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Prospecting in Hawaii: Is There Gold Along the Beach?

This week, I traveled to Dallas, Texas, where I spoke to the Hotel Development Council of the Urban Land Institute. Addressing a distinguished group of hoteliers and financial experts, I discussed the prospects for an economic recovery in Hawaii, particularly in light of the recent rash of major hotel purchases. I touched on a number of economic and political issues to help the audience decide whether the current “prospectors” of hotels are finding genuine “gold nuggets” or just a “flash in the pan.” I hope that readers of Saturday Briefing enjoy my remarks.

Good morning. I am honored to have been asked to speak with you for a few minutes about what is going on in Hawaii.

To put the things into perspective, I want to give you a little bit of the history of Outrigger Hotels & Resorts.

  • My parents started the company in 1947 with a four-story, walk-up, two blocks off Waikiki Beach. Room prices were about $5 per night, maybe $7.50 for the better views. Twenty-five thousand visitors came to Hawaii that year.
  • When the Outrigger Reef Hotel was completed in 1955, 100,000 visitors touched our shores.
  • Twelve years later, in 1967, when the Outrigger Waikiki was completed, Hawaii passed the 1 million visitor mark for the first time. A lot of those visitors were GIs and their families who met in Waikiki on R & R. Perhaps some of you were in that group.
  • In 1982, we purchased the Prince Kuhio Hotel, and Hawaii1s visitors passed the 4 million mark.
  • In 1988, we became involved with the Royal Waikoloan Hotel on the Big Island. The number of Hawaii visitor arrivals exceeded 6 million that year.
  • Today, there are close to 7 million visitors, and the next generation of Kelleys is at the helm. Under their leadership, Outrigger is reaching out across the Pacific looking for new opportunities in places like Majuro, Guam, Palau, Tahiti, Fiji and Australia.

The brochures I passed out will give you some information about those projects. The packet also contains some current news clippings and a recent economic study we did in cooperation with the state government and the World Travel & Tourism Council, which shows the importance of tourism to Hawaii. It accounts directly for 25 percent of the economy and one job in three. Add the indirect effect, and you can double those numbers. I tell people all the time that In Hawaii, Tourism Is Everybody1s Business.

The situation in Hawaii today is unlike anything I have ever experienced in my 50-year association with the state1s visitor industry. Hawaii has always been one of the leaders in world Travel & Tourism.

Until the beginning of this decade, it seemed we could do no wrong. We had strong growth in visitor numbers year after year, often with double-digit increments. As late as 1990, there was only one time when the year ended with fewer visitors than the previous 12 months. That was 1980, when we had a long strike at United Airlines.

On top of that, Hawaii, particularly Waikiki, became the darling of Japanese travelers. They would arrive on whirlwind, four-day visits. Still sleepy from the overnight flight from Tokyo, they were shuttled to shops to purchase their omiyage, gifts to take home to friends and relatives. That was great for the economy and great for hoteliers because with sold-out hotels, night after night, their rooms were not ready anyway.

The Japanese stayed in the better hotels, paying more than their Westbound counterparts for their rooms, and, overall, spending just about double per day what Americans spend and spending a lot more than most people from other parts of the world.

During the 1980s, Japanese companies acquired a significant part of Hawaii1s visitor plant at astronomical prices. They bought tour operators or installed their own. They purchased transportation companies. They also acquired, or built, a good portion of the hotel inventory–often paying more than $500,000 per room.

Visitor arrivals peaked in 1990, just shy of 7 million visitors per year. Eastbound travelers comprised 32 percent of that number, and most of those were Japanese.

Suddenly, the “bubble” burst, and the Japanese stopped buying hotels. For a while it did not matter, because the number of Japanese visitors still increased every year. Their presence buffered the state from a recession in California, a hurricane and The Gulf War, all of which knocked down the number of Westbound visitors.

By 1996, Eastbound visitors were 41 percent of the total, and the yen reached its peak strength. There were long lines outside of the Louis Vuitton and Gucci stores in Waikiki. Shopkeepers were criticized for disregarding American customers and focusing only on the Japanese in their stores.

Last year, things started to shift the other way, and the trend is accelerating today. So far this year, through August, the number of Eastbound visitor arrivals is down almost 9 percent. Since the length of the visits also is decreasing, Eastbound visitor days are down almost 10 percent as compared to 1997. That adds up to a loss of 1 million Eastbound visitor days this year.

True, this has been offset by a recent surge in Westbound visitors, but since the spending differential between East and West is $100 or more per day, even at current yen values, a total of more than $100 million has been taken out of Hawaii’s relatively small economy in eight months.

It has all had a significant impact on Hawaii’s hotel industry. Hotel occupancy this past August, normally a peak-travel month, fell to 76 percent, a 15-year low. Some have pointed out that the drop was accentuated by the 15-day Northwest Airlines’ strike and a late Labor Day holiday, but it really reflected a year-long trend.

As occupancies have fallen and the Japanese banks have begun to face reality, Hawaii’s hotels have started to go up for sale.

  • The first was the Hyatt Regency Waikoloa, which was sold about three years ago. The reported price was $60 million, plus a commitment to put in an additional $30 million in improvements. That1s a total of $90 million, a fraction of its $360 million development cost. The property is now operated successfully as a Hilton.
  • Later, Colony Capital snapped up the Ritz-Carlton Mauna Lani, also on the Big Island, for $75 million, 43 percent of its $175 million development cost. This year, hotel sales have really started to heat up.
  • In June, the Japanese-owned Grand Wailea Resort on Maui sold for a reported $263.5 million, 44 percent of its original cost of $600 million.
  • The neighboring Kea Lani also sold that month, reportedly for less than its $175 million mortgage.
  • In July, the 761-room Westin Maui, owned by Japan-based Abe International Ventures, sold for $132 million to Starwood Hotels & Resorts. That is $175,000 a room for a deluxe, leasehold property with a solid amenity package on the best beach in Kaanapali.
  • In August, the 720-room Maui Marriott next door sold out of bankruptcy for about $200,000 per room, fee simple. The price was driven up by spirited bidding between Marriott International and Hilton Hotels Corporation. The seller was another Japan-based corporation, Azabu Buildings Company, and the foreclosure was sought by The Mitsui Trust & Banking Corp.
  • August also saw the purchase of the 487-room Turtle Bay Golf & Tennis Resort on Oahu1s North Shore by a group headed by Hawaii developer Bill Mills. The seller was Japan-based Asahi Jyuken Company.
  • In September, our company, Outrigger Enterprises, purchased The Royal Waikoloan on the Big Island. We had been the manager of that property for nearly ten years and a partner in the ownership with a group headed by the Bass brothers. A Japanese partner in the ownership group had dropped out several years ago.
  • There had been any number of other offers for The Royal Waikoloan during the past three years but none closed. Outrigger matched or exceeded those offers and closed on the 545-room hotel just two weeks ago. After we complete major renovations, we will have about $125,000 per room invested in the Outrigger Waikoloa, a prime beachfront property in the heart of a deluxe resort.

Are these purchases good moves?

I think so, but it will be some time before the true values of these properties can be realized and cash flows return to normal. With Hawaii so dependent on Asian business, the financial system in that part of the world will have to be repaired before our visitor plant will again see full occupancies. If the U.S. economy goes into the tank during the next year, we will experience the proverbial “double whammy.”

In the meantime, there are some encouraging things happening in Hawaii.

This past June, we opened the $350 million Hawaii Convention Center in Waikiki after a 15-year effort. It is a beautiful facility and will generate business for all islands over a period of time. Organizations were reluctant to book the center until it was completed and tried out. Several hundred meeting planners were hosted during the three-day opening celebration, and according to reports, all came away with an excellent impression and are ready to slot the center into the future plans for their organizations.

For leisure or convention travel, Hawaii is uniquely dependent on air carriers. We keep a close watch on what the airlines are doing. Last year, Governor Cayetano dropped landing fees at Hawaii’s airports to encourage flights during this difficult time.

Thus, we were quite concerned when United and Northwest airlines announced they were shifting some of their aircraft away from Hawaii. In fact, as of last Thursday, United eliminated its daily Honolulu-Osaka flight, leaving the carrier with only a single, daily Hawaii-Japan flight from Tokyo. Some 300 United flight attendants have been relocated to other areas.

Fortunately, All Nippon Airways will step into the void later this month with daily flights to Tokyo utilizing 392-passenger Boeing 747s. ANA will also continue its daily Nagoya-Honolulu 747 service.

It is also good to hear that Hawaii is still the number-one destination for Japanese, drawing a steady 12.7 percent of the total outbound travelers from Japan. That has not changed during the turmoil of the past year

Another bit of good news is in the area of marketing. For many years, the Hawaii Visitors & Convention Bureau was thought of as the paragon of state and national tourism offices. They did great work with a minimal budget, and the arrival numbers kept on increasing. Ninety percent of the bureau1s funds came from government, primarily the state, with some county contributions.

Obtaining funds from the Legislature and county councils was always a challenge. Many of us spent countless hours wandering the halls of government to make the case that in today1s world, tourism needs to have competitive amounts of destination marketing funds.

To give you an idea of the magnitude of this issue, consider the following competitive, government-funded marketing budgets in effect for the current year:

  • California–$43 million
  • Texas & Florida–$68 million each
  • Nevada–$91 million
  • Caribbean–$194 million

Hawaii’s current budget of $32 million pales in comparison to those numbers.

We are really put to shame by the cruise lines, which operate under an entirely different set of rules and regulations and are able to spend nearly $200 million in advertising alone.

With the support of Hawaii’s visitor industry, the last state Legislature passed a 1.25 point increase in the Transient Accommodations Tax, which will take effect next January 1. It will increase the total tax on a hotel room to 11.41 percent. Timeshare rentals will also pay the TAT for the first time. The same legislation dedicated 37.9 percent of all TAT collected, approximately $55 million this year, to destination marketing.

A blue-ribbon marketing board has just been appointed to decide how these funds will be spent. The board includes some of the best and brightest marketing minds in the state, giving us all confidence in the future. Their names will be released on Friday, and I am proud to say the list includes representation from Outrigger Hotels.

When the Tourism Board starts allocating its marketing budget, many in the industry believe the Hawaii Visitors & Convention Bureau should get the bulk of the funds. That probably will be the case; but if the bureau does not produce results, future marketing contracts might be awarded elsewhere.

There might also be a change in the political climate in the state. For 36 years, the Democratic Party, with help from the government labor unions in particular, has run Hawaii’s state government. Just like any political environment, those in power will help those who help them. As a result, the growth rate of Hawaii state government has far outpaced the growth of the state1s population or the growth of its private sector domestic product.

Forbes magazine pointed out in 1983, “The paradise state is a veritable purgatory for business with a stagnant agricultural economy and a powerful political and labor union bureaucracy that has smothered attempts at industrial development.”

Things have not changed much in the past 15 years, as suggested by Forbes’ 1997 article, “The People1s Republic of Hawaii.” The article stated, “A union-backed Democratic majority in the state legislature took advantage of a cyclical boom in the late Eighties to load new taxes and costly mandates onto local business. The taxing and regulating has been a job-killer.”

Hawaii is now on the bottom of the economic ladder of state economies. As bankruptcy filings have surged during the past few years, the people of Hawaii have become restless and are challenging the Democratic Party and the union leaders.

There are now candidates from other parties–Republican, Libertarian and so on–for almost every elected position in the state. In the past, almost half of the incumbents went unchallenged. Almost certainly, there will be an increase in the number of seats occupied by other parties, primarily Republicans, when the Legislature convenes next January.

In a nationally-watched race, Republican gubernatorial candidate Linda Lingle currently has a double-digit lead over the incumbent, Democrat Ben Cayetano. Whether she can keep that lead and win on November 3 remains to be seen. The Democratic Party has a long history of marshaling the votes at the last minute.

If elected, Lingle will still have a tough job and an uphill battle to reverse the four-decade trend of high taxes, increased regulation and big government. It would appear that with a Legislature controlled by the Democratic Party, her job will be even more daunting. However, the results from the primary election show that the general population is itching for a change in direction, and Lingle might get better cooperation from the Legislature than expected.

Politics aside, Hawaii is still one of the greatest destinations in the world and its future continues to be bright, despite our present doldrums and problems.

It is safe and clean.

We have the unbeatable combination of a number of world’s bests:

  • Our year-round good weather.
  • Our physical attributes, with beaches, mountains, volcanoes and sparkling blue oceans.
  • Our activities.
  • Our cosmopolitan population mix. We are American, but foreign and exotic at the same time.
  • Our host culture, where people offer, from the heart, wonderful hospitality unmatched in the world.
  • We also have resorts and shopping venues that are the equal of those anywhere else on the planet.

I know we need to polish some areas of Waikiki that have grown old and dilapidated. Our state and city governments are finally beginning to help, rather than hinder, this process.

We need to do a better job reminding people what a wonderful place Hawaii is to visit and enjoy. We need to ride out the current economic travails of Asia and be ready for the hordes of first-time visitors that will come when their economies are healthy again. And make no mistake, they will come in the future.

When the Asian financial crisis has faded and visitor numbers have returned to normal, I predict the hotel purchases of 1998 will go into the history books as real bargains.

There are a few more choice properties left, and in case you had not noticed, they are not making any more beachfront lots in Hawaii. I invite you all to come and take a look.

Posted in: Weekly Lead Article
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