The hotel and the adjacent Blackstone Theatre were built on the site of Timothy Blackstone's mansion by John and Tracy Drake, sons of Blackstone's former business partner, the hotel magnate John Drake. John and Tracy Drake also developed the Drake Hotel. Their father had been a director of Blackstone's Chicago and Alton Railroad. At the time of the opening, the hotel and theatre were located at the southern edge of the Chicago Theatre District at Michigan Avenue and Hubbard Court (which was first renamed 7th Street and later Balbo Drive).
The hotel was named for Timothy Blackstone, a notable Chicago business executive and politician, who served as the founding president of the Union Stock Yards, president of the Chicago and Alton Railroad, and mayor of La Salle, Illinois. It was built from 1908 to 1910 and designed by Marshall and Fox. The original construction was capitalized at $1.5 million ($27.2 million today), including a $600,000 to $750,000 bond issue by the Drake Hotel Company. In the 1920s, the Drake Hotel Company undertook some financing arrangements which included extending their debt to construct the Drake Hotel. They used the Blackstone Hotel as collateral for one loan in 1927. The Wall Street Crash of 1929 rippled into the hotel industry, leaving the Chicago Title and Trust Company with 30 Chicago hotels in receivership and causing the Drakes to default in 1932. The hotel ended up belonging to Metropolitan Life, which held the mortgage. MetLife leased the Blackstone to hotelier Arnold Kirkeby in 1936, and Kirkeby bought the hotel outright in 1941. Kirkeby sold the hotel to Sheraton Hotels in 1954 and it was renamed the Sheraton-Blackstone Hotel. The hotel endured troubles in the late 1960s, as the neighborhood surrounding it declined, and Sheraton finally sold the property to local hotelier Mark Friedman on September 12, 1973 for $5 million and the hotel became the Blackstone Hotel again. In 1995, the Blackstone was sold to the Maharishi Mahesh Yogi.
On May 29, 1998, the Blackstone Hotel was designated as a Chicago Landmark. The hotel was added to the National Register of Historic Places on May 8, 1986. It is also a historic district contributing property for the Chicago Landmark Historic Michigan Boulevard District.
The hotel closed in 2000 after Occupational Safety and Health Administration building inspectors found safety problems during a 1999 inspection. The building's owner, Heaven on Earth Inns Corp, run by Maharishi Mahesh Yogi, looked into several options before selling the property to Rubloff, Inc., which in 2001 announced plans to convert the building into condominiums priced as high as $8.5 million. Rubloff's plans were unsuccessful due to financing difficulties and a lackluster market for buyers of Blackstone condominiums. Even two rounds of price cuts were not enough to spur interest in the condo opportunities and Maharishi Mahesh Yogi's non-profit organization was unable to obtain financing.
The years of neglect following the closing of the hotel took a toll on the building's appearance with both the interior and exterior facade crumbling. In 2005, it was announced that the hotel would undergo a $112 million renovation and acquisition with a planned opening in 2007 in a deal between Marriott International/Renaissance Hotels and Sage Hospitality, a Denver, Colorado-based company. The hotel's restoration process was quite lengthy because of the extensive interior damage. $22 million of the expected $112 million was the cost associated with the acquisition. Sage sought $22 million in tax increment financing from the Chicago Community Development Commission. They eventually were approved for $18 million in tax-increment financing. The final cost of the restoration came to $128 million, of which the city of Chicago provided $13.5 million for street-front improvement, including the restoration and recasting of over 10,000 pieces of decorative terra cotta, and federal historical tax credits because the building is a historical landmark. The Chicago Landmark status necessitated renovation oversight by the Commission on Chicago Landmarks.