Capitalizing on a Contrarian Market

Hotel developers eyeing metropolitan Milwaukee are defying conventional wisdom by proposing new properties in a market many already consider overbuilt. In Milwaukee and Waukesha counties, the largest population centers in southeast Wisconsin, more than 30 hotel proposals are filtering through municipal approval processes, according to the Greater Milwaukee Hotel and Motel Association

If 25 percent of these win approval and financing, they could add 1,000 to 1,500 rooms to a convention and tourism market not listed on Smith Travel Research's top 25 U.S. destinations.

“We don't mind competition, but there's simply not enough business to support additional rooms,” says Kirk Drusch, general manager of the Brookfield Suites Hotel & Convention Center. Drusch is watching several projects unfold in Brookfield, an upscale Waukesha County community struggling to find office tenants for a handful of commercial complexes. Brookfield recently created a tax-increment financing district to help pay for improvements at the 1.2 million-square-foot Brookfield Square Mall the city is trying to re-establish as a regional destination.

At the same time, while occupancy and ADR in Brookfield and surrounding suburban areas are below Midwest standards, downtown Milwaukee's respective rates are increasing. That upward trend partly explains why developers are speculating that new hotels will succeed in Milwaukee's central business district.

With downtown land prices rising, developers are turning to hotels as key components of mixed-use projects that will help generate high revenue per square foot to satisfy lenders, says Jim Barry III, president of the Colliers Barry real estate brokerage and development firm.

Of course, proposing a hotel and actually building one are different challenges, says Herb Rackliff, general manager of the Milwaukee Hyatt. “I'll believe a hotel is going up when I see evidence of construction,” he says.

Downtown Milwaukee occupancy rates now approach 70 percent, says Greg Hanis, president of Hospitality Marketers International Inc., a local consulting firm working with a dozen developers looking at southeast Wisconsin locations. ADR for the seven largest downtown hotels is near $120. “There is an excitement building in downtown Milwaukee that is fueling hotel development,” says Hanis.

In the past five years, more than 2,000 residential condominiums have been added to downtown's housing mix. More than 400,000 square feet of former factory and warehouse space have been converted to office and retail space over the same period.

But elsewhere in the metro area, hotel numbers are flat. The Milwaukee-area hotel occupancy rate for the first four months of 2006 was 58.1 percent, according to Smith Travel Research. In 2005, the occupancy rate for the metropolitan area was 61 percent, its highest since the Sept. 11, 2001 terrorist attacks. The 2006 figure is likely to improve after the summer tourism season, the busiest months of the year for Milwaukee metro lodging.

The daily room rate for the metro area is $75.21 through April. The final ADR figure for 2005 was $78.74, up from $74.30 in 2004.

“Overall, It's hard to figure out where the new demand generation is coming from,” says Bill Otto, president of the Marcus Hotels & Resorts division of Milwaukee-based Marcus Corp.

Marcus owns three of the largest hotels downtown — The Pfister, Hilton Milwaukee City Center and the Wyndham Milwaukee Center. Few competitors have managed to break into Milwaukee's unusual luxury hotel market because of Marcus' dominance.

One of the biggest factors in the increase in hotel proposals is the large number of mixed-use commercial projects under consideration in downtown Milwaukee, says Otto. When developers can include multiple commercial uses in one complex, including a hotel, they have a better chance of securing financing, he says.

A second factor is the vast amount of vacant and under-utilized land being redeveloped. The development along the Park East corridor on the northern edge of downtown is taking place on 64 acres owned by the county, the city and a handful of private owners. The city and county have issued seven requests for proposal. Efforts also are under way to redevelop five parking lots and several vacant warehouse buildings.

In addition to music, arts and ethnic festivals that take place from June through August, new tourist attractions such as the redesigned Milwaukee Art Museum and the new Pier Wisconsin Discovery World bring a steady stream of visitors to downtown.

Doug Neilson, president and chief executive officer of Visit Milwaukee, claims the region can support many new hotels. The city is evolving as a destination, he says.

Moreover, additional rooms could help the Midwest Airlines Center book more conventions. Many convention organizers cite a lack of hotel rooms near the center as a reason to choose other cities for their events.

But Otto, Drusch and others believe greater Milwaukee does not need more hotel rooms under current market conditions. The only way that would change is if the Midwest Airlines Center in the middle of the central business district draws more visitors or if additional corporate offices move to Milwaukee.

“The same collection of customers can't support new hotels,” Otto says.

A third-phase expansion of the convention center has been considered since shortly after a 1999 addition of 70,000 square feet gave the Midwest Airlines Center 189,000 square feet of convention space. However, any expansion would require the state legislature to approve additional taxes to finance it. Raising taxes for that could be a tough sell in southeast Wisconsin.

On another front, real-estate developers hope to build two new mixed-use office/residential/condo-hotel high rises downtown, even though the outlook for attracting office tenants from outside the state to relocate there is dim. Most relocation among corporate tenants in southeast Wisconsin is from one municipality to another. Economic-development agencies have had little success recruiting corporate headquarters or regional offices to the area.

Marcus' Otto cites relocation of Manpower Inc., from Glendale, WI to downtown Milwaukee as an example of a corporate headquarters that can enliven the hotel market. The problem, he says, is not enough corporate headquarters or large office tenants are following Manpower's lead.

Still, hotels are being discussed for the proposed Ovation Center and Lake Pointe mixed-use office complexes downtown. The Ghazi Co. of Charlotte, NC has also proposed an Embassy Suites for its mixed-used, high-rise development across the street from the Midwest Airlines Center and the Hilton Milwaukee City Center. Milwaukee City Development officials are negotiating with Ghazi over a tax incremental financing district for the project.

Starwood Resorts and Hotels is talking to US Bank Corp. of Minneapolis and KBS Properties Inc. of Milwaukee about adding a 214-room Westin to its 42-story Lake Pointe high-rise. Lake Pointe is on hold until the developers can land an anchor office tenant.

While the majority of hotel projects bandied about are unlikely to receive municipal approval and financing, a handful could be considered sure bets.

Downtown Milwaukee could use another extended-stay hotel and boutique hotel, says Ed Kileen, a principal with Endeavour Development Inc., Milwaukee, who once worked for Marriott Hotels as a site-selection specialist. The Residence Inn By Marriott and Astor Hotel are the only extended-stay hotels in downtown.

Development Opportunity Corp., Fort Myers, Fla., plans a nine-story, 120-room, extended-stay hotel that will include 18 residential condos and 10,000 square feet of retail in downtown's 64-acre Park East corridor. A DOC spokesman says negotiations aim for a StayBridge Suites.

Several boutique hotels also are being considered for the heart of Milwaukee. Local developer Tim Dixon plans to open a $15-million, 100-room hotel in a former warehouse building that will target visitors to a $95-million, 130,000-square-foot Harley-Davidson Museum expected to open in 2008.

“Dixon's project goes beyond the cookie-cutter approach for hotels and has the best chance of being a success downtown,” says consultant Hanis.

Milwaukee developer Doug Weas plans an 18-story, 150-room boutique hotel, including a health club and 30 condos. It would be the tallest building in downtown's third ward, which runs along the Milwaukee River. In this area, dozens of former warehouses and factories have been converted to offices, condos, boutique shops and restaurants.

Weas' project is expected to be a Renaissance ClubSport, a high-end concept from Marriott International.

A mile north of the imminent Harley Museum, two neighboring developments in the Park East corridor, with a combined value of $149 million, feature plans for a pair of hotels along with retail stores, condos and apartments. Park East Square will occupy four acres and is being constructed in two phases by Chicago-based RSC & Associates. The first includes a 140-room upscale boutique hotel, 110 apartments, 12 condos and 70,000 square feet of retail. The second will have a 140-room, midmarket hotel, 27 condos, 120,000 square feet of anchor retail and 35,000 square feet of restaurants, shops and nightclubs.

In addition, Park East, a former freeway corridor demolished three years ago, is being considered for a $2.8-million project proposed for Milwaukee County-owned land. Ruvin Development Inc. of Mequon, WI wants to build a 20-story building with a 175-room, upscale hotel. At the same time, Milwaukee-based Rana Enterprises is proposing an 18-story high-rise with a 200-room hotel.

“We are just as surprised as everybody else with all the hotel proposals,” says Joel Brennan, the executive director of the Milwaukee Redevelopment Authority.

THE BIG IDEAS

The halo effect. Developers of hotels in the Milwaukee area hope robust occupancy and ADR in downtown spread to the suburbs. Leverage tourist attractions. Milwaukee's new Discovery World and a Harley-Davidson Museum under construction could spur hotel demand.

Capitalize on land availability and civic cooperation. Underdeveloped land and an encouraging political climate can stimulate hotel development.

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