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Friday, October 31, 2014 |  Madison, WI: 33.0° F  Partly Cloudy and Breezy
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The downtown hotel boom: Should Madison chip in to add more rooms for Monona Terrace?
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Credit:David Michael Miller

The way Sanford DeWitt sees it, there are two kinds of travelers. There are the "spreadsheet guys," who "have to have everything planned out, have to have an itinerary."

"They're going to stay at a Hyatt," he says.

The other type of traveler is the "adventurer." This kind of person might book a hotel just a couple of hours in advance. They wouldn't be caught dead in any sort of organized tour, and they hate chain restaurants. The adventurer wants to get out and explore a city, ideally on foot or bike, to see what the homegrown culture has to offer.

The adventurers make up just under half of all travelers, according to the United Nations World Tourism Organization. But, DeWitt says, "Most of the attention and facilities are geared toward the [spreadsheet travelers]." He would like to change that.

He's proposing a boutique hotel and hostel for the 800 block of East Washington Avenue called the LaFollette Hotel. The project would be modest, with about 90 hotel rooms and another 80 hostel beds. It would be tailored as much to the neighborhood as to visitors. The project would have a restaurant and community gathering space. It would be an ideal place for families on the east side or downtown to put up visitors. Most importantly, says DeWitt, the hotel would be a place for those who want to interact and explore Madison.

"Our business is geared at getting those kinds of people in and getting them out into the neighborhood," says DeWitt, who has a background in real estate and has run several small businesses. "Other hotels will send people to a couple of different restaurants, but they don't give them the tools to do the self-discovery that a lot of people want to do."

Downtown Madison is in the midst of a mini-boom in hotel construction. The city is contemplating funding a massive project next to Monona Terrace in hopes of boosting the convention business. Another hotel is being proposed at the site of the old Pahl Tire, 202 E. Washington. The Edgewater Hotel is under renovation. A hotel is now being constructed on West Johnson Street.

But how many hotels does downtown need? And what kind of hotels? Then there's the key question: Should the city spend tax dollars building them?

Occupancy rates

A study completed late last year by Johnson Consulting of Chicago found that the greater Madison area - which includes Monona, Fitchburg, Middleton, Verona, Sun Prairie and a handful of other suburbs - has 85 lodging properties, with a total of 8,924 rooms.

In the downtown core, there are 10 properties, with 1,845 rooms. The study's figures do not include the newly built HotelRED near Camp Randall, which has 48 rooms, or the Edgewater, which will have 198 rooms after renovation. It also excludes smaller bed-and-breakfast operations.

The average hotel rate in 2011 citywide was $89.20. Downtown hotels brought in an average of $127.97 per room.

In 2011, according to Johnson, the occupancy rate for all city hotels was just over 61%. Downtown hotels fared better with a 67.4% occupancy rate. The five hotels closest to Monona Terrace performed even better, with a 69% occupancy rate.

According to Heywood Sanders, a professor of public administration at the University of Texas at San Antonio and a prominent critic of publicly funded convention facilities, "The general rule of thumb is you have to run about 65% occupancy to make much money."

For years, officials have pointed to the shortage of rooms near Monona Terrace as a reason the center hasn't attracted the conventions they would like. In 2012, Monona Terrace hosted 32 conventions and 33 conferences. (Conventions are larger and generate more hotel stays than conferences.)

Two studies have recommended Madison build larger hotels near Monona Terrace. In 2008, Hunden Strategic Partners recommended (PDF) the city build a 400-room hotel within 1,200 feet of Monona Terrace. And last year, Johnson Consulting recommended the city build a hotel with at least 400 rooms, but as many as 500.

Turning us down

The studies confirm what Gregg McManners has known for years: Monona Terrace is losing convention business because there aren't enough hotel rooms nearby. It has a guaranteed block of 150 rooms from the Hilton Madison next door, but many conventions need at least 300, he says.

"A number of conventions have turned us down because of the lack of rooms," says McManners, executive director of Monona Terrace. "Until we change that, we're not going to grow our convention business. It wasn't because of our facility that they turned down Madison. They turned it down because of the hotel space."

McManners says that after the Hilton opened in 2001, the convention center saw a 10% to 15% growth in conventions. He expects business to grow more with another hotel.

But Sanders disputes the notion that more hotel rooms magically bring more conventions. Cities across the country have been trying this strategy for decades without much to show for it. According to Sanders, the United States in 2000 had 52.1 million square feet of available exhibition space. In 2011, the space had grown to 70.5 million square feet, a 33.7% increase. But, he says, convention business and attendance have both declined or stayed flat.

He points to Baltimore as a perfect example of this trend. The city constructed a $305 million Hilton in 2008 in hopes of growing business at its convention center. Johnson used this project as an example of how a new hotel could boost attendance at Monona Terrace. But so far, the Baltimore Hilton has been a failure. From its opening until 2011, the hotel lost $53.7 million, according to the Baltimore Business Journal.

Other cities have also done poorly. St. Louis borrowed $266 million in 2003 to renovate the historic Grand Hotel to complement its nearby convention center. The hotel was foreclosed on in 2009.

If new conventions fail to materialize, the new convention center hotel is forced to look for other business, Sanders says.

"Then you get a hotel that's competing against every hotel in that sub-market for the same pool of business. As in the Baltimore case, [the convention center hotel] will reduce its rates, it'll start offering deals, it'll start trying to cannibalize business from other parts of the market."

Too many rooms

Despite the well-publicized struggles of the industry around the country, Madison officials seem determined to push the same strategy here.

The city proposes using two blocks across from Monona Terrace that now include the Municipal Building and the Government East parking garage to build a hotel. The project, dubbed Judge Doyle Square, has many components, including building 520 to 600 underground parking stalls, as well as office and commercial space. The whole project is driven by the desire for a new hotel.

"It's kind of like they've been salivating over that block for so long, they just can't look away," says Bert Zipperer, who served on the Common Council when the city was arguing over whether to build Monona Terrace. "They're entranced by that site."

But the market is at odds with the call for a 400- to 500-room hotel. Four development teams submitted proposals to develop Judge Doyle Square, and all of the proposals were under the 400-room threshold. Some proposed fewer than 300 rooms.

"It's too many rooms," says Harley Blackburn, vice president of Journeyman Group, which proposes building a 352-room Marriott (or, alternatively, two hotels with a combined 352 rooms). "It's just not profitable to put in that big of a hotel."

But even the smaller hotel is going to require city subsidies. Journeyman - which is one of two development teams still in the running - is looking for subsidies for various aspects of the project, including $9 million from the city's parking utility; $18.8 million from city revenue bonds for the city-owned and -operated parking elements; $25.8 million in tax-increment financing bonds issued for the hotel, retail, office, residential and private parking elements; and $4.4 million to fund a financial gap that the company's preliminary estimates indicate could be needed for a full-service Marriott.

Blackburn says full-service convention hotels always require a little bit of public funding because they have "a lot of space that's not being used by the operators" to generate revenue.

Sanders isn't surprised the proposals are more modest than city officials were hoping for. Smaller hotels are "easier and cheaper to build, and they have less risk," he says. "They're not as expensive to operate. That's what the market can support."

Indie appeal

To judge from the number of pending hotel projects, the Madison market is heating up.

In addition to the renovated Edgewater Hotel, the Raymond Group is building a 194-room Hampton Inn and Suites in the 400 block of West Johnson near the UW campus. And the Alexander Company is proposing a 100- to 150-room hotel on East Washington.

Sanford DeWitt, who wants to build the LaFollette Hotel on East Washington, says Madison needs unique indie hotels, not more chains. "I don't have any desire to stay in those kinds of hotels," he says. "And a lot of people don't."

He got the idea for his project after traveling extensively in Europe and finding many alternatives to the large, generic chains. The "adventure" travelers gravitate to indie lodges.

"Those [chain] hotels lack authenticity," he says, comparing them to restaurants. "Go down to the Cardinal Bar and get the Cuban sandwich at that new window-service joint. Then go to Subway. The difference in sensations is profound, isn't it?"

While DeWitt says some city officials have supported his concept, the city is ultimately holding him up. He needs to know two things before moving ahead with his project: whether he'll have to buy the entire lot (which the city purchased a couple of years ago through its land bank process) and how much parking he'll be required to provide.

"If I've got to come up with money to build a parking ramp, that's a whole other deal," he says. "If we're going to do a parking ramp, then tax-increment financing is an issue, and we've got to pay for a different consultant. I don't want to do that in advance if I don't have to."

Return on investment

The arguments in favor of a major hotel project next to Monona Terrace sound familiar to former alderman Zipperer. Monona Terrace itself was bitterly debated for years before finally winning narrow approval from voters in 1992.

Zipperer was against building it then and still "isn't that crazy about it. It walls us off from the lake."

"The argument at the time was, 'We have to build Monona Terrace or downtown will fail,'" he says. He sees the same argument for the convention center hotel: "It's always absolutely imperative that we do this, and if we do it, it will be a wonderful nirvana."

Zipperer is also concerned that the city has funneled so much of its hotel tax revenue into Monona Terrace. He would rather see it go to basic city services.

The room tax is expected to bring in $10.5 million (PDF) this year. Of that, a little more than $6 million goes to Monona Terrace to help pay operating expenses, debt and capital expenditures. Another $2 million goes to the Greater Madison Convention & Visitors Bureau, which helps promote both the convention center and tourism in Madison. The rest of the hotel tax funds are dispersed to the Overture Center, the Rhythm & Booms July 4 fireworks event and a few other programs.

Zipperer doesn't see much in the way of results from Monona Terrace. He sees a downtown dominated by condos and hotels and wonders where are the high-paying jobs the city needs to create.

"To focus on the hotels, it seems like a lot of money. And I'm not sure there's a return for all the community members," he says. "Especially when one institution gobbles up all the revenue."

McManners argues that the subsidy is money well spent.

"Convention centers were never built around a business model to make money," he writes in an email. "They were designed to make other entities money. The average economic impact generated by Monona Terrace in the past seven years...is $41,581,300, or roughly 62% of its construction cost every year. Regardless of our subsidy, we provide a tremendous return on that investment, and the downtown benefits."

Mayor Paul Soglin acknowledges it can be risky for cities to invest in convention centers. But he thinks Madison's situation is different.

"I'm well aware of municipal failures in this area," Soglin says. "They have not done the kind of work we've done from the inception of Monona Terrace. We built the facility knowing the market and what the potential was. We didn't just build something on the site and hope folks would show up."

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