Downtown hotel market absorbs new supply

Last updated on January 7th, 2021 at 03:02 pm

With a surge of hotel development coming to the downtown Milwaukee area, industry observers are no doubt watching to see how the increase in room supply will impact the marketplace.

So far, the downtown Milwaukee hotel market has posted impressive results after three new hotels opened in late 2012 and in 2013. The 127-room Hilton Garden Inn opened in November of 2012, the 90-room Brewhouse Inn & Suites opened in April of 2013 and the 205-room Marriot Hotel opened in June of 2013.

Despite the 422-room increase in supply for the market, the downtown Milwaukee hotel occupancy rate increased from 67.2 percent in 2012 to 67.4 percent in 2013 for the January through November period (the latest data available), according to Smith Travel Research Inc.

“I’m kind of impressed with how the market has done,” said hotel industry consultant Greg Hanis, president of New Berlin-based Hospitality Marketers International Inc.

The downtown hotel market will be tested later this year when the new 381-room hotel at Potawatomi Bingo Casino, located in the Menomonee Valley near downtown, opens this fall. That will be a significant addition to the downtown area hotel market’s room supply, but Hanis predicts the market will be able to absorb it.

Demand, measured by the total number of rooms sold, for the downtown area hotel market has increased by 20.7 percent since 2007, an average demand growth of 3.4 percent per year, according to the Smith Travel Research data.

“That’s pretty good,” Hanis said. “That means it’s a healthy market.”

Potawatomi Bingo Casino hotel

Over the same time period (2007- ’13), the supply of rooms has increased 16.4 percent, or 2.7 percent per year. Therefore, the growth of demand has outpaced supply.

“The market is absorbing the new hotel supply very well,” Hanis said. “That’s pretty impressive.”

A healthy hotel market is able to absorb the additional room supply from a new hotel within three years, Hanis said. That means within three years occupancy rates in the market return to the level they were at prior to the new hotel opening and adding additional supply to the market. If it takes longer than three years for occupancy levels to bounce back, it indicates that the market is struggling to absorb the new hotel.

In downtown Milwaukee, hotel occupancy rates for the first seven months of 2013 trailed 2012 occupancy rates, but occupancy rates in August, September, October and November were higher in 2013 than in 2012.

The 2013 hotel numbers were certainly boosted by Harley-Davidson Molor Co. Inc.’s 110th Anniversary celebration in late August.

Major events that will help fill downtown hotel rooms in 2014 will include: the International Institute of Municipal Clerks annual conference (5,520 room nights), the International Society on Thrombosis and Haemostasis annual meeting (5,125 room nights), the International Society of Arboriculture annual conference and trade show (3,945 room nights) and the NCAA men’s basketball tournament (3,239 room nights), according to Visit Milwaukee.

Hanis predicts the opening of the 381-room Potawatomi Casino hotel will lower the downtown area hotel market’s occupancy rate to about 63.6 percent in 2014, but then the market’s occupancy rate will rise to 64.5 percent in 2015 and between 65 and 67 percent in 2016. He expects the market to return to its 2013 occupancy rate in three years or less. The market had an occupancy rate of 65.4 percent for all of 2012.

“I’m not overly concerned,” Hanis said.

However, the impact of a casino hotel is hard to predict because it has a different business model than a traditional hotel, Hanis said. Casino hotels primarily exist to keep gamblers playing at the casino longer so they don’t go to their rooms and start using the non gamstop betting sites UK is generally famous for.

“The problem with a casino hotel, they use them for so many reasons: comp rooms, high rollers, etc.,” Hanis said. “It can be a loss leader. They don’t need to make a profit on the rooms.”

Some of the casino hotel rooms might not be available to the general public, which would reduce the hotel’s impact on supply and the occupancy rate of the overall market, Hanis said. Also, the tribe has said that most of its hotel guests will be new hotel visitors to Milwaukee and will increase the demand for the downtown area’s hotel market.

But the casino, subsidized by its own lucrative gambling revenues, has the ability to offer lower priced hotel rooms, which could reduce the average daily rate for the downtown Milwaukee area hotel market.

For the first 11 months of 2013 ADR was up 3.7 percent to $127.39 for the downtown Milwaukee hotel market. From 2007 through late 2013 the downtown Milwaukee hotel market’s ADR increased 7.6 percent, about 1.3 percent per year.

Nationally, ADR has been slow to rise since the Great Recession, even as hotel demand has recovered.

“That’s one of the areas where the hotel industry has been very slow to respond,” Hanis said. “Demand has come back, but hoteliers have been reluctant to go after the increased demand with higher rates. They got hit so hard during the recession they are scared to chase higher demand with higher rates at this point.”

Hanis predicts ADR for the downtown Milwaukee hotel market to rise to $129-130 by the end of 2014.

National hotel markets, including the downtown Milwaukee hotel market, had a big bounce-back in 2010 from the Great Recession and have experienced steady growth since, Hanis said.

“The market is probably stabilizing a bit,” he said. “You’re getting back to historic demand growth.”

And the demand growth for downtown Milwaukee area hotels has been enough to absorb the new supply, so far. Any fears of a hotel glut in the downtown market so far appear to be overblown.

“If (existing hotels) say the market can’t absorb the new supply, that’s not what the numbers show,” Hanis said.

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