FL MORRIS / FMORRIS@STARBULLETIN.COM Outrigger's Lewers Street properties will soon give way to construction of a new high-rise, temporarily taking hotel rooms off the market.

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Hawaii hotel rates
soar skyward

Driven by simple supply
and demand, room prices
are expected to surpass
2000 levels soon

Demand for Hawaii's hotels and an ever dwindling supply of rooms has reversed a three-year trend of declining hotel rates, but hoteliers are as concerned about profitability as ever.

"Hawaii was 12 percent ahead for the first 10 months of 2004 and it looks like we'll surpass 2000 room prices very easily," said Joseph Toy, president of Hospitality Advisors LLC.

It's the same story across the country as strong demand levels and market improvements are making bargains harder to find. Room rates across the top 50 hotel markets in the United States -- which reportedly fell 6.4 percent from 2000 to 2003 -- increased by 3.7 percent this year, according to the Winter 2005 Hotel Outlook prepared by PKF Hospitality Research and Torto Wheaton Research. Room rates also are expected to jump another 4.7 percent in 2005, according to the report, which was released earlier this month.

Rooms in New York, the nation's most expensive market, are forecast to lead the price growth with an average daily rate of $237. Rooms in Honolulu, the second most expensive market, are predicted to rise to $143 per night, with Boston, San Francisco and West Palm Beach, Fla., rounding out the top five most expensive hotel markets.

A strong U.S. and Japanese economy, improved airlift, reinvestment in Hawaii's hotels, a strong yen and a weak dollar will continue to increase demand for the state and drive up room rates in 2005, said Keith Vieira, senior vice president and director of operations for Starwood Hotels & Resorts Worldwide Inc., Hawaii and French Polynesia.

At the same time, conversions of hotel rooms to condominium and timeshare units has decreased the supply of Hawaii hotel space.

While the market is likely to continue to propel room rates upward, the challenge next year for Hawaii's hoteliers will be increasing profitability, Vieira said.

"Our rates have nearly recovered to 2000 levels, but meanwhile we've had five years of increased expenses," Vieira said. "The reality is that Hawaii is a very expensive place to do business and hoteliers are still concerned about profitability."

Even so, the news is good for the hotel industry. Hawaii hotel room revenue reached a record high $215.4 million in October for that month, surpassing October 2000's $215.2 million, according to Hospitality Advisors LLC. Statewide average daily room rates, which came in at $140.96, also set an October record.

"We'll continue to see room prices rise in 2005, but since the market has been recovering in Hawaii for some time, we'll see more modest increases than on the mainland," Toy said.

However, visitors to Hawaii are willing to pay greater prices if their demand is high and the islands meet their expectations, he said.

"We've already seen more acceptance of paying higher prices in Waikiki," Toy said. "When the Aston Waikiki Beach Hotel and the Waikiki Beach Marriott renovated their hotels and substantially raised rates, the market accepted the change."

The upcoming $800 million redevelopment of Outrigger's hotels in Waikiki, the improvement of Kuhio Avenue and renovations to the Royal Hawaiian Shopping Center and the International Market Place are likely to have a similar effect, he said.

"As the product continues to improves, it will have greater appeal for the upscale market," Toy said.

There's excitement that Outrigger's Waikiki Beach Walk Project, scheduled to begin in the second quarter of 2005, will turn an aging and congested portion of central Waikiki into a combination of new and refurbished timeshare and hotel accommodations.

As part of the project, six low- to midrise hotels will be replaced with a single sky-reaching tower, expanses of open space and an old-Waikiki-themed complex of shops, restaurants and entertainment.

"It's going to be great for Waikiki," said Stan Brown, Marriott International's vice president for the Pacific and Japan.

The initial reduction in hotel rooms is likely to compress the market, further causing hotel rates to rise, he said.

As part of the Outrigger project, the Ohana Reef Tower will close to guests in February and several other properties will follow suit in April, said David Carey, president and chief executive officer of Outrigger Enterprises.

"There's no question that increased investment as well as supply and demand has created an upward pressure on rates," Brown said. Despite downtimes in tourism, Marriott has reinvested in Hawaii since 1999, he added.

Still, while the broad expanse of hotel improvements has started to pay off for Hawaii as a destination, rates have not been rising as fast as inflation, Brown said.

"There has been a rebound in rates, but we still have a long way to go," he said. "We need to continue spending marketing dollars on Hawaii and discourage any tax increases, which would be extremely negative for an industry that is just starting to rebound."