Posted on: Sunday, November 2, 2003
From hotels to condos
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By Andrew Gomes
Advertiser Staff Writer
With off-beach visitor units aging, more owners are expected to find it cost-effective to convert them to housing.
Rising home prices and aging Waikiki visitor accommodations are leading a growing number of hotel owners to sell hotel units as residential condos in a trend that is easing pressures on Honolulu's tight apartment and condo markets.
More than 1,500 units at generally older, off-beach hotels are being taken out of hotel operation this year for conversion, and industry followers predict more will follow.
"You're going to see more and more hotels convert," said Peter Savio, a local developer who has helped transform several hotels for residential use recently, including the 251-unit Ohana Surf Hotel.
The trend won't significantly change the population mix of Waikiki, where the daily average of 72,000 tourists outnumber roughly 20,000 residents, but it will provide more housing for residents frequently frustrated by low inventory for sale or rent.
Hotel conversions also are allowing hotel owners to upgrade properties in Waikiki, improving the area's overall appearance and the financial climate for remaining off-beach hotels.
At the Ohana Surf, Savio began accepting long-term rental applications two weeks ago. He said he received almost 400 responses over the first weekend and keeps getting them. "The response was overwhelming," he said.
Hotel operators and owners said several market factors are encouraging the sale of more properties, including extra-soft occupancy during the past three years for off-beach hotels needing renovation.
Money spent to upgrade these buildings can yield more immediate returns if refurbished units are sold as residential condos rather than continue in what some view as a more risky hotel business since 9-11.
"The question that owners look at in some of this older inventory is if you're going to put the capital in to refurbish it and to bring it around to some acceptable standard in today's market, how are you going to get a return on it as a hotel?" said Bill Henderson, vice president of business development for Outrigger Hotels & Resorts.
In some cases, room rates are competitive whether it's an old, off-beach hotel or a beachfront hotel. But visitors generally prefer rooms near the ocean.
Savio said some hotel owners foresee greater challenges as better-positioned hotels fight for tourists who are demanding more.
"It just makes sense to sell the properties now," he said. "They have enough rooms in Waikiki — they don't really need some of these smaller and older hotels."
Kelvin Bloom, president of Aston Hotels & Resorts, said he's seeing owners jump at the opportunity. "I think it's just reflective of how hot the current market is," he said. "The median sale prices of the condominiums have gotten to the point where it makes economic sense to sell them off."
The median price for an existing O'ahu condo sold in September was $180,000, up from $158,500 in September 2002. There were 703 sales, a 54.5 percent rise from 455 in September 2002 and the second-highest volume since 1987 when the Hono-lulu Board of Realtors began keeping records.
Condo inventory was down to 1,584 units at the end of September, about 100 more than the year earlier but down from about 3,500 in 1997 and 4,700 in 1991. The average time an O'ahu condo spent on the market was a relatively quick 27 days.
The biggest recent example of a hotel converting to residential condos is the former 600-room Ohana Hobron Hotel at 343 Hobron Lane. The property, converted into a 181-unit condo called The Windsor, is more than half sold after about a month. Last week, available units started at prices from $303,500 for one-bedroom units and $467,500 for two-bedroom units.
Pearl City resident Kay Gushikuma, like others, views remodeled hotel units as a potentially appealing place to live. "I'm trying to get a place close to Waikiki," she said.
The hotel-to-residence conversions are expected to further reduce Hawai'i's inventory of accommodations for visitors, which dropped to 70,783 units last year from 72,204 in 2001, according to state figures.
But Henderson of Outrigger said the conversions will be positive for Waikiki because historically lower-end inventory gets removed, helping improve the market as a whole.
Joseph Toy, president of local consulting firm Hospitality Advisors LLC, said a lot of older hotels have been particularly challenged by generally soft hotel occupancy in Waikiki for the past three years.
But he noted that not all owners of hotels needing upgrades are turning to the residential market. Several have renovated properties and sold units to individual investors who continue renting their units to tourists through a hotel management company.
These so-called "condotels" often contain a mix of hotel rental units and residential units, depending on what a new unit owner wants.
Examples of these mixed-use properties recently put on the market include the former Ohana Ala Wai Towers now operating as the Waikiki Marina; part of the Hawaiian Monarch Hotel; part of Kuhio Village; and the Bamboo Hotel.
"Just because (of) conversion to condos, they can still manage it as a hotel," Toy said. "Depending on how they convert, it may have less inventory and less rooms to sell, but generate immediate income (from the sales)."
Henderson said the planned resale of Waikiki Terrace Hotel units following an $11 million renovation is an example. Larger one- and two-bedroom units may appeal more to residential buyers, while studios may be better suited to remain as hotel rentals.
Advertiser staff writer Kelly Yamanouchi contributed to this report. Reach Andrew Gomes at agomes@honoluluadvertiser.com or 525-8065.
"They're adequate now," Savio said of borderline hotels, "but they're not going to be adequate in five to 10 years." So owners, he said, are taking advantage of low interest rates and strong demand and prices for residential condos and leaving the hotel business.
