|By Thomas A. Corfman, Chicago Tribune|
Knight Ridder/Tribune Business News
Nov. 3, 2004 - Hilton Hotels Corp. is putting up for sale the Palmer House Hilton, Chicago's oldest and second-largest hotel.
Hilton, which has owned the hotel since founder Conrad Hilton snapped it up in 1945, is aiming for a price of roughly $250 million, sources said.
The famed hotelier paid a hefty $20 million for the hotel, established in 1871 by legendary Chicago entrepreneur Potter Palmer.
Beverly Hills, Calif.-based Hilton is expected to conduct a formal study of its options before officially putting the 1,639-room property at 17 E. Monroe St. on the market, sources said.
As a condition of any sale, Hilton would retain management of the hotel, whose 25-story structure was built in 1925. A deal would free up capital to finance a stock buyback or new investments.
Hilton's move comes amid a local hotel market that has barely kept pace with 2003 results, with occupancy rates slightly higher, but room rates slipping.
Nonetheless, major investors are starting to make bets that downtown hotels will regain the profitability they enjoyed before the Sept. 11 terrorist attacks and the recession, although perhaps not until 2006.
Last month, the limited partnership that owns the Westin Michigan Avenue said it had an agreement to sell the 751-room hotel for $137 million to JER Partners, a McLean, Va.-based private equity firm.
After the sale, Starwood Hotels & Resorts Worldwide Inc., which owns the partnership's general partner, would continue to manage the prominent property at 909 N. Michigan Ave.
The price, more than $182,000 a room, surprised many hotel industry observers.
"Money chases product when they feel the market has turned around," said Brian Flanagan, president of Chicago-based Property Valuation Advisors Inc.
"Every once in a while, you see flashes of a pretty strong comeback, but it hasn't been sustained."
Hilton executives, during a conference call with analysts last week, said they were considering selling some of the 55 hotels the company owns, a small fraction of the 2,173 properties it manages under brands that include Doubletree and Embassy Suites.
Although declining to comment on specific assets, Chief Executive Stephen Bollenbach said: "The Palmer House is one that's kind of tough to think about because it's an old hotel, it's a great hotel, it's in a great location.
"But to try to get it up to our operating standards, we would have to put quite a bit of capital in it, so it's one that we're looking at very, very carefully."
Tuesday, a Hilton spokeswoman could not be reached for comment.
In addition to an outright sale of the Palmer House, exceeded in size in Chicago only by the Hyatt Regency, the study is expected to look at such options as converting a portion of the structure into condominiums or turning some of the guest suites into hotel-condominiums, sources said. In the latter case, individuals own rooms and rent them out when they are not being used.
Potential buyers are expected to take a hard look at how to boost the profitability of the hotel's underutilized retail space, including its arcade, and its 44,400 square feet of office space.
Chicago is starting to see some of the strong investor demand that is driving up hotel prices nationwide, said Rick Swig, president of RSBA Associates, a San Francisco hotel consulting and asset management firm.
"That's had potential buyers swallowing very hard before they go to acquire," said Swig, who advised a family-owned company in a buyout of its investment partner in Chicago's Fairmont Hotel, 200 N. Columbus Drive.
"But at the same time, there are very few quality hotels on the market that are not selling, even at very high prices."
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