Hawai'i's hotel room rates set a record in May and were the second-highest in the country behind New York City. High room rates mean a healthier hotel industry, more tax revenues for public use, stronger employment and higher wages.

With a record 7.3 million tourists projected to visit Hawai'i this year, it's likely rates and revenue per room will continue to grow.

Arizona resident Shawna Lummer paid $300 a night to stay at the Waikiki Beach Marriott Resort and Spa last week with her husband and two daughters.

"It's more expensive than other parts of the country, but I think for what you're getting here, it's expected," said the 39-year-old Nextel senior sales trainer. "It's expensive, but it's worth it. It would be nice if it were less; we'd come back more."

Hotel executives say the key to keeping rooms filled and rates high is offering tourists something not found at other destinations.

"We've got to be known as a place that provides good values by memories and experiences that aren't available elsewhere, and then people will be willing to pay the cost of coming to Hawai'i," said Keith Vieira, senior vice president and director of operations for Starwood Hotels & Resorts in Hawai'i and French Polynesia.

Room rates have been steadily climbing since 2003 as the visitor industry recovered from the slump caused by the Sept. 11 terrorist attacks.

Room rates every month so far this year through May have topped the same period last year, which itself set an annual record in room prices and revenues.

"We're looking at a very strong summer, and in the case of the fall it's also going to be fairly strong as well," said Joseph Toy, president of hotel consultancy Hospitality Advisors LLC.

Tourism experts attribute the rise, in part, to increased demand and the repositioning of hotels to more upscale properties.

Higher occupancies allow hotels to raise rates faster than inflation, and that's been the case more so in Hawai'i than on the Mainland, Toy said.

Thanks to hotel renovations over the past five years, "a lot of properties that were underperforming are now back to a level of product where they should be and are able to command more rates," Toy said.

The renovations at the Aston Waikiki Beach Hotel and the Waikiki Beach Marriott Resort and Spa are some examples, he said.

Over the past few years, the industry has phased out many budget and economy hotels, and more upscale properties have emerged, said Barry Wallace, senior vice president of operations for Outrigger Hotels and Resorts.

He pointed to the former Waikiki Terrace Hotel, a budget/economy property, which was developed into the Outrigger Luana Waikiki resort condominium, with posted rates as high as $300-plus a night.

"It isn't just that hotels are getting more for their room; in fact, there's a different type of hotel out there, and that's had a bigger impact on the industry than in the actual rise in price," Wallace said.

The percentage of Waikiki hotel rooms that fall into the economy and budget categories shrank from 27 percent in 2000 to 23 percent last year, according to Hospitality Advisors. Mid-price rooms now make up just a quarter of Waikiki inventory, compared to 33 percent in 2000. At the same time, upscale and luxury units grew from 40 percent to more than 50 percent.

Outrigger has closed, sold or torn down about half of its Ohana branded properties — which typically appealed to more budget-conscious travelers — to bring back products positioned much higher in the market, Wallace said. The company's $460 million Waikiki Beach Walk redevelopment project that began this year includes converting a handful of Ohana hotels into a more upscale Embassy Suites and Fairfield time-share property.

The higher rates are something that Hawai'i has long deserved, according to Wallace.

"I think for many years, because of its huge amount of inventory, Hawaii has been frankly an unreasonable bargain," he said. "It's been way cheaper than it should be. And I think this is just a market adjustment that's taking place that involves a contraction of the inventory, particularly at the low end and at the same time, the rise in demand that we're experiencing because of some of the problems elsewhere in the world. You put the two together and it's become a very healthy time for Hawai'i hotels. And as a result of that, many of the owners are seeing the opportunity to reinvest and improve their product.

"I would say as an industry we're more profitable than we've been in a long time ... (in) probably 10 years," Wallace said.

Toy said the profits largely go toward paying off debt for renovations and go into further improvements and maintenance in properties, as well as returns to the owner and reinvestment in employees. Hotels also build up reserves for future capital improvements, he said.

Statewide, hotel revenues set a record last year of $2.73 billion, beating the previous $2.7 billion high water mark of 2000, according to Hospitality Advisors. The statewide average daily rate for 2004 and revenue per available room, a critical measure of hotel profitability, also set records of $150.86 and $117.36, respectively.

Hawai'i hotels took in a record $782.3 million in the first quarter of this year.

But while hotel executives are clearly pleased with the improved business, they are quick to point out that they are still making up for slower periods caused by the Sept. 11 attacks, SARS and the Iraq War.

"You have to go back to the year 2000, and if you look at trends annualized from 2000, we're still catching up from those numbers," said Stan Brown, Marriott International's vice president for Pacific islands and Japan.

"So while the rates have fairly significant month-on-month and year-on-year growth, if you go back over the last five to 10 years, we still have a long ways to go to outpace many markets," Brown said. "We're just starting to get to the healthy numbers, but we still have a ways to go."

Particularly in Hawai'i's case, "because of 9/11 and SARS, there was such a depressed room rate for a number of years that we are trying to grow back to some level that can increase profitability," said Starwood's Vieira.

"As good as the arrivals have been, when you look at hotel profitability, we are still below levels of four years ago. So we need this rate increase to cover the increase in operating costs we've been sustaining. And in looking at where rates were in 2000, I don't think the rate increase is out of line. I think this growth is good, and hopefully will continue."

Hawai'i has the highest percentage of leisure travelers among many destinations, meaning most travelers are spending money out of their own pocket, Vieira said.

"When you come to Hawai'i, it's your own dollars, so there's always going to be sensitivity to value, to price and to options - are there other locations," he said.

At some point, the prices will level off, said Toy of Hospitality Advisors. But the market hasn't reached that point yet.

"Given the increase in strong demand, despite the rise in prices, it still shows that the market attaches a premium to a hotel product in Hawai'i," Toy said.

People seem willing to pay higher prices, particularly given a strong summer season this year.

"We're not getting too much resistance on the rates," said Duke Ah Moo, staff vice president of Hawai'i operations at Pleasant Holidays, the largest U.S. operator of tours to Hawai'i. "It's more so they're looking for availability, especially during the summer right now. ... They're willing to pay more to travel during the peak season right now, but there's just nothing available."

Ah Moo said customers consider prices, "but when you have a limited availability, you don't really have a choice."

Numbers are the average daily rate for hotel rooms in May. Hospitality Advisors provided the Hawai'i average. New York and D.C. numbers are from Smith Travel Research.