Hotel development boom will test strength of downtown market

Downtown Milwaukee hotels had a good year in 2012, based on market data from Smith Travel Research Inc. Occupancy rates, room demand and revenue per available room (RevPAR) have improved significantly since the Great Recession and now exceed pre-recession levels.

“Downtown has really come back,” said hotel industry analyst Greg Hanis, president of New Berlin-based Hospitality Marketers International Inc. “The (downtown hotel) market has really come back very well.”

Hotel developers and national hotel chains have noticed. A new 127-room Hilton Garden Inn opened downtown last year, three more hotels are under construction in or near downtown, and two more have been proposed.

The downtown Milwaukee hotel market currently has a supply of 3,940 rooms. If the two proposed hotels are built, in addition to the three currently under construction, the downtown hotel market will add another 1,014 rooms, bringing the total supply up to 4,954. Some wonder if there be enough demand for downtown hotel rooms to absorb that supply increase.

“It’s getting to the point, how many more hotels can you get in here?” Hanis said.

Based on the 2012 data from Smith Travel Research, it appears that downtown Milwaukee can support some additional hotels, Hanis said, but the number of hotels planned for downtown Milwaukee could strain the market if they are all built.

In 2012, the downtown Milwaukee hotel market had an occupancy rate of 65.5 percent, up from 64.6 percent in 2011 and 55.6 percent when the market hit bottom during the Great Recession.

As more rooms are filling up downtown, hotel room rates are rising. The average daily rate for downtown hotels was $122.63 in 2012, according to Smith Travel Research, up from $120.31 in 2011 and $114.72 in 2009. The downtown hotel market’s average daily rate peaked at $123.73 in 2008.

The downtown hotel market posted new highs for RevPAR and demand in 2012. RevPAR was $80.38 for the downtown hotel market in 2012, up from $77.75 in 2011 and $63.79 in 2009. The total number of rooms sold in downtown Milwaukee area hotels in 2012 was 917,356, up from 899,630 in 2011 and 732,956 in 2009.

“You’ve got some really positive numbers here,” Hanis said.

But can the downtown hotel market maintain that level of performance as supply increases?

The new Hilton Garden Inn hotel opened in November in the historic Loyalty Building northwest of Broadway and Michigan Street, in an area of downtown just north of the Third Ward. The 90-room Brewhouse Inn & Suites hotel will open in April at the former Pabst brewery complex in downtown Milwaukee. A 205-room Marriott Hotel at 323 E. Wisconsin Ave. will open later this year. The 20-story, 381-room hotel under construction by the Forest County Potawatomi Tribe next to its Potawatomi Bingo Casino in the Menomonee Valley, near downtown, will open in 2014. It is uncertain when construction will begin for The Couture, a 44-story building that would be built southwest of Lincoln Memorial Drive and Michigan Street, which would include a 180-room hotel.

In addition, San Francisco-based Kimpton Hotels & Restaurants announced recently that Milwaukee-based HKS Holdings LLC plans to develop an 8-story, 158-room Kimpton hotel northeast of Broadway and East Chicago Street in Milwaukee’s Historic Third Ward. The Kimpton hotel is expected to open in 2015.
The Smith Travel Research data shows why new hotel operators are coming into the downtown market. But the coming increase in supply is significant and demand growth will have to continue to absorb it all.

“You need sustained demand growth and cautious introduction of new supply,” Hanis said. “The staging introduction of new hotels is critical. If you put too many rooms in there (at one time) and the demand growth isn’t enough, then you’ve got problems.”

The current staging pace for new hotel room supply in downtown Milwaukee: 127 rooms in 2012, 295 rooms in 2013, 381 rooms in 2014 and 158 rooms in 2015.
Demand growth for downtown hotel rooms has been impressive since the Great Recession ended. The amount of hotel rooms sold at downtown hotels has increased 25 percent since 2009, or 8.4 percent per year. At the same time the supply of hotel rooms has only risen 6.2 percent, an average of 2.1 per year over that time period.

“The demand is far exceeding the supply growth,” Hanis said.

But it is unlikely the market will sustain an 8.4 percent yearly increase in demand. Demand for downtown Milwaukee hotel rooms surged 19.1 percent in 2010 as the industry bounced back from the recession, but then demand only increased 3.1 percent in 2011 and 2.0 percent in 2012.

A realistic pace for demand growth for downtown Milwaukee is about 3 percent per year, Hanis said. Meanwhile, the hotels that are proposed or are currently under construction would increase the supply by 27.8 percent.

If you assume a three percent rate of demand growth, then in four years, after the three hotels that are under construction are complete and the after the Kimpton hotel opens in 2015, the downtown hotel market’s occupancy rate will slip from 65.5 percent last year to 60.4 percent, Hanis said.

And if The Couture is built, with its yet-to-be-named hotel, the occupancy rate would slip under 60 percent, Hanis said.

“Now I’m getting nervous,” he said. “We’re really pushing that 60 percent (occupancy) range. The market is struggling at that point.”

However, developers of the new hotels say they believe their projects will serve a unique niche that will attract more travelers to the downtown hotel market. The Kimpton and Marriott have strong brands that will attract loyal customers and the Kimpton will serve a boutique, luxury market attracted to the Third Ward. The Brewhouse Inn & Suites also provides a boutique product, it is targeted for extended stay customers, and, like the new Hilton Garden Inn, it offers the appeal of a redeveloped historic building. The Potawatomi Tribe says their hotel will mostly be filled with hotel guests that are new to Milwaukee and are drawn by the casino. The Couture is strategically positioned on the lakefront near the Summerfest grounds, Milwaukee Art Museum, Discovery World, the Northwestern Mutual headquarters and the U.S. Bank Center.

“We’re trying to build a destination,” said Rick Barrett, the developer for The Couture project. “We look at it as an outstanding hotel site. We’re looking to drive new business. We’re not looking to take business away from anyone else.”

The new hotels may succeed, and they could also attract new travelers to downtown Milwaukee. But they will also battle existing hotels for market share and the existing hotels will have to step up their game to compete.

Kimpton has likely been watching the strong performance of the Iron Horse Hotel, Hanis said. The Iron Horse may have to remodel in 2015 to remain competitive, he said.

The new Marriott Hotel will compete with the nearby Pfister Hotel, Hanis said. Many of the hotels in downtown Milwaukee are located on the west side of downtown near the convention center. The Pfister is one of the few on the east side of downtown near the class A office towers. The Marriott and The Couture hotel would add new competitors to the Pfister’s neighborhood.

New hotels are able to offer several modern design amenities, such as upscale bathrooms, that older properties struggle to compete with. But old hotels, such as the Pfister and the Hilton Milwaukee City Center, can offer history and old world architecture that a new building cannot match. The Pfister’s status as a Milwaukee icon will help it endure against the new competitors, Hanis said.

“As long as Marcus (Corp.) keeps it fresh and well-maintained it’s going to sustain,” he said.

Hotel Metro was the first upscale boutique hotel in downtown Milwaukee, but now it faces competition from the Iron Horse and later the Kimpton and to an extent the Brewhouse Inn & Suites.

“(Hotel Metro) is going to feel another punch when the Kimpton comes in,” Hanis said.

The Hyatt, Hilton and InterContinental hotels downtown will take smaller hits from the new competitors, Hanis predicts.

But the additional hotels could help attract more conventions and group meetings to Milwaukee, Hanis said. The addition of Kimpton, a collection of luxury, boutique hotels and restaurants, is particularly impressive for the city, he said.

“It is a huge thing (for Milwaukee),” Hanis said. “It is a compliment to the city to have hotels like the InterContinental, Kimpton, and the Iron Horse, plus the historic Pfister. Milwaukee is becoming a respected hotel market and is definitely elevating itself to a new plateau.”

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