Hotel and Office Space
In Demand in Honolulu

Honolulu is proving to be a real-estate paradise for many hotel operators and office landlords enjoying a happy mix of strong demand and little new supply. The good times have come after Hawaiian property values were badly banged up by a succession of blows. First came the departure of Japanese investors when their economy was hit in the early 1990s, then cutbacks in military spending and, finally, the collapse of travel following the Sept. 11 attacks.

The hotel and office sector have been the strongest performers. Honolulu's hotels have the highest occupancy rates of any major city and its office buildings have the lowest vacancy rate, according to Property & Portfolio Research Inc., a Boston-based real-estate research firm. Not surprisingly, the prices of hotel rooms and office leases have been rising.

Outrigger Enterprises' Waikiki redevelopment project includes renovating and converting two hotels into the Embassy Suites Hotel-Waikiki Beach Walk.

The boom is due largely to American mainland tourists seeking exotic locales closer to home and still healthy military spending. Tourism, the Aloha state's key economic driver, is on pace to top last year's record $2.7 billion hotel room revenue, according to Honolulu-based Hospitality Advisors LLC.

Meanwhile the military has maintained a strong presence in Honolulu. Along with some other U.S. government operations, it accounts for a quarter of the city's office space, according to PPR. Honolulu dodged a bullet in July when the Defense Department's Base Closure and Realignment Commission opted to keep the Pearl Harbor Naval Shipyard off its list of facilities recommended for closure.

One reason it's tough to find a room in Honolulu is that there has been little new conventional hotel construction in recent years on the island of Oahu, home to Honolulu. Just the opposite is true. Oahu has lost about 3%, or 1,000, of its conventional hotel rooms since 2000 as more hotel operators have converted rooms into time-share units or luxury condominiums, said Joseph Toy, president of Hospitality Advisors.

The bad times that preceded the boom are one reason for the shift toward more time-shares and longer-term accommodations. The idea for property owners is to make the customer bear the risk of a slowdown, says Paul Brewbaker, the Bank of Hawaii's chief economist. "Why go long in one of the most remotely located places on the planet?" Mr. Brewbaker asked.

Just how long the good times will continue is unclear. New hotels are on the way, and the number of rooms available is expected to jump substantially through 2009, PPR says. Mr. Brewbaker said soaring energy prices are also a vulnerability for tourism in Hawaii, which on Sept. 1 became the first state since the 1970s to impose a cap on rising gasoline prices.

As other less developed parts of Hawaii draw tourists, some of Honolulu's older destinations have started to look dated. Among them is the iconic Waikiki beachfront, a densely populated 1½-mile long strip of high-rise hotels. The area, featured in the Bing Crosby movie "Waikiki Wedding," was the destination for countless honeymoons.

Now Waikiki is undergoing a revitalization. Among the public and private projects in Waikiki is a $460 million effort by Waikiki-based Outrigger Enterprises Inc. As part of Outrigger's Waikiki Beach Walk project, the company is updating several hotels in a 7.9-acre parcel in Waikiki. Outrigger is demolishing three hotels, roughly doubling the retail space in the area to about 90,000 square feet in an open-air promenade, and Orlando, Fla.-based Fairfield Resorts Inc. will transform the Ohana Reef Towers hotel into a deluxe time-share property with nearly 200 units. "Some of the thinking is similar to that behind the revitalization of Miami's South Beach," said David Carey, Outrigger's chief executive.

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