Nov. 15, 2002 - Just a few years ago, when Americans were flush and business was booming, executives at the Hotel InterContinental on North Michigan Avenue took stock of their elegant, history-rich property and found it wanting. 

"It was beginning to fade a bit, and we decided we needed to spend a lot of money on it," recalls Chris Mander, regional vice president for operations. 

And spend they did, to the tune of $70 million. Over the course of 2001, the exterior, the lobby and some 800 guest rooms were overhauled, the heating-cooling system and the elevators were upgraded, and meeting space was revitalized and expanded. 

"We did it to maintain our position in the face of new competition that was coming in," Mander said. 

Good thing they did. Three new hotels opened within two blocks of the InterContinental between June 1999 and May 2001--Homewood Suites, Hilton Garden Inn and Le Meridien--adding 903 rooms to the immediate area. 

Bold strokes, such as the InterContinental's, are proving to be the saving grace for venerable, older hotels downtown, helping them to compete against a surge of shiny, new, high-end rivals even as the industry struggles to pull out of its worst downturn in decades. 

"They either have changed to become something new to sharpen their focus, or they have played on their history and they are able to compete that way," said Steve Marx, president of Hotel Source Inc., a Chicago-based brokerage. 

But it remains an uphill battle for the older guys, and one that is far from over. 

Downtown luxury hotels built in 1988 and later, a period that includes construction surges in 1988-90 and 1998-2001, are commanding better room rates and pulling in greater revenue per available room, a key measure of profitability, than their older counterparts, according to data from Smith Travel Research. 

Should older hotels defer upkeep during this tight period, "it will come back to haunt," said Ted Mandigo, a hotel consultant based in Elmhurst. "Another year will show who has kept up, and who hasn't." 

Downtown hotels of all vintages are struggling for share in a market aggressively built up right before the economy softened. Moreover, with the economy languishing, business and convention travel lagging, and cost-conscious travelers increasingly shopping online for cut rates, the terrain remains rough. 

Room rates are down 6 percent through September for hotels in and around downtown, compared with the same period in 2001, according to Smith Travel Research. And revenue per available room is off nearly 8 percent. 

Some newcomers have faced tougher-than-usual acclimation periods, particularly those that opened last year within months of the Sept. 11 terrorist attacks, which sent the hospitality industry reeling. 

Among the entrants thrown for a loop by last year's tumult were The Peninsula Chicago, an ultraluxurious challenger to the world-class Four Seasons, and Le Meridien, a richly handsome across-the-street rival to the ornate InterContinental. 

"When we opened last year in June, it was a terrible situation, with the economy starting to slow down, and then Sept. 11," said Mario Mazzini, general manager at Le Meridien. "Those situations didn't just hurt new hotels, they hurt everybody." 

The Peninsula Chicago, which also opened in June 2001, experienced "a very difficult first nine months," said general manager Maria Razumich-Zec. 

Both hoteliers report significant improvement in recent months. 

"Our occupancy rate has been in the high 80 percent range in the last three to four months," Mazzini said. "People have started traveling again, but they are more attentive to what they'll spend." 

Although room rates at downtown luxury hotels generally remain below 2000 levels, the newer hotels appear to be commanding higher rates. For the year through September, hotels open since 1988 had an average daily rate of $164.33, nearly 9 percent higher than the $150.90 for older hotels, according to data from Smith Travel. 

Newer hotels "are fresher, the technology usually is relatively cutting-edge," said Brian Flanagan, president of Property Valuation Advisors in Chicago. "And people like to see what new product is in the market--something as simple as a cocktail lounge at the Sofitel, something they haven't seen, haven't done." 

Still, these numbers may not tell the whole story in the Chicago market, which is highly stratified. Within specific subgroups, hoteliers say their room rates and revenues per available room are neck and neck with direct rivals, regardless of the age of the properties. 

"We are very comparable," said Robert Allegrini, a spokesman for the Hilton Chicago, which celebrated its 75th anniversary with a gala reception Thursday evening. 

The Hilton Chicago, which underwent a $185 million facelift in 1985, has 1,500 rooms and 200,000 square feet of meeting space, and, as such, has only a few rivals for big group business: the Palmer House Hilton, another historic convention hotel; the Hyatt Regency and Chicago Marriott, built in the '70s; and the Sheraton Hotel and Towers, opened in '92. 

"There are only a few hotels with as many guest rooms and as much meeting space as the Palmer House or the Hilton ... so they are not as affected by the new competition over the last five years," said Marx of Hotel Source. 

But many midsize and smaller downtown hotels are facing new rivals. And many have been remaking themselves in a big way to stay competitive. 

For instance, Chicago investment group Palmet Ventures sank $15 million into a remake of the former Bismarck Hotel, turning it into Hotel Allegro, a California-style boutique hotel. 

Starwood Hotels & Resorts remade the historic Midland Hotel into the W Chicago-City Center, shooting for an atmosphere of '40s glamor, and the Days Inn on Lake Shore Drive into W Chicago-Lakeshore, which aims for a naturalistic, Asian feel. 

The list goes on and on. 

"Of the ones that have been redone in the Loop, they are doing pretty well, they are holding their own," said Baker Jenner, a principal with Palmet Ventures. "Nobody is really dragging." 

Of course, nobody in the hotel business is doing handsprings, either, and the outlook can be described only as cloudy. 

Hotel consultant Mandigo thinks it could be the fourth quarter of 2003 before corporate travel budgets improve, providing relief for the hotel industry. 

"Combine the hassle of travel with the fact that we're just coming off of `interesting' corporate earnings, and we're not over the hump yet," he said. 

When the market eventually recovers, the hotels that spent the money to stay sharp will come out on top, observers say. 

"It's not just the new competitors you need to think about," said Mander of the InterContinental, "but even the old ones. This industry doesn't stand still."

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(c) 2002, Chicago Tribune. Distributed by Knight Ridder/Tribune Business News. HLT, HOT, MAR,