The Great Leap
What seemed like a risky move by outrigger a decade ago now looks prophetic, as a boom is under way
Back in the early 1990s, when Outrigger Hotels & Resorts started thinking about renovating its aging Waikiki properties, pumping big bucks into the area might have seemed a bad bet.
Statewide visitor arrivals were falling, and tourists were not staying much longer than they traditionally had. Meanwhile, daily spending per visitor was fairly flat: less than $150 per day for tourists from the mainland.
For its part, Outrigger had a number of buildings, several of them tired and in need of repair, forming a canyon of concrete near the Ewa end of Oahu's prime tourist area.
Lenders were hardly beating down doors to throw money into this market, says David Carey, Outrigger's president and chief executive.
What a difference a decade or so can make.
Now, with Honolulu booming, Outrigger's bet looks like a stroke of genius. As the company celebrates the opening of the first phase of its $535 million Waikiki Beach Walk redevelopment, money is flowing into Waikiki in torrents.
"There has never been a time when there was so much equity in the market," Carey says. "There's no way in our wildest dreams that we could foresee the availability of equity and debt (now) available for Waikiki.
"Now they're calling me and going, 'Do you have any other projects I can invest in?'" he says.
But it was not always this easy. In fact, when Outrigger began considering renovating its Waikiki properties, there were questions about whether it could even do so under Honolulu zoning laws.
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"There's no way in our wildest dreams that we could foresee the availability of equity and debt (now) available in Waikiki." —David Carey, Outrigger's President and Chief Executive
As Mel Kaneshige, Outrigger's executive vice president for real estate and development, explains it, zoning laws designed to reduce density in Waikiki over time had created a disincentive for property owners to renovate. In order to comply with zoning laws, property owners would have to greatly reduce what is known as the floor-area ratio of their properties. Floor-area ratio refers to the total square feet of a building relative to the area of land it occupies. And the result would mean cutting the building's size for the sake of sprucing it up.
"What owner is going to take a functioning building and cut it in half?" Kaneshige says.
Still, that did not stop Outrigger from seizing opportunities to buy land that went up for sale around its existing properties. Thus, Outrigger began assembling properties as if its corner of Waikiki were a life-size Monopoly board. The vision of consolidating properties into a master development greater than the sum of its parts was coming into sharper focus.
By 1997, Outrigger had successfully lobbied city government to change zoning laws to allow for renovations. But that did not solve all of the company's problems. There was still a big question: Could Outrigger afford to do the deal on its own?
Carey recalls thinking, "Maybe this project is too big for our-sized company."
So Outrigger put out a request seeking proposals from major developers to partner with. The company received interest from major players, including shopping center giants such as Rouse and Trizec Hahn, a developer of glitzy megaprojects including the Desert Passage shopping mall at the Aladdin hotel in Las Vegas and the Hollywood & Highland Center in Los Angeles.
Unfortunately, Carey says, the late 1990s were perhaps "the worst time in Hawaii's history" economically. So the "bake-off" among the potential development partners "sort of cratered."
But the lack of a partner was not Outrigger's only challenge. There was also the obstacle of people who did not want to sell their property. As Carey tells it, lenders generally wanted nothing to do with a deal involving leased properties. Plus, local zoning and regulatory issues could be complicated if the development area encompassed patches of land with different owners.
"Any one of them" can be overcome, Carey says. "But you put them together and it's a show stopper."
An artist envisioned that the Lewers Street Pavilion area of the Waikiki Beach Walk will attract locals and visitors alike to while the hours away eating and shopping in this rendering.
Again, Outrigger prevailed by convincing the Honolulu City Council and then-Mayor Jeremy Harris that it was in the city's interest to see Outrigger's corner of Waikiki transformed.
Central to Outrigger's vision is the creation of a project that will not only enhance property values, but also create a public gathering place that could draw people to Waikiki.
In the end, the City Council agreed to use its eminent-domain powers to force landowners to sell out to Outrigger. The threat alone was enough.
"They never did have to use eminent domain, which we think is a good thing," Carey says of the City Council. But what it did was get the owners to the table.
"And frankly," he adds, "they got their price."
"In the end," Kaneshige says, "the deal worked for everybody."
At this point the project has clearly made it over the hump. Even though the master development is being financed through a complex structure of debt and equity attached to each project, Carey and Kaneshige say that finding equity and debt investors has been fairly easy.
The only question left, it seems, is whether the Beach Walk will fulfill Outrigger's vision of a gathering place where tourists and locals will come. As it is designed, the Beach Walk project will surround a retail and entertainment complex that Outrigger hopes will become Waikiki's iconic public space, a space that Kaneshige likens to an Italian piazza.
"Waikiki had no central place where people could gather," he says.