COVER STORY, OCTOBER 2006

STAY EXTENDED
The Midwest hospitality industry is integrating condo residences into the mix and redeveloping historical properties to draw consumer interest.
Luci Cason

Hotel redevelopment is taking off in the Midwest, especially in large cities like Chicago and Minneapolis. “In downtown urban areas, you’re seeing more redevelopment than new construction because construction costs keep going up astronomically,” says Steven Marx of the Chicago-based consulting firm Hotel Source.

This redevelopment ranges from minor re-branding or freshening up of an asset to outlays on renovation than total more than developers’ original acquisition costs. To finance costly new construction and redevelopments, many developers are pairing residential components with their hotel projects.

“You’re seeing many hotels built with mixed-use or residential because it spreads the risk. Because of the expense associated with land right now in urban areas, it’s really hard to just put a hotel on a site,” Marx says. “But if you can spread the risk, it’s easier to finance. Also, there’s the cachet that if you can put a name on a residential building, like Ritz Carlton or Four Seasons, you’re going to get a big premium. You get a certain expectation of quality that you’re not going to see with a no-name.”

Increasingly, travelers to the Midwest are looking for hotels that have novel historical components, but that also feature all the modern conveniences and amenities of newly constructed hotels.

“There’s an expectation that the rooms and bathrooms are going to be large, and that the technology is going to be state of the art,” Marx says. “That’s something that travelers are demanding more and more and developers are responding to that.”

Ryan Companies is redeveloping the Farmers & Merchant Bank Building in Minneapolis into a Westin hotel.

Long interested in redeveloping the property, Ryan Companies decided that conversion to a hotel was its most economically feasible adaptive reuse. Originally completed in 1942, and recently placed on the National Historic Register, the limestone Farmers and Mechanics Bank building was built in the Streamline Modern International Style – a very “muscular” style that contrasts sharply with an international-style, 11-story tower that was added to the building in 1963.

“It’s a really interesting contrast in styles because this was a conservative bank that went for a relatively edgy style back in 1963,” says Joel Schurke, Ryan Companies’ director of development.

When completed in March 2007, the hotel will feature 212 rooms, 10,000 square feet of retail, and a 15,000-square-foot restaurant incorporating many of the stunning features of the original bank building. The hotel’s rooms will be standard Westin design. However, other areas, including the three-story lobby, will showcase many of the building’s original design elements, like the original chandeliers and wood carvings featuring farming and industrial merchant scenes. The vault areas of the former bank’s lower levels will be converted into meeting rooms and many of the former banking offices will be converted into private dining rooms.

The interior lobby space of Ryan Companies’ new Westin hotel redevelopment in Minneapolis.

Mixing the old with the new can be difficult, though. Challenges include fitting Westin’s prototypical guestrooms, pool, fitness, restaurant and bar spaces into an existing building footprint, and making sure that the exterior renovation of the building comports with National Historic Registry guidelines.

“They have a lot to say about what can and can’t be done on the exterior expression of the building,” says Jeff Hultgren, Ryan’s hospitality construction team leader, who notes that redeveloping an historic building of this scale involves constant communication with local, state and national historic preservation entities.

The Westin Minneapolis isn’t the first redevelopment of an historically significant property that Ryan Companies has undertaken. It has also redeveloped the city’s Grain Belt Brewery, originally built in 1891; the 1929-built Sears Building; and will next year begin redeveloping Forshay Tower, also built in 1929, into the W Minneapolis Forshay.

Schurke notes that Ryan Companies recognizes the value of converting historic buildings because such conversion often results in high-quality materials and craftsmanship that could not easily be recreated with new construction.

“The upside is that, from a community standpoint, it extends these buildings’ lives, and from Ryan’s standpoint, it allows us to use features creatively,” says Schurke of redevelopment in general. “It brings finishes and features that you really couldn’t afford to put in today. Now, it’s not cheap to restore those things, but at the same time it brings an aesthetic quality that is going to be attractive to guests.”

Redeveloping properties like the F&M Banks building as hotels, “keeps these wonderful, historic buildings still open to the public,” Hultgren notes. “If they were developed as condominiums or some other private use, the public could longer go in and view the building.”

It’s not only this mix of high-quality construction with modern amenities that will attract travelers to the Westin, but also the personal connection that many of the city’s residents feel with the former F&M Bank building. With Wells Fargo’s Midwest operations office across the street, “you have a building full of bankers who can go into a former 1940s bank lobby or into vaults on the lower level to conduct their business,” says Hultgren. Adds Schurke, “People like me who grew up here and banked at F&M, want to go and eat at this Westin now. That’s a unique quality that, from a local standpoint, will help to drive revenue.”

In Chicago, after sitting vacant for six years, the city’s Blackstone Hotel, originally built in 1910, is also being restored to its former glory. Various proposals were submitted for the property’s redevelopment before Denver-based Sage Hospitality Resources acquired it with plans to open it as part of the Marriott Renaissance brand.

The $112 million restoration is being completed by Chicago-based James McHugh Construction Company, which broke ground last March. When the Blackstone opens fall 2007, the 22-story hotel will include 332 hotel rooms, a small retail space, and a restaurant that the Marriott Restaurant Group is positioning as a destination in and of itself. “It’s really going to have an identity apart from just being a hotel restaurant,” says Brian Hardy, McHugh’s project manager for The Blackstone.

The project will return much of the hotel’s exterior to its 1910 condition. Most of the exterior terra cotta cladding is either being removed and replaced or cleaned and re-installed. Additionally, the walls on all the guest room floors are being completely demolished and re-built, with new plumbing, electrical and HVAC systems installed.

A redevelopment of this scale is not without its difficulties. Accessing the property itself has been a challenge, as much of the hoist and crane work has had to be done from an adjoining alley. Additionally, the hotel contains a number of historic rooms, which McHugh has been careful to preserve in the midst of demolition. These rooms include the hotel’s ballroom, lobby, great art hall, barbershop and one known simply as “the smoke-filled room,” once a popular hangout for politicians.

But challenges are the nature of the beast when it comes to renovations, especially in high-density areas like downtown Chicago, Hardy says. “A lot of renovation work occurs in the downtown loop area, so you’ve got a lot of neighboring houses and a lot of traffic,” he says. Also, construction vehicles may have difficulty getting up and down narrow alleys, and the placement of construction equipment can also pose a problem. “With new construction, you can figure out the best locations for hoists and cranes, but with renovation work, you are stuck with putting these in the best location possible,” he explains. “You can’t always set up a job the way you would with a new project, so you’re forced to deal with existing conditions.”

Although hotel renovations and redevelopments are now popular in downtown Chicago, one notable new-construction project will soon make a remarkable change to the city’s skyline. 400 North Lake Shore Drive is being developed as a $1.2 billion, 124-story residential tower, slated to be North America’s tallest building.

The Fordham Company had planned to develop the site as Fordham Spire, but the property was purchased by Dublin, Ireland-based Shelbourne Development Ltd. & the Shelbourne Group in July. Shelbourne Executive Chairman Garrett Kelleher was seeking development opportunities in Chicago last summer when he was approached by Christopher T. Carley, Fordham’s founder and CEO, to provide gap financing. Kelleher told Carley that, instead of providing financing, he was interested in purchasing the development itself. A week later, in a whirlwind transaction, Kelleher closed the deal via Blackberry during a family vacation.

“He’s always kept his finger in Chicago affairs and looked here for projects,” says Shelbourne’s General Counsel Tom Murphy of Kelleher, who moved to the city in 1986 and lived there for 10 years. “He loves Chicago and he’s very excited about this property.”

Due diligence has begun on the project, which has already received preliminary design and planning approval by the city. Although architectural plans are still in the preliminary stages, the obelisk-shaped property, designed by architect Santiago Calatrava, is sure to feature prominently in Chicago’s skyline.

As such, it was important for Shelbourne and the previous developer to get the city’s input and approval on such a major project. “Chicago has a very robust political environment with lots of participation from neighborhood groups,” Murphy says, noting that Fordham had met with many of the groups to air questions and concerns.

“The design of this building is very alluring and architecturally significant, and the fact that it’s a very slim building cuts down on the loss of people’s views or light, so that was a major consideration,” Murphy notes.

Leading the trend of mixing residential and hospitality components, the project will integrate high-end apartments into the floors above the hotel guestrooms. When complete, the building will feature 150 hotel rooms, 300 luxury residential apartments on its upper floors, and about 50,000 square feet of retail space. With the city’s convention and tourism businesses booming, the property will marketed to high-end business travelers and tourists, and to those desiring a luxury residence in the heart of the city’s downtown. “It’s very expensive to build a building of this height because so much is devoted to the structural integrity of the building,” Murphy says. “That makes this a high-end property out of necessity.”

“It’s a property that will really be a gateway to Chicago,” he notes. “The building will be marketed globally, recognizing Chicago’s place as an international city.”

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