Most acquisition models for hotels are built on assumptions that hold across a wide range of American markets: labor costs that escalate on a predictable line, commodity inputs priced against national indices, and a supply chain that delivers on a schedule a general contractor can plan around.
Those assumptions are reasonable in most places. In Hawaii, they need adjusting, and buyers who make the adjustments early tend to close on terms that hold up.
The Escalation Assumption
The single most consequential difference is how expense lines move over time.
A mainland pro forma commonly applies a three percent annual increase across operating expenses. In Hawaii, several of those lines move at closer to six or seven percent – a divergence that compounds quickly across a hold period.
“When we do a three percent annual increase on a mainland pro forma, some elements are six to seven percent here,” says Mike Perkins of The Bratton Team at Colliers International Hawaii. The lines that behave differently are identifiable rather than mysterious: labor, insurance, shipping, and deferred capital in an environment that is harder on buildings than most.
The cumulative effect is measurable. Perkins puts the typical gap between a mainland-built pro forma and actual performance at fifteen to twenty-five percent by year two. That is not a reason to underwrite conservatively for its own sake – it is a reason to build the premium in at the outset, where it can be priced.
Shipping And The Expense Line
Hawaii’s dependence on inbound logistics touches nearly every operating category, including some that would not appear supply-chain sensitive on a mainland model.
Inter-island shipping is the clearest recent example. A cost increase of around twenty-six percent moved through jurisdictional approvals, and the carriers involved were still operating at a loss even after it took effect – a signal that the underlying cost structure, rather than pricing opportunism, is what drives the number.
Food is a related exposure. Hawaii imports well over ninety percent of what it consumes, which means food and beverage cost of sales carries a freight component that a mainland comparable simply does not have.
The same dynamic extends to anything a hotel needs on a schedule. An item that takes six weeks to arrive on the mainland commonly takes ten to fourteen weeks here.
Labor And The Union Framework
Labor is the largest single component of hotel operating expense, and in Hawaii two features shape it.
The first is the union framework, which affects both cost and flexibility. Union hotels are working from a base of roughly thirty dollars an hour, with further increases anticipated. Just as significant for the model is what the framework means operationally: staffing cannot simply be flexed down through a soft period, which changes how seasonal variation flows through to margin.
The framework is more negotiable than buyers often assume. Perkins describes a client whose entitlement approvals required union construction and union hotel operations, while restaurants within the property remained outside that scope. The terms are settled deal by deal rather than imposed uniformly.
The second feature is scarcity. The pool of experienced hospitality staff is finite, and it narrows further on the Neighbor Islands. Quality carries a premium simply because there are fewer people available to hire.
The Entitlement Clock
On the development side, the entitlement process runs long enough to belong in the financial model rather than in the project schedule alone.
A pro forma that assumes a mainland approval timeline understates carry costs and pushes stabilization earlier than it will realistically occur. For buyers evaluating development and income-producing opportunities across Hawaii, the entitlement position of an asset is often as material to value as its physical condition.
Reading The Numbers First
Asked what he looks at first when a set of Hawaii hotel numbers arrives, Perkins names three things: average daily rate, revenue per available room, and expenses as a percentage of RevPAR.
The third is where the Hawaii premium shows up. Rate and occupancy can look comparable to a mainland asset while the expense ratio tells a materially different story, and that ratio is the fastest read on whether a model has been built with local inputs or imported ones. Owners tracking monthly Hawaii market statistics have a reference point for where those figures sit across the market.
Managing The Premium
None of this argues against Hawaii hotel investment. It argues for building the model correctly, and there are established ways to reduce the premium rather than simply absorb it.
Planning is the largest lever. Working with groups that are established locally, that hold supplier relationships, and that can source from Asia as well as the mainland compresses lead times materially. Tariff changes have prompted a number of developers to re-source across countries, and those with existing relationships have adapted faster.
Operating efficiencies developed during the pandemic have proved durable – housekeeping on request and technology deployed to reduce operating costs both continue to hold. And the market is showing a K-shaped pattern in which luxury properties have absorbed cost increases through rate, while the mid and lower tiers compete harder and, in doing so, are innovating faster.
Perkins’s advice to anyone building their first Hawaii hotel model is direct: don’t be too aggressive, be realistic, and apply a premium over the comparable mainland asset. Buyers who start from that position find the market considerably more predictable than its reputation suggests – and Hawaii has historically been able to recapture cost increases through rates in a way that few markets can.
About the Expert: Mike Perkins (S) is an Associate Vice President with The Bratton Team at Colliers International Hawaii in Honolulu, specializing in development and income-producing commercial assets.
The Bratton Team is a Hawaii commercial real estate and investment sales group, exclusively contracted to Colliers International HI, LLC. Led by Mark D. Bratton (R) CCIM and Mike Perkins (S), the team has advised buyers and sellers across all Hawaii asset classes for 40 years.
This article is based on information provided by the expert source cited above. It is intended for general informational purposes only and does not constitute legal, financial, or real estate advice. Readers should conduct their own research and consult qualified professionals before making any real estate or financial decisions.
Disclosure: Individuals or companies mentioned may have a commercial relationship with KeyCrew.
