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Waikiki: Present and Future

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

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Full transcript at hawaiibusiness.com/forums

Photo: Rae Huo

Panelists

This an edited and condensed version of a conversation involving:

  1. Moderator: Steve Petranik, Editor, Hawaii Business
  2. W. David P. Carey III:  President and CEO, Outrigger Enterprises Group
  3. Eric Gill (right), Financial Secretary-Treasurer, Unite Here Local 5 Hawaii
  4. George D. Szigeti, President and CEO, Hawaii Lodging & Tourism Association
  5. Ernest “Ernie” K. Nishizaki, Executive VP, Kyo-Ya Co. LLC
  6. David Uchiyama, VP, Brand Management, Hawaii Tourism Authority
  7. Rick Egged, President, Waikiki Improvement Association

Petranik: What has improved in Waikiki over the past decade?

Egged: Properties and many hotels have been renovated, so streetscapes have improved, although we’re still working on redoing all the sidewalks.

Szigeti: In the past, many people would go to Maui and the Neighbor Islands as a destination, avoiding Waikiki by design. But with all the improvements, Waikiki is now a destination. People want to experience Waikiki.

Carey: Ten years ago, if I wanted to take somebody to a high-quality restaurant, there were few choices in Waikiki. Today, you have plenty of choices, different menus. And there’s a much wider variety of retail.

Petranik: Let’s invert that. What are Waikiki’s problems?

Egged: Beach erosion. We’ve been working on sand restoration projects over the last few years, but it’s clear that we need a plan for ongoing and regular beach maintenance and redoing some beach structures to maintain Waikiki beaches.

A 2008 study said we’d lose $2 billion a year if we didn’t have a beach. Today, it would be even more. Frankly, with sea level rising and climate change, we also need to reinforce the beach as a buffer between our properties and the ocean.

Szigeti: The homeless situation has been a long-term problem and its epidemic. We’ve been working very closely with government officials and the private sector and everyone seems engaged in tackling a difficult subject. The mayor’s Housing First action plan looks like it could work.

Gill: The physical improvement of Waikiki is great. The problem is we don’t see a similar commitment to the jobs. This is a function of the ownership of our hotels. Many hotel owners are private equity companies, such as Blackstone (owners of the Hilton and Hyatt) and they’re not really in the hotel business. They are more than happy to make capital expenditures to increase the value of the property on resale, but that increases the debt load with the same number of rooms. We’re already running virtually 100 percent occupancy on most of the beach, so where does the money come from to pay for improvements and it’s our observation that it comes from the workers. We lose jobs when hotels and the associated debt service change hands.

When these guys don’t make their numbers and need to retire their positions, they look into selling condos and condos do not provide as many jobs. In some cases, they eliminate jobs entirely and that reduces the tax base.

Carey: One challenge for Waikiki is the cost of operating hotels, which has continued to rise. It isn’t just labor. Utility costs are very high, as are property taxes and regular taxes. So, some hotels can’t charge enough to cover those expenses and pay for renovations. You can charge more on the beach or in renovated properties, but what happens to off-beach properties that need to be renovated? Will owners spend that money without converting to condominiums? I don’t know the answer. 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.

Nishizaki: One of our strengths in Waikiki is also a problem: We are dependent on Japanese tourists. We need to get more group business (meetings and conventions).

Uchiyama: I don’t think we did a good job in the meeting and conventions area. We’ve restructured the sales and marketing, doubled our sales coverage and redeployed staff. The new convention center operator matches better with the type of customer we are looking for. SMG (the old operator) had strong positioning in the rest of the U.S. with large convention centers, but AEG (Facilities, the new operator) comes with a lot of global strength, Beijing, Singapore, Sydney, Europe, and those customers are willing to take offshore meetings, and 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. 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.

Gill: I share the optimism, but we need to look broader. It’s not just the convention center itself, but the surrounding area, which is 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 standalone building, but now it has a building on either side. They’ve redeveloped that whole Gaslamp area. We’ve talked about doing the same things but we just keep talking. It’s not just HTA or the tourism industry, that’s a city issue.

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 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 the only place where that price works is on the beach right now and there aren’t any more beach sites. That’s why a lot of people choose to condominiumize because the condo owner buys the unit upfront and a developer doesn’t carry the risk.

I appreciate Eric’s challenge. If you have a home ownership condominium with a lot of residents, it doesn’t employ a lot of people. We operated a hotel that had 600 rooms and it 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.

Egged: A good example of that in Waikiki is the Ilikai. The Ilikai was a disaster for Eric’s workers.  

Carey: It started with Westin’s predecessor selling a few condos throughout the building for residences and it’s really difficult to mix residents into a commercial operation.

Gill: At one point in the ’60s, we had 600 workers in that building. We have 63 left. All the food and beverages are basically out and much reduced standards. The latest buyer acquired it in foreclosure and is trying to sell off the last 200 rooms and eliminate the hotel in its entirety to make its numbers and then those 63 jobs are gone.

Timeshare is a similar trend in the financing side. Equity wants to deal with only limited service rather than full-service hotels. Timeshare is limited service. You clean twice a week; that’s two-sevenths of the housekeeping staff. You check in and out once a week. By definition, timeshare provides fewer jobs, but now they are going a step further. Hotel developers are saying, “We’re going to build limited-service hotels” and the City Council permitted them (outside of Waikiki) without a conditional-use permit. Why is our government defining what we permit by the lack of jobs it creates, because when you say limited services, you’re saying limited jobs.

Petranik: A lot of baby boom workers are going to retire soon.

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