Posted on: Sunday, July 4, 2004

Hotels slowly losing ground

By Kelly Yamanouchi
Advertiser Staff Writer

The tourist accommodation market in Hawai'i is gradually shifting away from one made up almost entirely of hotels to one in which more tourists stay in time-shares, resort condominiums and on cruise ships.

Hawai'i is an aging destination that attracts repeat visitors who are looking for different, more independent experiences. These repeat tourists are somewhere between a visitor and a resident and want to be treated as such.

"It just seemed like a good deal to have a time-share in Hawai'i," said Edward Miller, who lives in Flagstaff, Ariz., and owns a time-share at Ko Olina and another on Kaua'i that he shares with his seven children.

The shift to more hotel alternatives could eventually change the face of Waikiki and other tourist centers as it cuts into hotel room tax revenue and tourism employment. Tourism leaders hope to get ahead of the curve and manage the change.

The shift shows in a tally of how many hotel room nights sold annually last year versus in 1994, two years with roughly the same number of visitors. Ten years ago, the state sold 18.85 million hotel room nights. Last year the number dropped to 17.38 million, a decline of 7.8 percent, according to research by local hotel consultancy Hospitality Advisors LLC.

"There has been some sort of evolution over that 10-year period," said Murray Towill, president of the Hawai'i Hotel & Lodging Association.

There are several reasons for the shift:

• One is the drop in Japanese visitors. In 1994, Japanese made up about 28.6 percent of visitors to Hawai'i. Last year, that share dropped to about 20.9 percent.

• Mainland tourists, who have replaced some of the Japanese tourists, tend to prefer alternative accommodations like time-shares, resort condominiums and cruises.

• Condominium sales sped up in the late 1990s and a share of visitors to Hawai'i are returning to vacation homes, said Joseph Toy, president of Hospitality Advisors.

• Time-share use has increased in recent years.

• The cruise industry is growing, with the addition of a new ship operating interisland cruises this month.

"I think it's a good thing," Toy said. "People are beginning to look at alternative accommodations or looking at other ways to stay in Hawai'i. ... The product has to respond to the market."

The growth of the time-share industry also shows that some visitors are committing to multiple visits to Hawai'i, he said.

While hotel rooms are losing some of their dominance in the market, hotel stays still make up the majority of vacation stays by far, Toy said.

Many hotel companies are already diversifying into time-share or resort condominium properties in Hawai'i to take advantage of the trend. The decline in hotel room use has led to a series of conversions to resort condominiums, residential apartments and time-share use in Waikiki. That has helped hotel companies to keep up their financial performance as the lower supply of hotel rooms adjust to the lower use. That also keeps hotel occupancy levels relatively steady.

"Our strategy is to grow both segments — to grow time-share and hotels," said Stan Brown, Marriott International's vice president for Pacific Islands and Japan. Marriott has eight resorts in Hawai'i, with time-shares in operation or planned on Kaua'i, Maui and at Ko Olina. He said he has seen a shift in the mix from hotels to time-share in recent years, and added, "We see the opportunities and benefits of both."

But there could be an impact on the state's tax coffers, because time-share units are taxed differently, amounting to a lower take compared to tax revenue from hotel rooms. Cruises are not subject to the hotel room tax.

"The biggest impact in the erosion of visitor units will be felt by the government — less tax money will be generated," said Rick Egged, executive director of the Waikiki Improvement Association. "Overall for the future of Waikiki it's not a bad thing to have a more diverse product mix."

Even with the shift to alternate accommodations, hotel tax revenue is growing for now. Revenue from the transient accommodation tax, or hotel room tax, was $170.9 million in the year ended June 30, 2003, up 8.4 percent from the previous year. The tax revenues go to the counties, the tourism special fund for the Hawai'i Tourism Authority and the convention center special fund.

Time-share units and resort condominiums also tend to use fewer employees than full-service hotels because they often do not include daily room cleaning, concierge services, valet, restaurants and shops.

"There's a wind of change going on here now," said David Carey, chief executive of Outrigger Enterprises Inc., which operates Outrigger and Ohana hotels throughout Waikiki and the Islands. "There's no question that there's a change in inventory dynamic and the taxes generated and the employment generated."

Rex Johnson, executive director of the Hawai'i Tourism Authority, said the authority will probably do research on the effects of time-share and condominium conversions this year, then figure out how to respond.

"That's probably one of the things that we need to look at now," Johnson said. "The inventory would be less. That would certainly affect (hotel room) taxes and a lot of other things. Employment could be affected."

He said changes could affect the tourism authority, county zoning, property taxes and hotel room taxes.

"The state needs to come out with a policy about, 'Do we want to encourage this or not?' " Carey explained. "Otherwise, private companies like ours are going to do what's prudent from an economic standpoint."

Outrigger is already deep into the conversion process. The former Ohana Hobron, which used to be a hotel managed by Outrigger, has been converted to a condominium. Outrigger last year sold its Ohana Surf Hotel to be converted into a residential apartment building. And Outrigger earlier this year announced changes to plans for its $350 million Waikiki hotel redevelopment, deciding to convert a hotel to time-share, sell two others as resort condominiums and make a new hotel into a mix of residential condos, condos for hotel use, some hotel units and possibly time-share.

"If we convert to a condominium, chances are we can get our money out at a lot better rate and with a lot less risk," Carey said. "The Ohana Surf, we converted to residential rental and it filled up almost overnight."

Low interest rates are driving conversions to residential real estate use of former hotel buildings, Carey said. A stronger economy also drives demand for rental units, he said. Waikiki is a popular spot for newcomers to Hawai'i looking for apartments to rent.

"It's going to be fascinating to see in five to seven years what the destination looks like," Carey said. "With a much higher concentration of time-share and condominiumlike product, it would have a different feel. It could be a more residential community with simply less hotel rooms."

Reach Kelly Yamanouchi at kyamanouchi@honoluluadvertiser.com or 535-2470.

Correction: The Hilton Lagoon Tower in Waikiki is a time-share property. A photo caption in a previous version of this story incorrectly said the tower contained hotel rooms.