be periodically replaced with fresher buildings, because they start to show age after seven years and become very dated after 25 years, Gardiner said.
National chains require franchisees to have newer properties to keep their brand names looking contemporary. Communities across Northwest Indiana also have been increasingly seeking hotels to bring visitors and more outside spending at youth sports complexes, craft breweries and festivals.
Banks have been willing to lend for such projects, especially when well-capitalized and helmed by experienced operators, Gardiner said.
“Like any business, being successful is harder than it looks, and hotels have a very high level of fixed costs that have to be paid, even if occupancy is very low,” he said.
“Once a hotel is able to reach good, consistent occupancy, they can provide very good investment returns to investors and be acceptable credit risks to lenders.”
Nationally, hotels are on pace for another record-breaking year, said Aaron McDermott, president of Schererville-based Latitude Commercial. The national hotel occupancy rate reached an all-time record 65.3 percent last year, and is 65.7 percent so far in 2016, according to STR Inc. data.
Hotel occupancy nationwide dipped as low as 54.6 percent during the Great Recession but is typically over 60 percent when the economy is humming along, according to STR statistics.
“Locally, I believe there had been a hesitancy to build anything so the demand for higher quality and newer brands finally caused the growth to start,” McDermott said.
“We were still recovering from the recession so you still saw a lot of turnover of existing products just like you saw in other sectors. There was also a hesitancy to lend on new construction for a number of sectors particularly in the hospitality market that caused the pent-up demand of new products.”
Confidence builds hotels
Hospitality development slowed considerably during the Great Recession in 2008 and 2009, as projects got delayed or dropped entirely, said Greg Gordon, a vice president and business banking group manager at Centier Bank, which has financed hotel projects like the Hilton Homewood Suites Extended Stay Hotel in Munster and a Hilton DoubleTree in Lafayette.
New construction and remodeling work in the hotel sector fell off for years, Gordon said. The rebound in hotel construction in Northwest Indiana has just been a microcosm of what’s occurred nationally.
“Because hotels tend to be large projects that require a significant amount of upfront planning and development, this created a four- or five-year period of very little hotel development in the local market,” Gordon said.
“As market conditions improved there was then somewhat of a race to meet the market, and construction activity picked up dramatically and that is still continuing today.”
Bankers balked at lending for new hotels because of concerns about the overall economy, Gordon said. But unmet demand piled up and opportunity emerged in the market.
“The forces of supply and demand then take over and activity picks up,” he said. “Banks began lending again on projects with strong sponsors and owners and viable franchises.”
Both Gordon and Gardiner credited the U.S. Small Business Administration’s SBA 504 program for facilitating hotel financing in recent years by reducing risk to lenders.
But there’s also demand created as hotel chains look to grow and replace aging facilities in the Region, Gordon said.
“All of the major hotel chains are rolling out new and interesting product types these days as competition drives the need for innovation in the hotel industry,” Gordon said.
“Hotels are really all about their individual markets and right now Northwest Indiana still has some unmet demand and a need for newer inventory and this has brought some strong operators to the Region.”
Under served no more
Some of the new hotel construction is driven by demand in communities that have been under served, Micah Pollak, of IUN, said. Munster, population 23,000, had only a single hotel until the expansion of Community Hospital created more demand.
And Crown Point, which has 28,000 residents and sits on the busy Interstate 65 highway, does not currently have a single hotel. Hawk Development, however, now is planning a 100-room to 130-room hotel as part of its $100 million Galleria Center on 109th and Delaware Parkway.
“Part of the reason these areas have been historically under served is local resistance to hotels locating in the city,” Pollak said.
“Over time, opposition has been decreasing as the need for hotel space becomes more apparent at the same time as hotels are more willing to adhere to stricter quality, pricing and aesthetics standards.”
Northwest Indiana also is a major transportation hub with Interstates 80, 90, 94, and 65, Pollak said. Travelers often prefer new hotels when they pull off the highway for some rest.
“We have an incredible amount of traffic both to and from Chicago as well as from across the nation pass through the Region,” he said.
“Many of the existing hotels in Merrillville and Hammond, as well as some of the new construction such as at Kennedy in Hammond, are located along these highways in part to serve these travelers.”