WESTERN SNAPSHOT, JUNE 2006

Hawaii Hospitality Market

The islands of Hawaii beckon to visitors with images of white sand beaches, rolling surf and warm sunshine. Situated in the middle of the vast Pacific Ocean, Hawaii’s hotels have long been favored among travelers throughout the world as a safe and exotic destinations. The Hawaii hospitality sector enjoyed an exceptional 2005 with the record number of visitors boosting occupancy and room rates to new levels. Add to that the increased investor interest and Hawaii’s hotels should enjoy another robust year.

Transaction volumes

Both favorable economic conditions and rising travel demand boosted hotel market dynamics with record hotel occupancies and surging hotel revenue. The abundance of capital for investment in hotels produced 2 consecutive years of healthy hotel transaction volumes. Both 2004 and 2005 posted well over $1 billion in Hawaii hotel transaction activity. Strong transaction activity will likely continue with the anticipated closing of several major hotel properties, including the Renaissance Ilikai Hotel near Waikiki and the Four Seasons Hualalai on the Big Island.

The tremendous availability of capital for real estate and the shortage of prime investment properties spurred many institutional investors to widen their search to include hotel and resort properties. In addition to hotel REITs, Hawaii hotel and resort investors included pension funds, private partnerships and wealthy individuals all vying for the limited number of Hawaiian beachfront hotels. This competition has driven up hotel sales prices while further compressing cap rates.

Visitor Statistics

Despite falling cap rates, many investors are bullish on Hawaii’s hotel market. Rising visitor demand levels and a shortage of developable beachfront land are already positively impacting room rates and have propelled hotel valuations upward.

A record 7.4 million visitors arrived in Hawaii last year, a 6.8 percent increase over the year-end 2004 figures. The western U.S. domestic market provided the bulk of the growth in air passenger arrival counts to Hawaii, rising 7.9 percent over year-end 2004 counts with nearly 3 million visitors. This figure, coupled with the jump in eastern U.S. passenger arrival counts, boosted U.S. domestic air travel to Hawaii to 5.26 million people, a 7.4 percent increase over the previous year’s figures.

All this growth in air passenger arrival counts increased Hawaii’s total visitor expenditures to a record $11.5 billion, an 8.4 percent increase over the 2004 total. Of this amount, U.S. domestic travelers constituted $7.8 billion or nearly 71 percent of the total. Both western and eastern U.S. travelers increased their spending in Hawaii, 9.3 percent and 9.5 percent, respectively.

First quarter 2006 visitor statistics indicate a continuation of the healthy hospitality trends demonstrated throughout 2005. Domestic visitor arrival counts rose by 0.5 percent to a new record for first quarter readings. Total visitor expenditures rose to $2.9 billion for first quarter 2006, up 5.2 percent from the same period last year.

Hotel Industry Statistics

The Smith Travel Research /Hospitality Advisors LLC Hawaii Hotel Flash Report reported that for year-end 2005 the state’s hotel industry generated more than $3.01 billion in hotel room revenues, a 9.8 percent increase over the previous year. Additionally, occupancy rates rose by 3.5 percent over 2004 year-to-date figures to 81.2 percent. Revenue per available room (RevPAR) jumped by 9.7 percent from $152.17 to $166.86, and average daily room rate (ADR) figures rose to $135.50 from $118.21 in 2004, a robust 14.6 percent increase.

This sizeable growth in Hawaii’s hotel metrics boosted its status among top resort and hotel markets. Hawaii ranked second only to New York among hotels throughout the country for highest hotel occupancy, ADR and RevPAR.

Market Trends

Timeshare conversion and development is the most notable trend for Hawaii’s hotel market. Many Waikiki Class C hotels have been targeted for timeshare or condo conversion. The results are higher occupancy rates and increased room rates due to reduced availability of hotel rooms in Waikiki. The Hilton Hawaiian Village is planning its second timeshare development, and Marriott is building 300 more timeshare units at its Ko Olina resort. Several notable neighboring island timeshare conversion developments include the former Ritz Carlton Kapalua and luxury resort, the Renaissance Wailea.

The rise in second home, vacation home and retirement home demand among the aging baby boomer generation resulted in billions of dollars in sales among luxury resort developments throughout the Aloha State. Ko Olina, Kapalua Wailea, Waikoloa, Mauna Lani, Hualalai and Poipu are locations for many of the luxury resort communities catering toward mainland buyers. This affluent demographic brings unique characteristics to former rural communities.

Forecast

Hawaii’s hotel market boasts some of the most famous resorts in the world and attracts visitors from all over the globe. Many of the ideal hotel sites have already been developed, and it becomes increasingly difficult to secure entitlements for resort zoning on oceanfront land. With the relative lack of additions in the supply pipeline combined with substantial availability of investment capital, demand for hotel property throughout Hawaii is forecasted to remain high. Hawaii’s hospitality industry is anticipated to continue to post solid positive market dynamics with steady strong occupancy, room rates and RevPAR gains.

Mike Hamasu, research and consulting director for Colliers Monroe Friedlander Inc., Mark Bratton, vice president of investment sales for Colliers Monroe Friedlander, and Joseph Toy, president of Hospitality Advisors LLC, contributed this report.

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