Long recovery on Maui begins to take shape

“Recovery on Maui is going to be a long haul. It’s a difficult situation.”

The observation by lodging stakeholder Benjamin Rafter, president and CEO of Honolulu-based Springboard Hospitality, comes three weeks following the firestorm that swept through the western part of the island, taking with it lives, real estate, trade and tradition; it smacks of the harsh reality of what’s ahead for the area.

At the start of September, hotel owners and operators with properties on Maui and other Hawaiian islands were—like Springboard—still coming to grips with the fire’s devastation, even those with assets nowhere near the conflagration.

“From a tourism perspective, all of Maui suffered major cancellations after the fire. This impacted Wailea, Kihei and other markets,” said Rafter, whose company manages 12 properties (with ownership in six) across four of the major tourism islands. He noted the cancellation pace has moderated but new bookings have not been strong.

Hawaii Governor Josh Green had issued an emergency proclamation following the fire discouraging nonessential travel to West Maui though October 17 so emergency workers, FEMA and the Army Corps of Engineers could begin the arduous tasks of search, recovery and debris removal. He has since encouraged travel to other parts of Maui and neighboring islands to help support the local and state economy.

Springboard Hospitality's Benjamin Rafter

In an August 29 video statement regarding recovery efforts, Governor Green echoed the Springboard CEO: “Our expectation is it’s going to take a long time.”

On the lodging side, according to STR’s Weekly Insights for August 13-19, the fire caused a 27.8% decrease in room demand. Additional CoStar research and individual hotel reporting found five Maui properties (1,904 rooms) were damaged or destroyed, representing 2% of room supply in the island’s market.

Among the decimated properties were Outrigger Hospitality Group’s 18-room The Plantation Inn on Lahainaluna Road in historic Lahaina Town and the Best Western Pioneer Inn, built in 1901 on Wharf St., and one of nine buildings that composed the Lahaina Historic District.

The Plantation Inn, along with the Kaanapali Beach Hotel, had been part of a two-property acquisition in July by Outrigger, which has 26 properties throughout Hawaii.

In terms of property loss, Jeff Wagoner, Outrigger’s president and CEO, did not disclose an estimated dollar figure and tagged the Plantation Inn “a very small percentage” of the company’s revenue stream. He added the bed and breakfast had been “performing well” prior to the fire.

What will happen to the site is still being determined, said Wagoner, who observed “at this early stage, it’s hard to say” what the potential impact on new hotel development could be.

Outrigger Hospitality Group's Jeff Wagoner

With the Inn gone, its sister property, the Outrigger Kaanapali Beach Resort, is providing refuge for the company's displaced employees and their families.

“Our largest room blocks for our employees, displaced community members and essential workers are at Outrigger Kaanapali Beach Resort and Outrigger Honua Kai Resort & Spa. We are working to include additional Hawaii Vacation Condos by Outrigger as well,” Wagoner said.

Best Western Hotels & Resorts declined to comment on the Pioneer Inn or provide a market outlook.

In terms of KPIs for Maui overall, CoStar data showed on August 19 that occupancy dropped to 49% from the previous week’s 59.3%, with ADR plummeting to $509.18 from $678.30 the week prior. RevPAR tumbled to $249.49 from $402.23 in the same period.

More specifically for Kaanapali, Kapalua and Lahaina—with the latter’s historic district and Front St. tourist magnet now just scorched rubble—performance metrics were down. CoStar data show occupancy for the week ending August 19 came in at 41.2% from 50.2% the week prior, ADR sat at $482.01 against $571.75 the previous week, and RevPAR dropped to $198.57 from $287.30 on August 12.

“I think Maui is handling this tragic event as best as possible,” said Emmy Hise, senior director of hospitality analytics for CoStar Group. “They are taking care of the displaced residents while opening tourism as much as possible, as it drives revenue to assist with recovery costs.” She noted many people offered vacation rental units to displaced residents, which “will most likely lower accommodation inventory for 12-plus months.”

For example, located in a different tourism zone, Springboard Hospitality’s two properties in Kahului—Maui Seaside Hotel and Maui Beach Hotel—there are displaced locals, disaster responders and guests now occupying rooms.

“The hotels were already at high occupancy, but they are taking displaced Maui residents first at a fixed, special rate, as well as government crews,” he said, adding that a limited number of the hotels’ total of 330 rooms are available for guests, particularly those traveling to Maui for business or needing to stay near the airport. “Most of the pure emergency business is probably going to go to Kaanapali where there are more rooms and empty hotels,” he said.

Rafter suggested that the impact from cancellations will go beyond Kaanapali and hit other areas, particularly Wailea. “In the short and medium term some of this will be offset by construction, government, FEMA and others. However, long term, Maui will lose not just to other Hawaii islands but to competitive markets like Mexico,” he contended.

Impact on valuations

Whether the current negative impact on demand in Maui will affect hotel asset values is unclear, but according to CoStar Group’s Hise, it’s unlikely.

“Maui and Hawaii have always been a high-barrier-to-entry market with some of the highest hotel topline performance levels nationally. Due to this, it is unlikely that asset values will be significantly impacted,” she said. “If they are affected, it would be due to higher debt and insurance costs, which other destinations also contend with.”

Colliers International's Nathan A. Fong

From his perspective, Hawaii-based Colliers International Senior Vice President Nathan A. Fong anticipates short-term valuation impact for the next year. “It will likely impact NOI as insurance premiums and lender requirements will likely increase,” he said. “When investors take a more in-depth review of Maui’s hotel dynamics and the fire’s implications to the island, they will realize that other regions of Maui as well as other Hawaiian Islands are not adversely affected by the fire. There is optimism that visitor counts and hotel occupancy rates will rebound.”

Fong said prior to last month’s fires, Maui’s hotel market fundamentals were strong, with a July 2023 occupancy rate of 67.4% and RevPAR of $656, an increase of 23.6% over pre-pandemic levels of July 2019.

Transaction volume, in contrast, has been a bit volatile, Fong said, as hotels on Maui do not often trade, and when they do, it’s at an aggressive cap rate.

“Since 2019, Maui’s hotel investment activity mirrored the statewide transaction levels as a 2021 spike in hotel sales volume coincided with a low-interest-rate environment and a solid recovery from the pandemic. Subsequently, hotel investment sales activity slowed recently because of rising interest rates,” Fong said.

Insurance implications

Also in the mix for hotel owners, operators and investors in Maui is strategic planning vis-á-vis risk management and insurance in the aftermath of the August fire that’s being termed Hawaii’s worst natural disaster.

“Hawaii has always been a challenging market for insurers, but for hurricanes. Now, a new peril, wildfire, has surprised insurers,” said Jim Gaubert, a property broker within Marsh’s U.S. Hospitality and Gaming Practice. “The current insurance market is already challenging, so Hawaii will see a few years of increased pricing related to this risk.”

Joe Addison, Marsh’s U.S. Hospitality and Gaming Practice leader, said while underwriting standards will become more rigid in the near term, there’s opportunity for hotel owners/investors to further detail location exposures and loss mitigation. “For instance, each location on each island is subject to different weather patterns and winds. Opportunity exists for a greater understanding of how those weather patterns will/can affect potential outcomes and/or wildfire potential,” Addison said. “Simply put, a significant difference of wildfire exposure exists between the leeward and windward side of each island” and includes various microclimates.

“Sound wildfire fundamentals have existed for quite some time in the insurance industry and have received further updating and improving from recent events, especially in California,” Gaubert added. “Their recent wildfire events have led to strong, new resource work from the likes of Cal Fire, and government and quasi-government groups and agencies. Their efforts can be looked upon as a foundational starting point to create strategy for [the] Maui of the future.”

The future

Envisioning what that future may look like for the afflicted areas when it comes to redevelopment is premature at best right now; however, Colliers’ Fong divulged, “Lahaina property owners already are experiencing speculators entering the market with cash in hand trying to capitalize on the misfortune.”

In a video statement in mid-August Governor Green said a moratorium on property sales in Lahaina was under consideration and that the state government was eyeing acquiring land in the historic area to keep predatory buyers/developers at bay.

This, said the governor, is “to protect it for our local people so that it’s not stolen by people on the Mainland. I’ve asked my attorney general to watch for predatory practices and we will be embedding attorneys who are going to work pro bono for our people. If people have someone reach out to them to try and get their land, we will be able to get expert legal advice so that doesn’t happen.”

As redevelopment efforts on Maui begin in earnest, the combination of construction material prices/shortages coupled with the lack of skilled construction labor will result in a spike to pricing, making target yields for hotel development difficult.

Nathan A. Fong

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Fong pointed out that Maui and the entire state of Hawaii face a shortage of available resort-zoned land, so challenges even beyond the wildfires remain for new resort development. These include “a lengthy entitlement process, a high-interest-rate environment and an anticipated surge in construction costs,” he said. “As redevelopment efforts on Maui begin in earnest, the combination of construction material prices/shortages coupled with the lack of skilled construction labor will result in a spike to pricing, making target yields for hotel development difficult.”

Fong suggested any proposed changes to zoning or building codes will be scrutinized and any additional hotel development proposed will be vigorously debated by the many factions impacted by the proposed changes, particularly in the devastated areas.

And as the wheels of recovery begin to turn, Outrigger’s Wagoner pointed out 80% of Maui’s economy is dependent on the visitor industry. “It is critical to promote responsible tourism to Maui as well as the other Hawaiian Islands. Working alongside Hawaii Tourism Authority as well as our valued travel advisors to create enticing packages will help stimulate the economy and support local businesses,” he said.

Springboard Hospitality’s Rafter stressed the hotel industry and the state need to really hit refresh to encourage renewed tourism and greater investment. “Get back to marketing and making people aware of Hawaii’s unique and special character, from beaches and weather to host culture and food. Hawaii has lulled itself into a sense that it is just better than everywhere else. The reality is that Mexico, Florida and the Caribbean, among others, are cheaper to get to with newer product and competitive beaches. Hawaii needs to make a new generation aware [of its offerings], both in the U.S. and in key international markets, such as Japan.”