One of the most highly underutilized office towers on one of the busiest corners in downtown Milwaukee has been sold to Drury Southwest Inc. and is expected to be converted into a 200-room hotel.
The fact that that the Missouri-based company is considering opening a luxury property at the First Financial Centre, 700 N. Water St., is another sign the city’s hotel market is booming. Milwaukee welcomed San Francisco-based Kimpton to the Third Ward in June.
But it also has some people questioning when the downtown area might reach too much supply for the city’s hotel room demand.
Drury Southwest plans on evaluating the market for a few years before deciding if it should move forward. But if it does, the Drury, along with the three other new hotels planned in downtown Milwaukee, would add a total of 624 more rooms to the neighborhood.
Since 2012, 730 hotel rooms have been added to downtown Milwaukee. Increase that number to 1,111 rooms if you count the 381-room hotel at Potawatomi Hotel & Casino that opened in 2014 in the nearby Menomonee Valley.
A 200-room Westin Hotel is currently being built just west of the 833 East Michigan building and Bear Development recently began work to convert the Button Block building at 500 N. Water St. into a 94-room Homewood Suites by Hilton hotel.
Choice Hotels International Inc. purchased a parking lot at 503-521 N. Plankinton Ave. in January, and is planning a Cambria Hotels & Suites on the property, which is typically about 110 rooms. A company spokesman would not return emails asking when construction would begin or if that project is still planned.
With the opening of the 158-room Kimpton Journeyman Hotel on June 29, there are 4,930 rooms downtown, up from 3,951 in 2010.
Despite the additional rooms, the occupancy rate has not taken a hit. In fact, through June 2016, the occupancy rate at the 29 hotels downtown was 66.1 percent, up 4.3 percent from the first six months of 2015, according to data compiled by hotel market data firm STR Inc., based in Hendersonville, Tennessee.
The average daily rate also has increased 3.8 percent, from $126.97 per day during the first six months of 2015 to $131.77 per day through June 2016.
SpringHill Suites by Marriott opened a 150-room hotel at the corner of Fourth and Wells streets on July 5. However, those rooms were not included in the data compiled by STR.
As of right now, the Milwaukee hotel market is doing very well, but if the downtown area continues to add hotels at this pace and does not retire any of the older properties, the occupancy rate will begin to falter, said hotel industry analyst Greg Hanis, president of New Berlin-based Hospitality Marketers International Inc.
One of the indicators of a hotel’s market performance is its absorption rate, or how fast a property begins to make money once it opens. Normally, the maximum amount of time should be three years, Hanis said.
The absorption rate in the Milwaukee market from 2010 to 2014 was 7.3 months. Over the past two years, the absorption rate has doubled, to 15 months.
Working the numbers, Hanis added 624 more rooms to the mix (if the Drury, Westin, Homewood Suites and Cambria Hotels & Suites all are built) and found the absorption rate becomes two years and nine months.
“Most of the time, developers start to get skeptical when you reach just over two years,” Hanis said. “Once you reach the three year threshold, you start seeing an impact on occupancy and it has a tendency to pull down rate increases and has an overall effect on the market.”
The older hotels in the city will be hit the hardest if the market hits oversaturation, Hanis said. Newer properties, including the Kimpton, The Iron Horse Hotel in Walker’s Point and the Milwaukee Marriott Downtown would fare better, he said.
“This is a unique market because across the United States, we’re seeing more prudent development (in other cities) where people are backing off and lenders are more cautious about going into markets that are getting overbuilt,” Hanis said.
What could serve Milwaukee better than four new hotels is one large hotel, Hanis said. The city’s largest hotel is the Hilton Milwaukee City Center with 729 rooms, owned by Milwaukee-based The Marcus Corp.
Marcus also owns The Pfister and the InterContinental, both in downtown Milwaukee. With a combined 1,257 rooms in the market, the company has the most supply and has been vocal in recent years in opposing subsidies for new hotels downtown.
Joseph Khairallah, chief operating officer for Marcus Hotels, said that while additional supply has been absorbed by the market to date, continued supply growth will depend on continued economic growth for the area.
“We are concerned that any additional hotel supply will be challenging without additional demand drivers for the market,” Khairallah said. “We are also in agreement with many of our community leaders for the need of an expanded convention center capable of handling larger citywide conferences. These conferences would benefit our community as they would translate into increased local spending and additional tax dollars.”
The average size of Milwaukee’s hotels is 170 rooms, which Hanis said is small for a downtown urban center and limits diversity in the market.
“Milwaukee needs a 750- to 1,000-room headquarter hotel to attract large conventions,” Hanis said. “The city has good air service and the (room) rates are not oppressive. Milwaukee could be very competitive to go after the group travel market, but you just don’t have the diversity (in downtown hotel size) to bring in a 3,000- to 4,000-person conference.”
