Hawaii hotel sales reach a peak in 1998

HONOLULU -- The year 1998 will be remembered as the peak year in sales of Hawaii hotels.

The state saw the long-awaited effects of the 1980s binge buying by Japanese -- often at inflated prices -- and new Japanese-owned resort development. The bubble burst long ago.

However, sales accelerated only after Japan's government finally became serious about the banks getting rid of bad loans and repatriating funds.

The 1998 transactions will result in massive amounts of hotel renovations, beginning this year.

For some older hotels, the purchases will bring badly needed improvements.

Purchased during the peak buying years of 1985 to 1990, their new Japanese owners did not have the funds for intended renovations.

"Transactions have slowed because of a lack of liquidity," according to Joseph Toy, director, hospitality consulting for PricewaterhouseCoopers here.

Until last summer, his office was getting 20 calls a week from interested buyers.

Now the number is down to "a trickle," he said, adding that buyers are bypassing Hawaii for Asia, where hotels are inexpensive.

By 1991, the buying spree had resulted in Japanese owning more than 60% of Hawaii's hotel rooms.

That percentage began to change in 1993 when mainland investors started buying financially troubled properties.

Among the owners that made purchases in 1998, their properties and plans for renovation, are:

Parent company Outrigger Enterprises also announced earlier this month that it is buying Aston Wailea Resort.

The chain takes over the property's management on Feb. 1 and is reviewing plans for the renovation of what will be in a few days Outrigger Wailea Resort.

Marriott is also buying the 438-room Waiohai Hotel and adjacent 129-room Poipu Beach Hotel.

Both are owned by Hong Kong-based New World Development Co. and have been closed since they were damaged by Hurricane Iniki, which swept through Kauai in September 1992.

Late December, KSL Recreation Corp. completed the purchase of the 781-room Grand Wailea Resort & Spa at Wailea, Maui.

The hotel, developed and owned by Japanese developer Takeshi Sekiguchi, was sold by New York-based International Hotel Acquisitions LLC, which had controlled the property since a financial restructuring in June.

Also at Wailea, the mortgage of Kea Lani Hotel was purchased last July by Trinity Investment Trust LLC, its original developer, from Mitsui Trust & Bank.

Trinity principals earlier owned the hotel, losing it some years ago to mortgage-holder Mitsui.

According to Trinity, the hotel has undergone continued improvements since opening in 1991 and no major renovation is planned.

Otaka Inc., owner of the 530-room Kona Surf on the Big Island, a property long on the market, is reported to be negotiating with a buyer.

Also, bids were opened in November for Maui's 550-room Ritz-Carlton, Kapalua, but there has been no word on the outcome.

Owners of hotels purchased in 1997 also have completed renovations, have them under way or are planning them.

Until last summer, Hawaii, it seems, was a hotel sellers' market, with prices approaching levels of the late 1980s.

It did not start that way.

The first major property sold was the 1,260-room Hilton Waikoloa (then a Hyatt) on the Big Island in 1993.

Pan Global Partners, with Hilton, bought a hotel that cost $360 million to build for just $55 million five years after it opened, then pumped in $30 million in improvements.

Subsequent ownership changes, followed by major renovation projects completed through 1997, included Honolulu's Kahala Mandarin Oriental, Orchid at Mauna Lani on the Big Island and Kapalua Bay Hotel on Maui.

Prices per room probably reached bottom in 1995 or 1996.

With booming financial markets, and mainland hotel prices accelerating faster, Hawaii remained attractive, and prices continued to rise.

Last August, for example, Marriott paid $145 million for the Maui Marriott -- just a little less than it sold for in the late 1980s.

It competed with Hilton at a foreclosure auction, paying more than $200,000 a room (compared with $44,000 a room paid for the Hilton Waikoloa Village five years earlier).

Then the market changed.

Wall Street began looking at hotel purchases with a more critical eye.

A financing crunch led to a slowdown in mainland hotel construction. (Hawaii is hardly affected: No hotel construction has been under way here in more than three years.)

In addition, last summer new tax laws eliminated real estate investment trusts

(REITs) from being a major player in hotel purchases.

Bob Hastings, of hotel appraisers Hastings, Conboy, Braig and Associates, described the spike in purchases as "pretty well finished."

"There is not much left to buy, tourism is down, and any buyers are finding it difficult to get financing although some big institutions are left in the market," he said.

"Hotels are for sale, but there aren't many buyers," said Ron Watanbe, managing director of Insignia/ESG Hotel Partners Inc.

"Waikiki is hurting," he said, a reference to the destination's occupancy slide.

But he also noted factors favoring continued sales.

"There is continued pressure by Japanese banks [for financially troubled owners] to sell, there are properties that need renovating, and companies that would like to be in Hawaii," he said.

Said Barry Baker, asset manager for Southwest Value Partners, "Hawaii has had some unique opportunities for great values. A few properties are available, and many are distressed.

"Banks are not so liberal, REITs are not big players anymore, but liquidity still exists. We will see a different set of buyers."

And said Ron Gilligan, of hotel broker R.F. Gilligan Realty, "There are still hotel companies that want to be in Hawaii and will pay top dollar.

"We have a long way to go before the fat lady sings."