Since 1962, The Marcus Corp. has been the dominant player in the downtown Milwaukee hotel marketplace.
With the iconic Pfister Hotel, the Hilton Milwaukee City Center and the Intercontinental Hotel in its portfolio, Marcus has owned downtown Milwaukee’s largest and most luxurious hotels. Marcus’ market dominance has garnered the company respect and a great deal of influence.
But in 2009, rival hotel development firm Jackson Street Holdings LLC, entered the Milwaukee hotel scene, first with a boutique hotel in the Park East Corridor, followed by three more hotels in downtown Milwaukee, with three more hotels proposed at one of the most important sites in the city.
Jackson Street Holdings' swift emergence downtown is offering a new challenge for longtime market leader Marcus. Other competitors also have arrived in recent years, including the Kimpton Journeyman Hotel in the Third Ward.
“At one time, Marcus had the upscale hotel market in Milwaukee,” said Greg Hanis, hotel industry analyst and president of New Berlin-based Hospitality Marketers International Inc.
“Now, there is the Marriott, Kimpton, Westin (under construction) – at least four to five major competitors, and they all carry brand names. The impact on Marcus has to be very strong. I’m sure they are scrambling to preserve market share in downtown Milwaukee.”
Historic versus modern
Jackson Street Holdings entered the downtown hotel market in 2009 when it and Milwaukee-based development partner HKS Holdings LLC opened the Aloft Milwaukee hotel in the Park East Corridor.
Then Jackson Street made a bold move by encroaching on the Marcus family’s crown jewel, The Pfister Hotel, 424 E. Wisconsin Ave., by opening the city’s first full-service Marriott Hotel one block away, at 625 N. Milwaukee St.
Jackson Street is owned by Ed Carow, Mark Flaherty and Randy Erkert. The three rarely grant media interviews and declined to be interviewed for this story.
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The Pfister Hotel[/caption]
Following the Marriott project, Jackson Street moved just west of the Milwaukee River and opened a SpringHill Suites by Marriott hotel at 744 N. Fourth St., across the street from the Wisconsin Center, competing directly with Marcus again, this time with the Hilton, 509 W. Wisconsin Ave., for convention business.
Once SpringHill Suites was underway, the group was back on the east side of downtown, getting ready to bookend The Pfister by building the city’s first Westin Hotel. The 220-room luxury hotel is currently being built between the U.S. Bank Center’s Galleria and the tower’s parking structure north of East Clybourn Street.
When the high end Westin hotel opens this summer, it will include an Italian steakhouse on the ground floor and also provide competition for the Pfister, as the Marriott has since it opened in 2013, by attracting business clients from nearby companies, including Northwestern Mutual Life Insurance Co., Johnson Controls Inc. and ManpowerGroup. The Westin site is about two blocks east of the historic Pfister, which was built in 1893.
“There is a difference between a luxury hotel and a historic hotel,” said Doug Nysse, principal at Milwaukee-based Arrival Partners LLC, which developed the Marriott, SpringHill Suites and Westin with Jackson Street. “Once people get to know luxury, they want luxury.”
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Greg Marcus, chief executive officer of The Marcus Corp., has questioned Jackson Street Holdings’ hotel development financing methods, from the use of federal Midwestern disaster area bonds to EB-5 financing, a federal visa program through which international investors who create jobs and development can earn U.S. green cards.
“Every single project they participate in has a subsidy,” Marcus said. “I can’t think of a time where, ultimately, that didn’t end up as a problem. I’m not going to comment on (Jackson Street Holdings) or what they are doing, I’m just going to say typically, subsidies don’t end well.”
The only time Marcus has received a subsidy from the City of Milwaukee in recent years was in 2000, when the city asked the company to build an 850-space parking structure for the Hilton which also could be used by Fortis Health, which later became Assurant.
The company has, however, taken advantage of various funding mechanisms to develop properties in other states.
On Marcus’ website, it states: “Marcus has led or been involved in several successful deals with complex financing arrangements. For example, $32 million in EB-5 financing was raised for our Capitol District Marriott project in Omaha, and Marcus negotiated a favorable ground lease and second mortgage with Oklahoma City and identified and received significant income tax credits for the Skirvin Hilton redevelopment.”
The company also requested $105 million in public assistance for a 600-room Marriott in Oklahoma City, according to a report by The Oklahoman. In 1999, Marcus received $10.9 million in tax increment financing to build the parking structure for the Hilton Madison Monona Terrace.
Marcus said he is pro subsidy if it is used to create a catalytic project.
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Milwaukee Marriott Downtown hotel[/caption]
“When you are sick, a dose of Nyquil is a good thing; you don’t drink the whole bottle. We’re not against a subsidy. Look at the (former Pabst Brewery that has been redeveloped); that was an area that needed a kick start. Next to the U.S. Bank building, with a lake view?” he said, referring to the Westin.
Fourth and Wisconsin
Now, after this cat-and-mouse game that began with the Marriott opening in 2013, Marcus and Jackson Street are both vying for one of the most important development sites in the city, a 2-acre parcel at North Fourth Street and West Wisconsin Avenue, across the street from the Hilton and from the downtown convention center (the Wisconsin Center).
In response to an RFP from the city, which owns the Fourth and Wisconsin site, Jackson Street and Arrival Partners submitted a $279.6 million proposal they are calling Nexus. It includes three hotels totaling 506 rooms, 103,000 square feet of convention space and 22,000 square feet of street-level restaurants, bars and cafés.
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The project, which would be developed with Arrival Partners, would fully integrate Milwaukee’s planned downtown streetcar, a requirement when the city announced last summer it wanted to sell the parcel.
Marcus also submitted a proposal for the site, which it unveiled recently. The Marcus proposal, a $125 million plan called eMbarKE, calls for a 276-room expansion of the existing Hilton Milwaukee City Center hotel and a tower with up to 200 apartments.
The hotel expansion would bring the total number of rooms at the Hilton to 1,005, creating a convention headquarters hotel for Milwaukee, which would solve one of the two issues currently keeping the city from attracting major conventions, according to Marcus.
The other issue is the convention center is a mere 266,000 square feet, with about 189,000 square feet of exhibit space. By comparison, Cincinnati has 196,800 square feet; Columbus has 373,000 square feet; Minneapolis has 475,000 square feet; and Indianapolis has two venues totaling 749,000 square feet of exhibit space.
Both the Marcus and Jackson Street Holdings proposals for Fourth and Wisconsin are requesting the convention center be expanded.
City officials have been meeting with both groups and are expected to select a proposal early this year.
The Marcus Corp., which includes both Marcus Theaters and Marcus Hotels & Resorts, was founded in 1935 with the purchase of a Ripon movie theater. Today, the Milwaukee organization includes more than 50 theaters in the Midwest, eight owned hotels and 11 managed properties.
At the helm is Greg, the third generation chief executive officer who took the reins from his father, Steve, and before that, grandfather Ben, the corporation’s founder.
Marcus Corp. got into the hotel business subtly in 1960, with the building of the Guest House Inn in Appleton. A second Guest House Inn was built in Manitowoc in 1963.
The next step was a major one. Ben Marcus was the only person to bid on The Pfister Hotel at a bankruptcy auction in 1962. Marcus originally considered replacing the 1893 hotel with a parking lot, but instead put Steve in charge.
Steve Marcus spent four years and $7 million renovating the hotel and constructing an adjoining tower with 185 rooms, meeting facilities, a parking structure, a night club and commercial space.
In 1972, Marcus purchased the Sheraton Schroeder Hotel, later to be named the Marc Plaza and again later rebranded the Hilton Milwaukee in 1995.
In 2005, Marcus bought the Wyndham Milwaukee Center hotel and rebranded it as the InterContinental. The purchase gave Marcus ownership of three of the four major hotels in the heart of the city at that time.
Greg Marcus said he felt compelled to participate in the Fourth and Wisconsin proposal because he looked at the broader area of the downtown, from Michigan Street to McKinley Avenue, and the impact this project could have on the city as a whole.
He believes Marcus’ history makes the company the right choice for the project.
“We’ve invested in (the Hilton) for 40 years, we’ve participated in the convention center market, we are the ones sitting there all this time, and we’ve built up all this experience,” Marcus said. “Others want to say they’ve developed new hotels – OK, but show up over a long period of time, stay committed, give back to the city, give back to the community and oh yeah, reinvest in your assets. I would be willing to bet we put more money into our properties than they’ve put into theirs.”
Seeing things differently
Before arriving on the downtown Milwaukee scene, Jackson Street Partners was Wave Development. The group, which included Carow and Flaherty at the time, partnered with Denver-based Sage Hospitality and others at the height of the real estate boom in 2006 to develop 11 CoCo Key water parks.
Five years later, the parks were in trouble, selling for well below their estimated $350 million to $450 million construction cost at an auction. One $67 million Massachusetts CoCo Key property sold for $10 million at a 2011 auction, according to a report by Arizona-based JLC Hospitality Consulting.
Wave did find success in the water park arena when the group successfully revitalized the Country Inn Hotel in Waukesha, rebranding it as the Country Springs Hotel and opening a 45,000-square-foot waterpark in 2003.
Then in 2008, the group teamed up with HKS Holdings, which would go on to develop the Kimpton Journeyman Hotel in the Historic Third Ward, and developed the Aloft in downtown Milwaukee.
Carow and Flaherty have been working together since about 2004, according to their LinkedIn profiles. Jackson Street’s website lists them as having 30 and 37 years, respectively, of real estate industry experience.
Randy Erkert, the company’s third owner, also has more than 25 years of real estate experience, according to the site, and also is a partner at the Mallery & Zimmerman law firm.
Nysse, who launched Arrival Partners in 2013 after spending 16 years at Milwaukee-based Kahler Slater, where he led the hospitality design team for the firm, got to know the principals of Wave (now Jackson Street Holdings) while working on the Aloft project.
“They are awesome,” Nysse said. “They are very creative, but not in a planning way – in terms of seeing a gap in the marketplace and seeing how to fill it.”
In his role at Kahler Slater, Nysse was the architectural consultant to Marcus on the company’s hotels from 1996 to 2010, including a major renovation project at the Hilton in 2000 that added 250 rooms, a new ballroom, and Paradise Landing, the first downtown indoor waterpark in America. The waterpark closed in 2013.
“I’ve had the opportunity in my roles to work on most of the hotels in Milwaukee that have been built in the last 20 years,” Nysse said. “And the ones I didn’t work on, I know about from friends and colleagues.”
Chris Anderson, senior vice president and chief revenue officer for Merrillville, Indiana-based White Lodging Services Corp., the company that manages the Marriott and SpringHill Suites hotels in downtown Milwaukee, said White Lodging chose to work with Jackson Street because its principals are entrepreneurs who want to continue to grow.
“White Lodging is a fast-growing service operator,” Anderson said. “We like the guys at Jackson Street and working with Arrival, because they are looking to do things a little different.”
Anderson knows the Milwaukee market and the competition. Like Nysse, he has a long history with Marcus.
He came to White Lodging after seven years with Marcus Hotels & Resorts. His most recent role with Marcus was senior vice president of sales, marketing and brand development, where he was responsible for the creation and implementation of the company’s revenue growth strategy.
“We’re in markets across the U.S. and our philosophy is when we go into a market at zero, we stay as a long-term player,” Anderson said. “In Austin, we now have 26 hotels. In Indy, we have all of downtown with multiple brands. We learn the customer, how they buy and when they buy. We’ve thought Milwaukee was an attractive market for many, many years.”
Alderman Robert Bauman, who represents downtown Milwaukee, said Jackson Street's Marriott hotel project was the most confrontational project he has ever reviewed from a developer. The issue was several pre-Civil War buildings were demolished to make way for the hotel. The city’s Historic Preservation Commission approved the demolition with the condition that the building’s facades were incorporated into the new structure.
Kyle Strigenz, co-owner of HKS Holdings, who worked with Jackson Street on the Aloft project, said before the new hotels were built downtown (by Jackson Street and others), the city had a tired supply.
“One of the best things to happen was the Iron Horse,” Strigenz said. “What it did was create an option for people coming to visit the city. We don’t want to be the only option; we want all kinds of options. And people who are used to traveling to Seattle or other big cities don’t mind paying more for quality.”
Occupancy remains strong
From October 2012 to October 2016, there have been three hotels added in downtown Milwaukee that are classified as “luxury or upscale.”
In that same timeframe, the average daily rate has gone from $126.46 to $140.88 for the 11 hotels that are considered luxury or upscale in downtown Milwaukee, according to Hendersonville, Tenn.-based hotel market research firm STR Inc.
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The rate increase benefits all the hotel operators, Hanis said.
“Coming out of the recession, hoteliers saw demand was up, but they were reluctant to push rates for fear of how fragile the market was and how devastating the Great Recession was,” Hanis said. “Now, we are seeing that growth in the rates with the addition of brands like the Marriott. It’s good, because it sets a new benchmark for the older hotels that have been reluctant to raise rates.”
Occupancy also has increased, despite the addition of 313 hotel rooms since October of 2012 in the downtown area. The occupancy rate was 73.3 percent at the upscale hotels in downtown Milwaukee through October 2012, compared to 76.7 through October 2016, according to the most recent STR data available.
But Joseph Khairallah, president and chief operating officer of Marcus Hotels & Resorts, doesn’t believe the occupancy rates will continue to increase in the downtown Milwaukee hotel market.
“The picture is not very rosy in Milwaukee as long as the convention center is hobbled by its size,” he said, adding that while Marcus has felt some impact of the Marriott opening, Jackson Street will feel the impact of the Westin because they are now competing for the same business.
“We run a tight business,” Khairallah said. “We wake up and look at supply and demand and what’s on the books. We don’t worry about what the Marriott is selling that day; we don’t play that game.”
Despite the loss of market share Marcus has experienced, and the hit the company could take depending on the future of the Fourth and Wisconsin site, the deep-seeded legacy the Marcus family has in the city will not waiver.
The company continues to be recognized by many for its 80 years in the community and its commitment to the city. It has donated more than $7.5 million to nonprofit organizations through its foundation over the past 10 years and has given countless volunteer hours to local groups.
It also still has a historic, iconic downtown Milwaukee hotel built in 1893 in its portfolio.
“I hate to say it, but the story is not over yet,” Marcus said. “(Jackson Street Holdings has) planted the flag and declared victory that Marcus is wrong (about the demand for downtown Milwaukee hotel rooms). I hope I am wrong, because that means there won’t be any problems (with oversupply) in the future.”