Cutting the budget

Hawaii's least-expensive hotel rooms are becoming less affordable because of shrinking inventory and upgrades

JUST OFF Keeaumoku Street in Honolulu, sharing the block with karaoke clubs, beauty shops and storefront restaurants, stands an increasingly rare breed: a nice hotel in Hawaii that rents rooms for $80 per night.

"We could probably jump on the bandwagon and get $130 a night," said Edward Saunders, general manager of the Pagoda Hotel & Restaurant, a 359-room property located on a side street near the Ala Moana Center shopping mall.

"We might not get the (high) occupancy," Saunders conceded.

"But," he added, "we're not looking to do that. Our focus has always been to provide value."

The Pagoda is hardly the only hotel in Hawaii offering simple rooms at budget prices. But budget rooms are clearly becoming an endangered species in Hawaii. And as supply of the inexpensive rooms dwindles, rates for budget-priced rooms are going up to a point where they are no longer really budget-priced rooms.

For the month of May, the average daily rate for a budget room in Hawaii was $96.05, Hospitality Advisors LLC reported in its monthly market survey. That was a 53 increase over the average daily rate of $62.95 for the budget category in May 2005.

Meanwhile, the phenomenal rise in rates didn't discourage visitors from snatching up rooms.

Occupancies for the budget category in May were 80.5 percent, only slightly off the remarkable 84.7 percent occupancy posted in May 2005 for the budget category.

During the same period, revenue per available room, which factors in both rate and occupancy, rose 45 percent to $77.34.

And May was hardly an anomaly. Year to date, the average daily rate for the budget category is hovering at about $100, with revenue per available room riding high at just over $86.

"Many people think that there aren't any affordable rooms here, but there are," said Joseph Toy, president of Hospitality Advisors. But, Toy said, there simply aren't as many as there once were.

The reason, Toy and others say, is one driven by market forces, especially owners who have invested heavily in properties to make them nicer. In many cases, developers have made small fortunes by turning shabby, poorly performing hotels into condotels -- condominiums that are placed in a pool managed by a hotelier and rented out when not occupied by the owner.

In other instances, owners have opted to turn low-end properties into nicer ones that can justify the higher rates needed to maximize revenue and recoup their investments.

Toy estimates that about 3,000 budget-priced rooms have been removed from Waikiki's inventory in recent years. And the decrease in supply naturally pressures rates to rise.

Meanwhile, rising luxury rates have made the higher budget rates seem like bargains by comparison.

"The whole thing was probably started by the fact that there was so much distressed property," said Mike Paulin, chief executive of Aqua Hotels and Resorts, which manages eight properties in Honolulu, including the Aqua Bamboo & Spa, Aqua Kuhio Village and Aqua Palms condotels.

"The pendulum probably swung a little too far to the luxury side, and now there's a flood in the midpriced category," he said.

The result is that properties like the Pagoda are enjoying extraordinary times. When Saunders started working at the Pagoda as a bellman 20 years ago, the hotel was primarily a kamaaina property, its core market visitors from neighbor islands and far-flung parts of Oahu who were looking for a clean, simple place to crash in town.

Kamaaina remain the hotel's core market, Saunders said. But in the last few years, more and more tourists from the mainland and Asia have come to stay at the property, attracted by the hotel's rates, which are among the lowest in Honolulu.

The result has been occupancy levels of 95 percent last year and about the same so far this year, Saunders said. Although rates are higher for visitors from elsewhere, the Pagoda offers Kamaaina rates as low as $80 a night, Saunders said.

"There aren't a whole lot of budget properties anymore," Saunders said. "But we're still value driven, and that's important to us."

To be sure, there are factors that might hinder the Pagoda from drawing top dollar. Although the property is walking distance from Waikiki and Ala Moana beaches, it is not on the beach or even in Waikiki. And it's hardly on the leading edge of luxury. As Saunders points out on a tour, the rooms have window unit air conditioners.

Nonetheless, the hotel's lobby is spacious, replete with bamboo accents and breezy with a distinct island feel. Its pool area is neat and clean. And the restaurant is surrounded by well-kept foliage and an extensive koi pond flowing from an artificial waterfall.

With all of the people coming through the hotel these days, the Pagoda's owner, HTH Corp., must spend more to replace items like carpets and bedding, Saunders said.

"Five years ago, things might have lasted five or six years," he said. "Now they don't last that long because there's a lot more wear and tear on the facility."

In addition, Saunders said that the surge in mainland customers has prompted Pagoda marketing executives to call on all of their major tour-packaging customers on neighbor islands to warn them that customers might not be able to find rooms at the Pagoda if they wait until the last minute to book them, as they once could do.

"It's a wonderful thing to see the eastbound and westbound business grow," he said. "But at the same time, people need to understand... ."

To be sure, the Pagoda isn't the only place on Oahu that has seen the value of the budget market. A stone's throw from the beach on Lemon Road near the Diamond Head end of Waikiki, several hostels are serving people traveling on a shoestring by offering dorm-style accommodations, with beds starting at about $25 per night.

Although that might seem like small change, the hostel model can drive per-room revenues of as much as $200 when eight people share a unit, which is not unusual.

That's considerably more than the average daily rates generated by upscale hotels in Hawaii, which posted average daily rates of about $173 for the first five months of 2006. Daily revenue per available room for upscale properties was about $141 through May.

Still, sharing a room isn't for everyone, said Orlena Wong, general manager of the 186-bed Waikiki Beachside Hostel.

"The thing is, we have a pretty niche market here," she said.

Beyond the hostels, the discount room in Waikiki appears an elusive creature, especially for people planning their trips only a month or so in advance.

A recent search on the travel Web site Travelocity.com, for example, turned up just five properties in town with rooms available for less than $100 per night during the week of Aug. 6. They included Marc Resorts' Hawaii Polo Inn and Tower on Ala Moana, with rates of $93.33 per night; the Ocean Resort Hotel Waikiki, with rates of $97.31; and the Aqua Coral Reef Hotel, with rates of $89.33.

The Pagoda's rate on Travelocity was $96.40 for the period.

Saunders acknowledges that the Pagoda has raised its rates amid the strong demand of recent years.

But, he said, the property views bargain-hunters as its core market, and it wants to serve them in order to build loyalty in case the market turns.

"The question is, 'How long is this bubble going to last?' " he said. "We think we're going to be in a pretty good position for when it breaks."