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Waikiki: Present and Future - Extended Version

Six tourism leaders gather for a Hawaii Business forum to discuss Waikiki’s strengths and weaknesses, and how to keep it a robust engine of Hawaii’s economy.

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Carey: Again, some counterpoint on that: It looks like Duke’s Waikiki has continued to add jobs and that 25 percent of its market is local.

Egged: Most successful restaurants in Waikiki have a very strong local component for exactly the reason Eric mentioned: It gives them that steady business.

Petranik: We’ve heard of the Hyatt improvements and those Kyo-ya has done or planned. Anything major coming up that’s under the radar?

Carey: We constantly look at refurbishment. Every five to 10 years, there’s something that needs to be done, depending on where the marketplace is. One of the challenges for Waikiki is the cost of operating hotels in this market has continued to rise and it isn’t just labor. Utility costs here are very high. Property tax costs are very high. Ongoing regular taxes are very high. So, some hotels can’t charge enough to cover those expenses and pay for renovations. You do that on the beach, you can do that in renovated properties, but the challenge for Waikiki is what happens to the off-beach properties that are going to run out of their life cycles and need to be renovated? Will the capital be willing to put the money in to do that, without, as Eric mentioned, converting to condominiums? I don’t know the answer to that. The business model is very tough and that’s not good for tax revenues, it’s not good for employment, it’s not good for retailers and shops, but that’s the economic reality of what happens to a building if you can’t manage the revenue above cost.

Petranik: George, some of your association’s members own these hotels. Do you sense a willingness to reinvest in some of the less expensive properties?

Szigeti: They’re always willing to upgrade their product, but I’ve not heard any specifics on it. I would like to address the food and beverage situation: In that business, the cost of electricity and everything else has really gone up. In my understanding, hoteliers usually break even or lose money on in-house food-and-beverage operations. It’s a tough component, but it is something they need to have.

Nishizaki: One of our current strengths in Waikiki is also a problem for us: We are heavily dependent on Japanese tourists. We need to get more group business (meetings and conventions) into Waikiki. If we get more group business, we will have more banquets and more meetings here, and that will help the food and beverage operation. Those business groups are something David (Uchiyama) and the convention center are working on and will create a different and important market for us.

Gill: I would echo that. We have a convention center. It is supposed to be generating group business for this town. It has not been particularly successful in doing that, and we have a real problem marketing in the business sector because we have an image issue and that’s probably a problem of our own creation. We – meaning the community and the industry – have a very successful marketing program for the leisure market that has counted against us in the convention market.

We’ve see people come into conventions here and then go home and get into scandals like, “How can you possibly have a meeting in Hawaii,” and yet we know this is a very hardworking community. The people here work as hard or harder than any other community in the country.

I support the successful operation of the convention center and I think we have a new opportunity with a new contractor.

I wasn’t invited to the discussions on that, however, my understanding is they have made commitments to the authority (Hawaii Tourism Authority) and the community, in essence, that they are going to redouble their efforts to do that and do it more successfully.

Petranik: David, can you tell us if there are any developments in meetings and conventions?

Uchiyama: I agree with all that’s been said. I don’t think we did a good job in this area. We’ve restructured the sales and marketing and doubled up our sales coverage and redeployed our staff. We also have changed the convention center operator and I think it matches better with what type of customer we are looking for. SMG (the old operator) had a lot of strong positioning in the rest of the U.S. with large convention centers, McCormick (Place in Chicago), Mosconi (Center in San Francisco), others, and AEG (Facilities, the new operator) comes in with a lot of global strength, Beijing, Singapore, Sydney, Europe, and I think those types of customers are willing to take offshore meetings, so I think we are going to grow very quickly.

We’ve also restructured our international offices where the emphasis had been on the leisure market. If you go back and read the original contracts, the contracts with international contractors (representing Hawaii overseas) had been focused on representing the destination but not necessarily the meeting segment versus the leisure segment. We’ve restructured that.

So, now we have dedicated MICE people (meetings, incentives, conventions and exhibitions) in each of those offices in Japan, Korea, China. All of them have targets and goals they need to meet, and I think there’s going to be a lot of development in this area. The other thing that’s important to MICE is being able to have a seat inventory for these large groups. And, for a while, we didn’t have that seat capacity. We didn’t have that out of Japan. We didn’t have it out of Australia. We developed Korea. China is starting to evolve. So, I think all of these are going to create opportunities for us in the meetings, incentives and conventions business.

Petranik: The convention center isn’t that old, but it is old in convention center years. Does it need physical upgrades or other upgrades?

Carey: Unfortunately, it wasn’t utilized as much as it should have been so, in upkeep, it’s still fairly decent.

Egged: It’s in pretty good shape.

Carey: Let’s be fair. There were some laws passed that constrained HTA’s ability to effectively market the convention center. It was a requirement that the operator would be the marketer. Well, SMG had done a wonderful job of operating in a number of cities, but they were not deep in marketing experience, and it made it more difficult to connect with the other marketing resources that Hawaii has, through the overseas marketing agencies or HVB in North America. They’re trying to correct that now with some structures that sort of get around the constraints put in place by the law, but it hurt us for a bunch of years, and I think we fell way behind because we had the wrong marketing structure in place for the wrong folks because the law said that’s what the HTA can do.

Petranik: Is a meeting visitor more profitable to Waikiki than a leisure visitor?

Uchiyama: Definitely, per daily spend is greater for a meeting or conventioneer. I think the other thing it brings to the industry is that the meetings business is booked further out, so it gives us a foundation to build off and allows hotels to revenue manage. So, you know, looking at 2014-2015, we’ve got a fairly decent amount of business on the books and we will continue moderate growth in those years. But, as we look at 2016, ’17 and ’18, we don’t have that backlog there, but that’s what we’re focusing on. It also gives compression to the state as a whole and the Neighbor Islands benefit as well when we have a citywide (major convention) here.

Carey: Every time there has been a citywide and Oahu is full, the Neighbor Islands do well.

Egged: We may see AEG bring in the element of entertainment and athletics. They are big spenders in that component because they have the Staples Center (in Los Angeles) and they have other big venues, like the San Diego center.

Nishizaki: When David says the spend is better from conventioneers, understand that on the profit and revenue side, the Japanese market can be better because our rates are a little higher. So I think it’s important that when looking at meetings, and David (Uchiyama) is trying to do this, is schedule them during the right time of year, such as when the Japanese visitors don’t travel much.

Carey: It doesn’t help much to have a citywide between Christmas and New Year’s.

Gill: I share the optimism. AEG has a lot of expertise in these areas. But I think we have to look at it in a broader sense, too. It’s not just the convention center building itself that is the venue, but also the surrounding areas. For better or worse, we put it out there and the surrounding area is kind of a desert for walkout traffic. Compare it to what other communities have done. I just came back from San Diego. The convention center was a stand-alone building, but now it has a building on either side. They’ve redeveloped that whole Gaslamp area. They made an attempt as a community to create a better venue. We’ve talked about doing the same things but we just keep talking about this. It’s not just HTA or the tourism industry, that’s a city issue.

Egged: The convention center area is a special district that is governed by the state basically, so developers wouldn’t necessarily have to get building permits from the city, although they do any way. When I worked for the state, we looked at expanding the district to clean up, improve and redevelop the area. We decided not to do so, because at the time, the convention center wasn’t generating the kind of business that would support that kind of effort. But, hopefully, as we become more successful, that is something they can look to in the future.

Gill: The city just permitted an old folks’ home right across the street, next to the Century Center tower. Is that really the right thing for that location?

Carey: There’s an interesting challenge to hotel development. Today, it probably costs between $400,000 and $600,000 a key to develop a high-rise hotel in the marketplace and the traditional rule of thumb, which is not exact but not far off, is you need about a dollar in average rate for every $1,000 in construction costs. So, in order for a hotel to pencil out that $400,000 to $600,000 a key that’s largely an average rate of $400 to $600 a room and, unfortunately, the only place where that works is on the beach right now and there aren’t any more sites.

In the current market, it’s a long shot to get anyone to develop a brand-new high-rise hotel building off the beach unless there is really something special. The only way it has happened around the country is with subsidies and that creates a whole other round of problems politically. That’s why a lot of people choose to condominiumize because the condo owner buys the unit upfront and a developer doesn’t have to carry the risk and they don’t expect the kind of turns expected by the Blackstones and the Whitehalls of the world (Whitehall Street Real Estate Funds are run by Goldman Sachs).

I appreciate Eric’s challenge. If you have a home-ownership condominium with a lot of residents, they don’t employ a lot of people. We operated a hotel that had 600 rooms and got converted to a residential apartment building. It had 200 employees, paid TAT, GET, commercial real property tax rates and now has five employees, pays no TAT, no GET and pays residential real property taxes, and the money all comes from here and it doesn’t come from outside the state. That’s the fundamental problem for our community.

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