Islands Hopping : Hawaii Is Sun-Kissed Again as Tourism, Retailing Revive

After sputtering for several years, Hawaii’s economy is finally shifting into gear, thanks to a renewed influx of free-spending Asian tourists and bargain-hunting hotel investors.

Slapped on two sides by the recessions on the U.S. mainland and in Japan, tourism-dependent Hawaii has lagged the nation’s economic recovery in the last few years.

But an upswing in visitor arrivals, a retailing explosion and renewed investor interest are finally giving the local economy some juice.

“It has been a long struggle,” said Stanley Hong, president of the Chamber of Commerce of Hawaii. In particular, “our international tourism is really the bright spot, the engine that is driving the recovery.” Tourism accounts for a quarter of the state’s economy and almost a third of its total employment.

Tourist arrivals from Japan--now 30% of the island’s visitors--reached a record high last year and are topping even that pace this year. New visitors from Australia, New Zealand, South Korea and Taiwan helped make up the decline of Japanese tourists in the early 1990s, but non-Japanese tourist numbers fell last year.

After stumbling for five years, the number of visitors from North America has finally risen over the last six months. Altogether, tourist arrivals this year are expected to surpass the record high of slightly less than 7 million reached in 1990, before recession, higher air fares and competition from other resorts knocked the bottom out of the tourism market.

Meanwhile, the precipitous drop in resort property values--10% to 20% in many areas--that accompanied the recession is attracting new players, and new money, to the islands. Investors from South Korea, Taiwan, Hong Kong and the U.S. mainland are snapping up hotel properties at a fraction of their original costs from debt-ridden owners, mostly Japanese and other offshore investors.

“In general, I think the wave of transactions we are seeing will be healthy for the local economy,” said Ann Bouslog, director of real estate and hospitality consulting for KPMG Peat Marwick. “What you are doing is bringing new capital to the state and often reorienting a 1970s- or 1980s-style facility to a ‘90s market.”

Because of lower overhead, the new owners can afford to pump in money for renovation and hiring. A prime example is Colony Capital Inc. of Los Angeles, which bought the former Ritz-Carlton Mauna Lani last year for $75 million, roughly a third of its original development cost. It is spending another $20 million to renovate and reshape the property, now known as the Orchid at Mauna Lani, to give it more of a Hawaiian feel.

“By buying for less than 40 cents on the construction dollar, Colony has leeway to make the necessary improvements to the property and make it one that can work in the ‘90s,” Bouslog said.

Four other major hotel sales, all at substantial write-downs, are now in the works, according to Bob Hastings, president of the appraisal firm Hastings, Conboy, Braig & Associates Ltd. Two undeveloped hotel sites at Ko Olina on Oahu sold recently for roughly a seventh of their 1988 price, just the latest in a string of deeply discounted resort sales here.

Hotel investors aren’t the only bargain hunters combing Hawaii’s shores. Japanese tourists, who spend nearly three times more per capita than other visitors, have fueled an unprecedented retailing binge.

“Especially on Oahu, tourism is much more retail-driven than before,” Bouslog said. “In Waikiki, there are some stores within hotels that are earning more than the hotels themselves. A few prime locations have gross sales of as much as $15,000 per square foot annually, while the national average is around $285.”

By selling to Japanese nationals while they are visiting Hawaii, retailers can sidestep barriers to Japan’s own market. Often, a chain’s Hawaii outlets quickly become its top performers worldwide.

Designer boutiques are only part of the story. Discount retailing, which reached Hawaii in the ‘90s, has proved a hit with visitors as well as local residents. Waikele, a suburban factory outlet center, has become a major tourist attraction.

“The new phenomenon in Hawaii is this incredible explosion of retail opportunities,” said Paul Brewbaker, chief economist for the Bank of Hawaii. “It’s not just for the tourist, but the most stunning success has been the Japanese market.

“My favorite story . . . is that the typical office lady or honeymooning couple from Japan will save enough by shopping for essential household goods at Waikele to pay for their trip,” he said.

In the urban core, retailers have ambitious plans to double the 4 million square feet of retail space that now runs from Diamond Head through Waikiki to the edge of downtown Honolulu, according to commercial real estate consultant Stephany Sofos, president of S.L. Sofos & Co.

“It’s pretty amazing,” she said. “Even if only 50% of it comes to fruition, that’s a lot. They are planning to make Hawaii the shopping mecca of the Pacific.”

Without visitor spending, Hawaii’s economy would still be stuck in the doldrums. Its recent uptick has been just enough to overcome drag from other struggling sectors of the economy. Hawaii’s real growth rate is projected at 1% to 2% this year and at more than 2% next year.

Agriculture: Agriculture is going through a difficult transition, as one sugar plantation after another folds in the state.

At its peak in 1970, sugar cane covered 340,000 acres on the islands. Now just a handful of sugar plantations cultivate roughly 70,000 acres. Although the trend has been painful for displaced workers, the retreat of King Cane is opening up prime land for other crops.

“For the first time, more entrepreneurially driven farmers are able to get out there and experiment,” Brewbaker said. “They have sufficient land to grow competitively for the local market on Oahu.”

Agricultural employment is actually on the rise, as farmers try new crops for Hawaiian consumers, supplementing more established exports such as macadamia nuts and coffee.

More locally grown produce, from lettuce to eggplant, is appearing in stores. On the island of Hawaii, hit the hardest by sugar plantation closings, a forestry industry is getting off the ground. Extensive plantings of fast-growing eucalyptus are planned on former sugar land at Hamakua.

Construction: The construction industry took a dive in 1992 and is not expected to recover until the end of the decade. With state and local government in an austerity mode, government construction contracts fell 27% last year.

One bright spot on the building front is the Hawaii Convention Center, finally taking shape and due to open in July 1998 in the part of Waikiki closest to downtown. Major conventions, including the American Dental Assn. and Lions Club International, have already been booked.

The center’s opening is likely to spur some hotel redevelopment in the area and should help even out seasonal troughs in the visitor industry.

“I think having the convention center will make a very big difference,” Hong said. “We are a great meetings and conventions place because of our excellent communications, travel connections, sanitation, living accommodations, food.”

On the Big Island, the Four Seasons Resort Hualalai, on hold for several years, is nearly complete and gearing up to open in September. It is hiring more people than were laid off when nearby Hamakua Sugar shut down, Brewbaker said.

New industries: Manufacturing has always faced an uphill battle in Hawaii because of its isolation and high labor and real estate costs. To succeed, entrepreneurs must come up with something new, or try to capitalize on Hawaii’s cachet, hoping consumers will pay more for things made in an exotic locale.

A campaign to label local products with colorful hibiscus tags reading, “Made in Hawaii with Aloha” is underway to help distinguish Hawaiian products for consumers.

An array of Hawaiian-made small items, from tropical fruit sauces to silk flowers, recently generated more than $1 million in sales after brief exposure on a national television shopping network, according to Pearl Imada Iboshi, the state’s chief economist. Other entrepreneurs are reaching further afield, designing electric vehicles, for example.

“It is really difficult to envision goods-based industries becoming dominant in Hawaii,” Iboshi acknowledged, “so we have to focus on how we can enhance our service-based industries, such as health care, sports and telecommunications.”

The state administration is also working to shed Hawaii’s reputation of being less than friendly to business. It spearheaded workers’ compensation reform, saving employers $17 million last year and is expanding enterprise zones. Gov. Ben Cayetano said he wants government to be a facilitator rather than a regulator.

Said the Bank of Hawaii’s Brewbaker: “There was a much more adversarial relation between government and business historically than what we’re now seeing.”

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Visiting Hawaii

After falling in the early 1990s, tourism is picking up. Year-over-year percentage change in number of visitors:

1996*: 7.6%

* Through May

Source: Hawaii Visitors Bureau

Hawaii Forecast

Economic data offer evidence of new life in Hawaii’s economy. A look at the most recent economic trend report from the Bank of Hawaii’s chief economist, Paul H. Brewbaker:

* Gradual recovery. Economic growth is expected to continue picking up speed after the stagnation of the early 1990s. The Bank of Hawaii expects 1.3% growth this year and 2.3% in 1997. The total “gross state product” was estimated at $33 billion for 1995.

* Booming retail sales. After slow growth in 1995, retail sales jumped almost 8% in the first quarter of 1996; agricultural sales rose 6.8%.

* Slowing construction. The Bank of Hawaii forecasts a 4% drop in construction volume this year but predicts it will plateau in 1997. Signs of activity during the first quarter, as well as a major convention center planned in Honolulu, are cause for optimism.

* Tourism upswing. The emerging Japanese recovery is expected to help the tourism industry’s recovery. The U.S. and Canadian recoveries are helping as well. This year through May, visits by Japanese tourists are up 7%, U.S. visits are up 3% and Canadian visits are up 22%. Airline flights have been added as well, reducing the price and availability pressures on seats in recent years. Japan Air Lines has just added the first nonstop flight to an island other than Oahu--to Keahole Airport in Kona.

* Government shrinkage. State government jobs decreased by 3,000 between April 1995 and April 1996, and the state plans to keep expenditures flat or lower over the next two years. Federal government spending dropped 3.7% in 1995, but Hawaii’s military installations remain important, and more dramatic cuts are not expected.

* Low inflation. Hawaii’s inflation rate is about 2.2%, lower than the mainland’s. Continued low real estate values, down 10% to 20% in some areas, as well as retail price competition among discount stores and overall slow growth appears likely to keep inflation in check. Also, the commercial real estate market, overbuilt like the condominium and hotel markets, has little ability to command higher prices.

Source: Bank of Hawaii