Waikiki Construction Refreshes Hotels

Current construction is a partial preview of the future

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In some ways, construction and Waikiki go hand-in-hand. After all, the pleasure palaces along the beach have provided many of the largest recent private construction projects in the state. By some counts, more than $2 billion has been spent over the last 10 years renovating and redeveloping Waikiki's crown jewels. And that's not counting the myriad smaller projects. But the question that both hotel owners and construction companies are asking is: What will get built or renovated in the next few years and in Waikiki's long-term future?

Snapshot in time

There are currently more than 500 active building permits in Waikiki. The vast majority are manini – minor electrical and plumbing upgrades, new grease traps, window relocations and flooring jobs – but there are also several big projects:

• For months, road crews and construction gangs have been resurfacing Waikiki's streets and sidewalks, spending millions of dollars in anticipation of APEC.

• On Olohana Street, Wyndham is finishing up the redevelopment of the Royal Gardens, its new timeshare property.

• The Mau family is nearly done with the extension of the Waikiki Shopping Plaza on Kalakaua, already snagging major tenants like Victoria's Secret and A/X.

• Almost unnoticed, a Mainland developer called the Chartres Group is completely renovating the old Ocean Resort Hotel. They hope to have one tower done in time for APEC, then gut the other tower and convert it all to a Hyatt Place.

That's today. But to truly understand construction in Waikiki, it helps to have more perspective. You have to look into the recent past to get a sense of the scale of the projects that can be done and gaze a little into the future to see the opportunities – and obstacles – ahead. You also have to poke around in global credit markets to understand why anyone would invest in Waikiki construction.

     Click to enlarge image.

Perhaps the best example of investment is Kyo-ya's ongoing renovation and redevelopment of its beachfront and Kalakaua-facing hotels. According to executive VP Greg Dickhens, Kyo-ya's plan has two phases. Phase I involved not only renovations, but a diversification of the company's assets outside the Sheraton nameplate. "We started with the Moana Surfrider back in 2007," Dickhens says. "We spent about $40 million renovating the historic building, converting that from a Sheraton to a Westin. We put in a new restaurant, (called) The Beachhouse, and a 16,000-square-foot spa, really upgrading the product."

At almost the same time, the company began a major renovation of the Sheraton Waikiki, its largest hotel and biggest moneymaker. According to Dickhens, "That was about a 5-year renovation project that included all the hotel guest rooms, all the corridors and brand new pools. We renovated the meeting space, redid the lobby and replaced every elevator in the building. That was about a $150 million renovation that we completed in 2010."

Although its largest hotel remained in the Sheraton fold, Kyo-ya decided to go more up-market with the classic Royal Hawaiian: "We closed that property for about seven months in 2008," Dickhens says, "and spent about $70 million renovating that hotel and upgrading it to our Luxury Collection level. Then, we actually just went back and renovated the Tower Building this year. We spent another $10 million on just the tower, so that was a significant refresh. In fact, we spent about $60,000 a room. We ripped out all the bathrooms and put in all new furniture, so it was a complete gut of the guest rooms. In total, the repositioning was about an $80 million renovation. Between the three properties – the Sheraton Waikiki, the Moana Surfrider and the Royal Hawaiian – it's about $270 million to $280 million."

One view of the future

These numbers are enormous for private sector construction in Hawaii, but they may be dwarfed by Phase II of Kyo-ya's ambitious strategy. This phase calls for a $550 million redevelopment of the 1,035-room Princess Kaiulani Hotel and a controversial plan to raze the old Diamond Head Tower of the Moana Surfrider and replace it with a new, 26-story, $140 million tower. The result wouldn't simply be a matter of construction; it would reflect a major change in the company's business model. The redevelopment of the Princess Kaiulani, for example, will underscore the visitor industry's evolution from pure hotel operations to mixed-use. "Over the past three years," Dickhens says, "we've been going through the entitlement process to redevelop that asset to include a mix of hotel, residential, timeshare and retail components. As approved, the hotel will include 650 rooms, 150 two-bedroom timeshare units, and 120 whole-ownership residential units. In addition, there will be 82,000 square feet of retail." The project involves a massive renovation of Ainahau Tower, while tearing down the rest of the property to build a new 34-story tower, a parking structure, and new retail and meeting facilities. In other words, it's going to be a construction bonanza.

     Photo: David Croxford

Although there doesn't seem to be much resistance to the Princess Kaiulani project, Kyo-ya's plans for the Diamond Head Tower across Kalakaua are more contentious. That's because the deal requires a variance from setback laws and height restrictions for new construction on the beach. That's drawn protests from environmentalists and others who say the new tower would loom over the beach, block views and change the character of the neighborhood. That would violate the spirit of the Waikiki Special District Guidelines, which were intended, in part, to prevent Waikiki Beach from being walled off from the rest of Waikiki by a row of towers. But for Kyo-ya, the logic of the new tower is inexorable: the old Diamond Head Tower, which was built in the 1950s, is simply uneconomical. It can't generate enough revenue to justify a major renovation. And to make a new property pay, it not only has to exceed the setback requirements, it has to embrace the modern paradigm of mixed use. That means part of the tower has to be timeshare or condominium.

Kyo-ya had planned to begin construction on its new Diamond Head Tower this year, but for now the project is lost in the appeals process. Even though the company already got unanimous approval of its setback variance from the zoning board, there's no guarantee the project won't be held up indefinitely by the usual entitlement slow dance. As David Carey III, CEO of Outrigger Enterprises, points out, permitting and entitlement snafus are just the beginning of the challenges to construction in Waikiki. The real problem, he says, is paying for it. "Everybody thinks about the approval part, but part of the process of construction and developing is you have to have the source of funds in order to proceed with the project." Carey offers the Beach Walk project as an illustration.

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