The Hawaii hotel market, once constrained by scarcity, now faces a different challenge: a pricing gap that has put a damper on transactions. According to Mark D. Bratton, CCIM, of The Bratton Team at Colliers International Hawaii, the market is seeing a divergence between what sellers expect and what buyers are willing to pay. While sellers are looking for returns around five percent, buyers are underwriting closer to seven percent, leaving a two-point gap that has resulted in stasis rather than distress.
This spread is not irrational; it reflects the cost of debt. With borrowing costs around 6.5 percent, a seven percent return provides a modest spread, while a five percent return would mean negative leverage. Buyers are thus declining to buy into a loss-making proposition, waiting instead for better conditions. The gap is also influenced by the fact that many acquisitions are priced to future positions, not day-one leverage.
The buyer pool has shifted, with independent investors and family offices becoming more active, while publicly traded REITs have stepped back, partly due to national trends and share price declines. This has created a market where the middle has thinned, and activity is concentrated at the two ends of the spectrum. Recent transactions illustrate this range: PACIFIC 19 Kona was acquired by Nine Brains, a firm backed by individual investors and family office capital, while Host Hotels acquired Turtle Bay Resort and repositioned it under the Ritz-Carlton flag.
Equity requirements for Hawaii hotel acquisitions are running higher than conventional norms. While typical financing assumes 20-30 percent down, Hawaii deals are seeing a practical floor of 30 percent, with 30-50 percent being common. This higher equity requirement comes with a benefit: at 50 percent down, lenders offer better terms, making the debt cheaper. Buyers who can stretch on equity are thus buying cheaper debt as well as a cleaner approval process.
Another requirement is time. The market moves slowly, and deals can take years to close, as evidenced by the PACIFIC 19 Kona transaction, which took six years from initial interest to closing. The process involved a leasehold position with a right to acquire the fee, allowing the buyer to improve the property before taking title.
The operational aspect of hotels is another factor that surprises mainland buyers. As Bratton puts it, hotels are a business inside a piece of real estate. Unlike apartments or office buildings, hotels are resold nightly, with staffing and food and beverage operations attached. Operating experience is crucial in underwriting, and labor structure is a specific item that often surprises buyers. Two major unions operate in Hawaii hotels, with renegotiation cycles every three or four years. Somewhat more than half of the state's hotels are non-union, but larger and legacy properties are more likely to be organized. Investors split on whether to consider union properties, with some pricing in the constraints and others refusing to consider them at all.
The market also sees a recurring request for fee simple beachfront hotel product, but it is close to unavailable, as much of Waikiki sits on leased land. The families who own the land have leased it rather than sold it, making fee simple oceanfront ownership a rare commodity.
Where price expectations diverge, transactions often close by giving the buyer control before title. This structure, seen in the PACIFIC 19 Kona deal, allows the buyer to fund improvements that close the value gap. For sellers, this trade of time for a better outcome can yield about 30 percent above an as-is sale.
The current market condition is quiet but not stressed. Debt levels across Hawaii hotel ownership are conservative, which has prevented a wave of forced sales. Owners are absorbing lower distributions rather than facing maturity problems. This combination of visible supply, disciplined balance sheets, and a spread that could close with a shift in debt costs describes a market waiting on a catalyst rather than one working through a correction.
