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Does Hawaii need more hotel rooms?
April 29 2013

The Hawaiian hotel industry is enjoying strong performance but has little hotel development in the works.

Highlights
  • The number of visitors to Hawaii reached nearly 8 million in 2012.
  • Tourism officials are trying to expand its visitor base to additional countries.
  • High energy costs are a major challenge to hotel operations.

HAWAII—Unless Hawaii adds more guestrooms to its hotel inventory, the tourism-dependent state won’t be able to accommodate the growing number of visitors wanting to visit the islands, says Kailua, Hawaii-based economist Paul H. Brewbaker. However, that view isn’t shared by many executives and analysts in the state’s hotel industry.

“We should all remember there are cycles, and the last one really hurt the tourism industry,” said Jerry Gibson, area VP for Hilton Hawaii. “Well-planned, positive growth in the timeshare and some hotel segments can be positive, but too much growth will be painful as the cycles arrive. We still have peaks and valleys on Oahu, and the neighboring islands still have tremendous growth potential.”

Brewbaker, an economist with TZ Economics, said he believes unnecessary restrictions on tourism development may put a cap on the number of vacationers who can visit the islands.

“From just under 7 million visitor arrivals back around 1990 and 7.5 million in 2006-07 before the recession, arrivals rebounded to almost 8 million in 2012, up dramatically from a cyclical low of 6.5 million in 2009,” Brewbaker wrote in an email message. “On a seasonally adjusted basis, arrivals in the first quarter of 2013 are already pointing to an 8.5-million arrival total for 2013. Problem is: Hawaii is running out of rooms.”

Brewbaker argues that Hawaii is “capacity constrained at 8.5 million annualized tourist arrivals” and that “the constant value of total tourism receipts was (in 2012) only 85% of the peak value in 1989.”

The number of hotels and guestrooms in Hawaii has been constant since 2007, according to census data from STR, the parent company of HotelNewsNow.com. At the start of 2007, the state had 284 hotels with 57,148 rooms. As of March, the census stood at 282 hotels with 56,793 rooms.

Brewbaker blames the nearly nonexistent growth of hotel inventory to an anti-development culture of “not in my backyard” born of the sustainability movement of the 1980s and ‘90s, coupled with “regulatory constraints on development.”

Joseph M. Toy, president and CEO of Honolulu-based Hospitality Advisors LLC, said the forces of supply and demand and basic economics will eventually spur new hotel development, but not now.

“What we need is continued product renewal, and while some of it will come through redevelopment, it’s prudent to pace the level of (new hotel) development,” he said. “We’re in a good cycle now, and while cycles can change, we need to get our industry on a firm financial footing to make sure the economics of development will be there.”

Toy points to Hawaii’s hotel building boom of 1980s as a cautionary tale. During the decade, a number of cash-rich non-hotel Japanese companies bought and built several mostly luxury hotels in Hawaii—the Ritz-Carlton Kapalua and the Grand Wailea among others.

“These developers, most of whom were unsophisticated, were driven by a significant increase in appreciation of the yen and were able to build a lot of properties that normally wouldn’t have been built using U.S. financing and economics,” Toy said. “In the 1990s, many of these properties were sold to more sophisticated and seasoned capital that addressed a lot of deferred maintenance issues, especially in Waikiki, which saw about $3.5 billion in reinvestment and repositioning in a five-year period.”

Toy said currently the development economics is only right for timeshare projects, but he believes new hotel construction may be on the horizon.

“For (development of) freestanding hotels, we’re getting close to a tipping point where it makes sense,” he said. “If our inventory increases at a natural level rather than a hyper level, the hotel industry will have a chance to improve yields, which then makes the case for new development. We’re getting there, but we’re not quite there yet.”

An up and down market
The past 10 years have been a roller coaster ride for the hotel industry in Hawaii. Following some strong years early in the last decade, occupancy and average daily rates tumbled in 2008 and 2009. The worldwide recession is partly to blame but other factors contributed.

“We had a substantial downfall due in part to the world economy in 2008, but then just as we were beginning to recover we had another setback, the earthquake and tsunami in Japan (in March 2011),” Toy said. “We began a slow recovery in 2010, it picked up at the tail end of ’11 and then roared back (last year).”

The low point for the Hawaiian hotel industry was 2009, when occupancy slipped to 64.7%, down 5.7% from the year before, according to STR. ADR fell 12.6% and revenue per available room was down 17.6%. Since then, the market rebounded and in 2012 occupancy was up 5% to 76.9%, while ADR and RevPAR rose 7.5% and 12.9%, respectively.

This solar array on the roof of the Kauai Beach Resort is designed to generate up to 100,000 kilowatt hours a month.
 

Toy believes Hawaii has benefitted from pent-up demand from mainland Americans returning for vacations. This trend coincided with unexpected recovery in the Japanese market.

“We had anticipated an increase in arrivals from Japan by 8% (in 2012),” said Toy. “It actually jumped by 17%, and part of that was driven by the Japanese government encouraging their citizens to travel abroad to take some pressure off the power grid (which was damaged) as a result of the nuclear reactor accident (following the earthquake).”

Diversifying the market has been another strategy, said Ben Rafter, president and CEO of Honolulu-based Aqua Hospitality, a management company with 24 properties on all six tourism islands in Hawaii.

“Historically, Hawaii has been a two-player game between traffic from Japan and North America,” he said. “Now we have strong traffic from Australia and South Korea. We have visa waiver for Taiwan, as well as burgeoning traffic from China.”

Airlift is always an issue for an island destination, but that dynamic is improving, Rafter noted.

“Hawaii has diversified to 954 flights per week, to 53 different cities from 20 different carriers,” he said. “To me, it’s priceless that Hawaii can have that level of diversity from where it was five or 10 years ago.”

While new development has been tamped down, the market has seen a number of transactions, management, brand changes and renovation projects in recent months:

  • Hilton’s Gibson said the company recently completed a $77.6-million renovation and expansion projects at the Hilton Hawaiian Village Waikiki Beach Resort. The project included renovations at two of the hotel’s towers, an expansion of one swimming pool and a renovation of a ballroom. He added the hotel will begin construction of an additional tower in 2014.
  • Earlier this month, Blackstone Group paid a reported $450 million for a leasehold interest in the 1,230-room Hyatt Regency Waikiki.
  • A partnership that includes Highgate Hotels bought the 401-room Courtyard by Marriott for a reported $127 million.
  • Joie de Vivre Hotels oversaw a year-long renovation of the former Seaside Hotel Waikiki and rebranded it this month as the Shoreline Hotel Waikiki. The boutique company expanded to Hawaii in 2012 with its takeover of management of the Coconut Waikiki.

The energy challenge
Not surprisingly, it’s costly to operate in Hawaii, said hotel executives and analysts. Energy is among the biggest challenges. One study from 2011 confirmed Hawaii as the mostly expensive state for energy costs.

“Energy is a huge expense for us that doesn’t seem to stop climbing,” said Gibson. “The cost of labor and benefits continues to be a challenge, and as sustainable as we all want to be, the majority of goods are brought in from a mainland and the cost of freight has risen exponentially.”

Aqua Hospitality, which only operates in Hawaii, has taken steps to curb the rising cost of energy. According to Rafter, the chain has adopted a guestroom locking system that turns off all but critical utilities when a guest leaves the room. Other initiatives include non-illuminated signage, drought-resistant plants and an extensive recycling effort. At the Aqua Kauai Beach Resort, a recently installed array of solar panels is projected to generate 100,000 kilowatt hours per month. Solar projects are in the works at two other properties, he said.

“As a state, we need to continue investing in alternative energy or other means of lowering our utility costs,” Rafter said. “As long as we’re burning oil for our energy, we’re highly dependent on the price.”

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