Finally, brand name hotels are beginning to sell again! After the fall of Lehman Brothers in 2007, when financial markets and subsequently real estate investment activity skidded to a stop, investors have reawakened and started eyeing hotels in Hawaii. As airline seat capacity surged to eclipse 2004 Hawaii visitor arrival counts and market indicators such as RevPAR (Revenue Per Available Room) and ADRs (Average Daily Room Rates) rebounded healthily, investment opportunity funds (i.e. vultures) came out of the woodwork and started combing the beaches for distressed hotels and resorts.
Prior to the market downturn in 2007, many Hawaii resorts secured CMBS funding for acquisition, redevelopment or renovation. It is these hotels that are often faced with a
distressed financial situation as their loans come to maturity. In 2011, a majority of the hotel transactions were for distressed property sales. The Fairmont Orchid Hotel on the Big Island was acquired by highly seasoned investors that purchased this prized hotel from its lender for nearly one half of the price it last traded for. Other hotels facing foreclosure include the Sheraton Keauhou Bay Resort on the Big Island of Hawaii and
the Ritz Carlton Kapalua on Maui.
You may ask why properties are trading now. We believe it is a convergence of a couple of factors. First, the increase in buyer interest is based on the belief that the worst of the travel downturn is behind us. According to PKF Consulting, average daily rates will rise 3.1% per year over the next two years. Tourism numbers are up significantly with arrival counts, hotel occupancy and tourism expenditures improving to pre-recession levels. Second, supply continues to remain constrained as there is only one new planned hotel development on the drawing board at this time. The buyers of hotels are mostly private equity funds and are paying all cash for acquisitions.
There were eleven transactions categorized as hotel or resort sales in Hawaii in 2011. Of the eleven sales, only two were land sales. These few land transactions leads us to believe that real estate development of hotels and resorts will not play a large factor in the upcoming expansion phase of the real estate cycle.
Looking to the future, we expect to see more foreign investments into hotels and resorts for sale in Hawaii. This is being driven by the strength of foreign currency against our dollar. Hawaii has seen increased Japanese investment into several trophy office buildings this past year. The robust improvement in retail sales spurred by resort retail and tourism expenditures will be a prime driver for future foreign investment in Waikiki. We expect the number of hotel transactions to increase and
the total dollar volume to double in Hawaii in 2012.
To download this article in Colliers International’s Investment Market Report YE2011, click here.