What’s behind the surge in downtown hotel development?

During the past five years, several new hotels have opened in or near downtown Milwaukee, adding more than 1,100 rooms to the market.

That’s a lot of new hotel room inventory for a city that is not considered a top tourist destination, like Orlando or Las Vegas.

And even more new hotels are coming to the downtown area. The 220-room Westin hotel will open this summer near the U.S. Bank Center. The Forest County Potawatomi Community plans to build a second hotel tower at Potawatomi Hotel & Casino that would add another 150 to 200 rooms there. A developer plans to convert the Humphrey Scottish Rite Masonic Center building into a 220-room hotel. Marcus Corp. and Jackson Street Holdings have massive competing hotel development proposals for the city-owned Fourth and Wisconsin site. Bear Development is converting the historic Button Block building into a Homewood Suites hotel.

It’s surprising to see so much hotel development going on in downtown Milwaukee. Why is this happening?

I decided to review the talk Doug Nysse, principal at developer Arrival Partners LLC, gave at the annual BizTimes Milwaukee Commercial Real Estate and Development Conference in November. Nysse knows as much about the Milwaukee hotel market as anybody. The theme of the conference was “myth busters” and Nysse sought to debunk the myth that Milwaukee is a “terrible” hotel market.

According to Nysse:

• Milwaukee has strong weekday corporate demand for hotel rooms.

• There is high leisure demand for area hotels from June through September, “which is the same time that most conventioneers want to have conventions in northern cities because of the climate here,” Nysse said.

• Unaccommodated demand for downtown hotel rooms during high travel periods has pushed hotel occupancy to the suburbs.

• Ten years ago, downtown hotels had an occupancy rate of about 66 percent. That dropped to about 57 percent during the recession but has recovered in recent years to about 75 percent in 2016, Nysse said, using data from Hendersonville, Tennessee-based hotel market data firm STR Inc.

• The average age of downtown Milwaukee hotels is 37 years old; in 2008, it was 46 years old. By comparison, downtown hotels in Chicago, Austin, Nashville, Baltimore, Louisville, Minneapolis, Cleveland and Madison have an average age of 21 to 25 years. In downtown Oklahoma City, the hotels have an average age of just 10 years.

• In 2012, metro Milwaukee’s population ranked 39th in the U.S., but its hotel room supply ranked 58th. “We’re just catching up,” Nysse said.

Nysse says the downtown hotel market has grown, especially as more companies are moving downtown, and points to a steady rise in hotel tax revenues in Milwaukee.

As more new hotels open, the older downtown hotels are vulnerable and may need to make changes to compete with the newcomers, says Greg Hanis, a hotel industry consultant. There is a “changing of the guard” taking place in the downtown hotel market, he said.

“Sometimes hotels close,” Nysse said. “They may be operationally or functionally obsolete. The fact of the matter is, like much of the U.S. hotel market, we are not overbuilt, but we are under-demolished.”

Reported by:  Biztimes.com