REPORT FROM THE U.S.—Hotel owners and operators in Hawaii remain bullish on the market despite recent softening in occupancy and the number of visitors arriving in the state.
“Hawaii, and Waikiki specifically, has proven to be a top three market in the (United States) with very strong demand characteristics and constrained supply over the past 10 to 15 years,” said Adam Valente, investment origination managing director of Rockbridge, a Columbus, Ohio-based investment group that in January purchased the 247-room Aqua Waikiki Wave Hotel in Honolulu. “Going forward, Waikiki in particular will have a special position vis-a-vis other U.S. markets from a hospitality standpoint.”
Hotel executives in the state cited several factors for the slowdown in the market, which suffered a 1.2% decline in occupancy during the first five months of the year, according to STR, parent company of Hotel New Now.
As Jan Freitag, senior VP of global development of STR, writes in the accompanying “Trouble in paradise? Hawaii hotel performance,” the 4.6% increase in revenue per available room from January to May was driven by an increase in average daily rate of 5.8%. Through May, arrivals to the state fell 0.5% compared to last year, while visitor expenditures increased by 3%, according to data from the Hawaii Tourism Authority.
“There are a couple of things going on, some of them subtle and some not so subtle,” said David Carey, president and CEO of Outrigger Enterprises Group, in explaining the flattening of demand. “Mostly, it has to do with economics. But it’s not one thing; it’s a combination of things.”
One issue cited by several hoteliers was weakening currency rates in two of the state’s key feeder countries: Japan and Australia. In addition, the government of Japan recently raised its consumption tax from 5% to 8% with another increase to 10% scheduled to take effect in the third quarter of 2015.
“What’s happening with many Japanese consumers is that instead of taking vacations, they bought refrigerators and cars to beat the April 1 deadline,” said Jerry Gibson, area VP of Hilton Hawaii.
Pent-up demand
According to Joseph Toy, president and CEO of Honolulu-based Hospitality Advisors, the downturn is a natural conclusion to a bubble in demand from mainland U.S. consumers following the end of the recession.
“We didn’t start crossing the line into real growth until the early part of 2012 when pricing began to strengthen a bit,” Toy said. “The real expansion happened in the mid part of 2012, and it accelerated to the end of summer of 2013.
“Since then, the Japanese market slipped due to changes in currency rates, and the pent-up surge in demand had pretty much played itself out.”
While Toy believes the industry will stabilize for the rest of the year, he said it is more difficult to forecast performance due to shorter booking windows.
Carey said the shortening of the booking window is a long-term trend that has become more pronounced in recent years.
“When I started in the business 20 years ago, I could tell you right now how September was going to be. Now I only have a pretty good read on next week,” he said. “The Internet has played a major role in that trend. People make decisions to go places in the same time frame (as they always did), but they know because of Internet booking sources they don’t have to conclude a transaction until they are really ready to do it.”
Hotel performance has varied from island to island, said Cheryl Williams, regional director of sales and marketing for Starwood Hotels and Resorts Hawaii and French Polynesia, in an email.
“We’ve had good year-over-year growth on Oahu and Maui, and we saw less compression this year versus last year,” she said. “Growth on the islands of Hawaii and Kauai has been slightly less robust.”
Increased competition from other resort destinations, especially Mexico, is another factor affecting demand for Hawaii.
“Mexico has been somewhat stable for the past couple of years,” Gibson said. “And to get there is a little less expensive and the hotels are a little less expensive.”
New feeder markets
Hoteliers in the state are searching in new directions for customers. Two primary targets are China and South Korea. Another, according to Williams of Starwood, is Brazil.
Arrivals from Asian countries besides Japan increased 18.4% in 2013 over the year before, with arrivals from Korea up 11.8% and China up 13.5%, according to the Hawaii Tourism Authority.
“There is a massive amount of demand in China to go to Hawaii, but it isn’t easy yet for an average Chinese tourist to get a visa to come to America,” Carey said, who added it’s easier for South Korean visitors to come to Hawaii because the U.S. visa waiver program includes the country. “That’s especially important for us because Hawaii is a starter market for honeymooners and people without a lot of money.”
Many hoteliers are upgrading their amenities, services and facilities to accommodate the expected surge in Chinese travelers.
“It’s a different market, and it’s important to be prepared,” Toy said. “You can’t compare the Chinese market to the Japanese or Korean markets. The guestroom setups and amenities need to be different, and the way (Chinese tourists) shop and eat and move within the destination is different.”
Hilton in Hawaii offers a program it calls Hilton Huanying to serve its Chinese guests. Components of the program include front-desk agents who are fluent in Chinese languages; in-room amenities such as teas and tea kettles, slippers and chopsticks; and expanded breakfast menus with a variety of traditional Chinese menu items.
Appetite for transactions
The market for hotel transactions in Hawaii remains robust. According to Toy, more than $840 million in sales closed so far this year. Last year, according to Colliers International, 13 hotel properties sold for more than $2 billion, and hotel transactions accounted for 53% of all commercial real estate sales in the state.
“Last year was a record for transactions, but this year will probably be a little under that unless a couple of transactions in the pipeline get done by the end of the year,” Toy said.
Little new hotel development is in the pipeline in Hawaii. According to STR, six properties totaling 339 rooms are under contract. Toy said most new hotel development under consideration is for limited-service properties.
“There is some luxury hotel development being planned, but most of those projects are part of mixed-use and condo developments,” he said. “On the other hand, we’re seeing significant inventory of timeshare projects coming up, particularly in Oahu.”
While the Aqua Wave was Rockbridge’s first acquisition in Hawaii, Valente said the company has interest in the state, and it is open to a variety of strategies.
“We’re going to leverage what we do well,” he said. “On the capital side of the business we can do first mortgages, we can do joint ventures, we can acquire as we did with the Wave. It could even be a development opportunity.”