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.

January, 2014

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.

Carey: The average age for a housekeeper in Waikiki is probably in the mid to low 50s, with an average service of 18 to 25 years.

Gill: We have a whole generation who came to work in the 1970s when Waikiki tripled its size – the Sheraton was built, the Hyatt and Tapa Towers went up. A lot of that group is retiring. I started in 1976 (at the Sheraton) and I am at the young end. We’re seeing a lot of people retire and not enough backfill.

Egged: One idea to encourage workers that came out of our Waikiki 2020 planning process was to develop workforce housing closer to Waikiki. Maybe you can’t afford to build affordable housing on the Kapiolani corridor, but what about the Kapahulu corridor? There would be fewer transportation issues because workers could walk to work.

Petranik: What’s the average commute for your workers?

Gill: If you live in Waipahu or Waipio or Kunia, you’re on the road by 5 in the morning to get here before the traffic builds up. But if you’re going to drive during the peak hours, it’s going to be an hour and a half for sure. But there isn’t affordable housing closer.

When Kakaako was first discussed, people said we have a great resource in the city center, close to bus lines even without the train. Yet we’re building high-end condos where we should be building working people’s homes, so we can get them off the freeways.

Nishizaki: In developing the McCully area, you could have nearby affordable housing not just for the workers here, but for university students, too. That would also make it easier for university students to work part-time in Waikiki.

Egged: We’re looking at the whole transportation plan for access to Waikiki and how to move around Waikiki in cars and transit. We’re looking for a circulator bus system that would loop through Waikiki. We’re looking at pedestrian and bicycle connectivity. We’re talking about another pedestrian and bike bridge (over the Ala Wai) that would connect Waikiki to the university.

Carey: A number of us think an elevated rail down Kuhio or Kalakaua would destroy much of Waikiki’s success. So, rather than complain about it, a lot of businesses, under WIA’s (Waikiki Improvement Association) guidance, have been discussing an alternative, a circulator system that would connect with the transit system without a concrete mass in the middle of Waikiki.

Gill: Parking is one problem that hasn’t gotten better in Waikiki and that’s going to be exacerbated in August when the Princess Kaiulani Hotel’s parking lot is torn down. A lot of the Moana customers will look for parking here (at the Sheraton) and the workers will as well.

When the new tower at Hilton was built, very little parking was built for those 500 or so rooms and there was a dispute about whether those rooms were residences or resort rooms, which have different parking requirements. Developers have been exceedingly squishy about that. Hilton, for example, in its 2002 documents, described those rooms variously as resort rooms or long-term rooms, depending on how it served their purposes in developing parking or not and that same thing just went through for the new Ritz on Kuhio. For once, the (city’s permitting) department actually agreed with us that it shouldn’t be a big switch. You can’t say it’s a resort, then put it up and all of a sudden say it’s now condos and, oh by the way, now you need more parking.

Uchiyama: I want to address workforce development because it is really important. Two years ago, with the industry, we got together with the DOE and its career and technology education program (CTE) and developed two classes that have been introduced to high schools: hotel management and travel industry management. They’re now taught in 12 schools and the objective is to get it to 26 schools statewide. DOE collaborated with the community colleges to get those high school classes accredited so students can go to the community college to get an associate’s degree or to travel industry management. Educating the community more through our kids is important so people understand what tourism brings to our community overall.

Gill: Getting people into housekeeping jobs was mentioned earlier. We don’t want to tell our youth the only good jobs in hotels are management jobs. Our training trust is working on a workforce development plan. But the standards that Kyo-ya (owner of the Sheraton, Royal Hawaiian, Princess Kaiulani and Moana hotels) have maintained for employment here are not universal. Not the wages, not the benefits and so on.

You walk across the street to the Hyatt and you got people paid half as much with no family medical or retirement medical or retirement benefit at all. When I was with the Teamsters, I was bargaining with gas companies, bus companies and various trucking companies. This hotel (Sheraton) provides better jobs than almost every other operation in the state. You have paid family medical, you have childhood medical. You have a decent pension and can afford retirement. You have what amounts to $29 an hour total package at this hotel and other beachfront hotels to some extent farther back in the ranks. That’s a great package for any young person.

But a lot of people don’t recognize the value of the job. “I don’t want to clean toilets.” But are you willing to clean toilets for $20 an hour and another $10 in benefits? I was a dishwasher here. I made more washing dishes than people driving trucks and the benefits are better. Part of it is educating our young people that these are good jobs.

Carey: We have three-generation families in our housekeeping departments. I would invite you to come down to housekeeping briefing in the morning or lunch and look in the eye of these housekeepers – generally women, but sometimes men – and say they are not satisfied with what they do everyday. When someone cleans your room, how does it make you feel? It makes you feel great and the staff knows they are creating that feeling.

Nishizaki: Another good thing the HTA has done is educate young people on the importance of our industry, because all too often people who are not in the industry look at us and say, “This is only for the visitors. Waikiki is only for the visitors.” It’s important that young people learn the importance of the industry, more so than people of my age who are not in the industry.

Egged: Also important to Waikiki’s future is we have been able to increase our room values. We have gone from having 24 percent of our rooms fit into the luxury or upper mid-scale level 10 years ago to having 44 percent, and it is increasing. Over those 10 years, the total dollars generated just in Waikiki have grown 60 percent because we’re bringing in a higher-end spender.

Petranik: David, what new markets are you reaching out to?

Uchiyama: I think Latin America is of interest to us as well as expanding in Southeast Asia, especially Hong Kong and Singapore, and we are seeing some of that captured with new routing. China Airlines has a good route structure within Southeast Asia with tourists coming through Taiwan as a gateway and then on to Hawaii.

Carey: But that’s not good enough. We need a direct flight from Hong Kong. I fly this two, three times a year and it’s painful to get to Southeast Asia and back.

China will soon be the largest outbound country in the world. For us to get our fair share of that will require adjustment to the visa processing. Right now, it is very difficult for an average Chinese tourist to get a visa to travel to the United States. Over time, markets ebb and flow and the lesson of the early ’90s, when Japan and the U.S. went down, we had nowhere else. Right now, we’ve got Australia, Japan, North America, and we’ve got burgeoning business out of Korea, some potential out of Taiwan, nascent business out of China. Ideally, you have a little bit out of a lot of markets so that as the economy slackens we always have a steady flow of regular visitors. Australia doesn’t have a (similar visa requirement for Chinese visitors), Thailand doesn’t have it, Bali doesn’t have it. These are our competitors.

Uchiyama: We’ve created a lot of headway. It used to be three months (for Chinese to get a visa to America). It’s down to two weeks. As we see the new airlift coming to the China market – Air China starting in January and Hawaiian in April – then we’ll have service from both Shanghai and Beijing. I think it will start to pick up, but getting further into Southeast Asia is something that we need to do as well.

Nishizaki: Are those markets using the Neighbor Islands, because Waikiki is already running at a very high clip?

Uchiyama: We were marketing ourselves as Hawaii, but research told us the perception of Hawaii is Waikiki. Now we’re marketing “The Hawaiian Islands,” so the potential visitor know it is multiple islands. Before, we didn’t push the contractor or offices in Japan to distribute business. Now, we’ve got goals for each island out of each market, so there’s a conscious effort to push business to the Neighbor Islands.

Egged: Another strength of Hawaii is that we are such a safe destination. In the Waikiki 2020 conference, we were looking back and found the incidences of crime are 40 percent less than they were 10 to 15 years ago and a lot of that is due to a great police force but also because of improvements in the community.

Gill: If you go to Cancun, armed guards keep the local people out. My nephew is in Jamaica with the Peace Corps and he got carjacked four times. That’s a function of the surrounding community being dirt poor looking at fabulous wealth walking on the beaches. The key to keeping Hawaii attractive in that sense is to make sure that this industry pays for the local people and they know it. That’s when everybody’s aunties work in hotels, make good money and are able to raise families. That’s when they appreciate the jobs.

(This transcript was edited for clarity and conciseness.)

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