Hawaii | The Desired Destination for Vacations and Investments Alike at the Crossroads of the Pacific.

By Amelia Lim

Private equity funds such Blackstone, Colony and Walton Street own Hawaii hospitality assets worth billions of dollars in their portfolios. Mirae Asset and Resorttrust have acquired iconic Hawaiian hotels in the last 12 months, joining the ranks of offshore conglomerates including Kokusai Kogyo, Mitsui Fudosan and Seibu Holdings. Tech titans of the high net worth set, including Michael Dell and Larry Ellison, control some of Hawaii’s top luxury hotels. Hospitality Properties Trust, Host Hotels & Resorts and RLJ Lodging Trust are well-established publicly-traded REITs who have hotels in the Aloha State.

It’s clear why so many different types of investors have Hawaiian hotels in their portfolios. RevPAR (room revenue per available room), has consistently ranked within the top three markets in the U.S. and growth rates over the long term are better than in many key U.S. gateways. Between 2000 and September 2015 – a period of nearly 15 years spanning two global recessions – RevPAR for the State of Hawaii grew at the compound average annual rate of 4.2 percent, more than twice faster than New York City’s rate of 1.7 percent and well above the national average of 2.6 percent over the same period. Beyond the hospitality sector, Real Capital Analytics recently announced that Hawaii was ranked one of the top markets in the world in terms of total commercial real estate sales volume through H1 2015, with approximately $3.7 billion in sales. Hawaii has risen from 130th place in 2009 to its present 26th position globally, no mean feat for a state with a resident population of only 1.4 million supporting 8.3 million visitors.

The fundamental strength underlying Hawaii’s value proposition for lodging owners and investors lie in barriers to entry that are as monumental as they are well known, ranging from steep construction costs and arduous entitlement processes to the lack of suitable sites for hotel development. If not for these supply-side constraints, the fallout from 2009 would have been much worse. Given the market’s solid fundamentals, it is no wonder that investors will underwrite to a sub-7 percent stabilized cap rate (assuming a fee simple property), and recent transactions have closed at going-in returns that are well below 5 percent, underscoring investor confidence.

An analysis of Hawaii hotel transactions over the last ten years reveals that prior to the 2009 recession, activity peaked in 2006* when over $1.5 billion in hotels with nearly 5,000 rooms exchanged hands. By 2013, the value of Hawaii hotel transactions had soared to over $1.7 billion, with more than 5,100 rooms being transferred. Through Q3 2015, the total value of hotel transactions in Hawaii amounted to less than $500 million, suggesting that the cycle has plateaued.

Concurrent with the moderating of transaction activity, new construction of pure-play hotels (i.e. not condo-hotels) facilitated by steady revenue gains as well as increased liquidity in the debt capital markets has appeared on the horizon. The Courtyard by Marriott at Kahului Airport on Maui, Holiday Inn Express Kona on the Big Island, Courtyard La'ie and proposed Hampton Inn Kapolei (both on Oahu) are among notable proposed- or new-builds. Escalating construction costs, however, have balanced out the equation. As an example, Blackstone’s Hyatt Regency Waikiki recently completed a guestroom renovation, but will not be moving forward with the announced $100 million renovation of the common areas and retail podium in the near future. The Residence Inn and Embassy Suites projects in Kapolei have also been indefinitely delayed, reportedly due to the increase in construction costs. Based on CBRE’s recent experience in the market, it is estimated that ADRs (average daily rates) would have to exceed $500 in order for the construction of a traditional hotel to be economically feasible.

While the abundance of capital from China has made an indelible mark on mainland hotel transactions in the last 18 months, particularly those involving trophy assets, Chinese capital has been noticeably absent from the Hawaiian hotel transaction landscape. The large proportion of leasehold assets in Hawaii is seen as a factor which has discouraged Chinese investors, who have a long-term hold horizon and therefore perceive leases to be a significant impediment. The devaluation of the yuan is therefore anticipated to have limited impact on the Hawaiian lodging industry, especially when taken from the additional context that Chinese visitors comprise a surprisingly small proportion of total visitation to Hawaii (less than 2 percent in 2014). To put these numbers in perspective, there were approximately 160,000 Chinese visitors, which are closer in order of magnitude to the 143,000 European visitors in 2014, when compared to more than 1.5 million Japanese and 525,000 Canadian visitors.

With its changing visitor demographic, increasing quality of tourism plant on all islands, and established desirability as a visitor destination and investment location of choice, CBRE believes Hawaii will extend its significant trend and prominence as hotels to continue to be perceived as safe and highly desirable from both a national and international perspective.


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