Real Estate Spotlight: Additional hotel room supply could impact downtown market

The 227-room Drury Plaza Hotel is being developed at 700 N. Water St., in a former downtown office building.

Last updated on June 18th, 2019 at 12:21 pm

A number of hotels set to open in the coming months could have significant impacts on the downtown Milwaukee market, based on an analysis of market data.

The occupancy rate for downtown Milwaukee’s hotels was 66.3 percent in 2018, an improvement of 2.2 percent over the year prior, according to market data from Hendersonville, Tennessee-based STR Inc.

Data provided by STR, reaching back to 2012, shows that the occupancy rate appears to be generally stable for the downtown Milwaukee hotel market over the past seven years. Greg Hanis, a hotel industry analyst and president of New Berlin-based Hospitality Marketers International Inc., noted the rate shows a narrow range of 65.6 percent to 68.3 percent.

However, the added rooms that will come from hotels that plan to open over the next year or so will certainly impact the market, Hanis said.

At least four new hotels will open their doors downtown soon. This includes the Drury Plaza Hotel at 700 N. Water St., which will add 227 rooms; the Cambria Hotel, at 503-521 N. Plankinton Ave., which will add 132 rooms; and two hotels that will be built next door to each other: A dual-brand Home2 Suites by Hilton and Tru by Hilton at 433 E. Michigan St. and a Holiday Inn Express at 517 N. Jefferson St., which together will add a little more than 300 rooms.

The hotels are all expected to open between this summer and early next year.

Hanis considered those upcoming hotel openings to see how those additional rooms might be absorbed in the coming years. To do that, he looked at how demand for lodging has grown over the past six years. For instance, demand grew by 4.9 percent in 2018 versus the year prior. Averaging the past six years of demand growth shows the average year-over-year change is roughly 5 percent.

A conservative estimate for demand growth, about half that six-year average, would be roughly 2.5 percent. Hanis used the six-year average demand growth, as well as a more conservative estimate, to project the likely changes to occupancy rates in the downtown hotel market in the coming years.

Starting in 2020, the first full year these hotel rooms would be on the market, the occupancy rate for the downtown market was found to be between 62.3 percent (conservative estimate of 2.5 percent demand growth) and 65.4 percent (assuming a full 5 percent demand growth). If these new rooms weren’t added, occupancy rates would be between 69.7 percent and 73.1 percent.

Continuing into 2021, occupancy rates when factoring in the additional rooms range between 63.8 percent and 68.6 percent, and in 2022, occupancy rates are projected to range from 65.5 to 72.1 percent. Without the new hotel rooms, in 2021 that rate would likely range from 71.4 to 76.8 percent, and in 2022 it would range from 73.5 to 80.6 percent.

“The new rooms will have an impact on the market,” Hanis said. “If I were a new hotel developer, I’d say don’t count on downtown Milwaukee occupancy to go up by 2022.”

Meanwhile, work continues on the planned downtown hotels. The companies offered various reasons for wanting to locate in the market.

Carolyn Feltner, director of marketing with Drury Hotels, said crews are busy converting the 14-story former office building into a 227-room hotel, and the project is on track to finish by the end of this summer. She said the new hotel is one instance in a push for Drury Hotels to open more locations in downtown markets.

“One thing we talked about with our guests (is) where they want to go, and we’ve been hearing ‘Milwaukee’ for years,” Feltner said.

A spokesperson for Choice Hotels International, which owns the Cambria Hotels brand, said in an email that Milwaukee is an ideal market for a Cambria hotel because of its “tremendous tourism growth,” as well as the fact that it is a top city for entrepreneurs and startups.

Both companies noted nearby attractions, such as the Milwaukee Public Museum, downtown Riverwalk, Wisconsin Center and Harley-Davidson museum, as factors in the decision to bring their brands to downtown Milwaukee.

Other data points

The STR market data shows that hotel room supply was up about 2.7 percent in downtown Milwaukee in 2018, a result of the opening of the 150-room Hyatt Place at the former Pabst brewery complex, while demand was up about 4.9 percent from the previous year.

Revenue was up 5 percent in 2018, to a little more than $182 million. Revenue per available room was a little less than $94, a 2.3 percent increase from the year prior.

The average daily room rate for the downtown area was $141 a night, virtually unchanged from what was observed in 2017.

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Alex Zank, former BizTimes Milwaukee reporter.

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