Hotel investors using mainland-based pro formas for Hawaii properties risk significant forecasting errors, according to Mike Perkins of The Bratton Team at Colliers International Hawaii. In a recent analysis, Perkins highlighted that expense lines in Hawaii escalate at six to seven percent annually, compared to the three percent typical on the mainland, leading to a cumulative gap of fifteen to twenty-five percent by year two.
“When we do a three percent annual increase on a mainland pro forma, some elements are six to seven percent here,” Perkins said. The divergence stems from Hawaii’s unique operating environment, where labor, insurance, shipping, and deferred capital costs all outpace mainland norms.
Shipping costs are a major factor. Inter-island shipping recently saw a twenty-six percent increase, and carriers continued operating at a loss even after the rate hike, indicating structural cost pressures. With Hawaii importing over ninety percent of its consumables, food and beverage costs carry a freight component absent from mainland comparables. Lead times for goods are also longer, with items that take six weeks on the mainland often requiring ten to fourteen weeks in Hawaii.
Labor, the largest operating expense, is shaped by a union framework that sets base wages around thirty dollars per hour with further increases anticipated. This framework also limits staffing flexibility, affecting how seasonal demand impacts margins. However, Perkins notes that union terms are negotiable on a deal-by-deal basis; one client secured approvals requiring union construction and hotel operations while keeping restaurants non-union.
Staffing scarcity, especially on the Neighbor Islands, adds another premium. The limited pool of experienced hospitality workers means quality comes at a higher cost.
On the development side, Hawaii’s entitlement process is lengthy and should be integrated into financial models rather than project schedules. Assuming a mainland approval timeline understates carry costs and overestimates how quickly a project can stabilize.
To assess a Hawaii hotel’s potential, Perkins focuses on three metrics: average daily rate, revenue per available room, and expenses as a percentage of RevPAR. The expense ratio is particularly telling, as it quickly reveals whether a model incorporates local inputs. Owners can track market-wide figures through Hawaii market statistics.
Despite these challenges, Perkins advises against avoiding Hawaii hotel investment. Instead, he recommends building models with realistic inputs and applying a premium over mainland comparables. Mitigation strategies include partnering with locally established groups that have supplier relationships and can source from Asia, as well as leveraging pandemic-era operational efficiencies like housekeeping on request and technology-driven cost reductions.
The market is showing a K-shaped recovery, with luxury properties absorbing cost increases through higher rates while mid and lower-tier properties innovate to stay competitive. Perkins’s advice to first-time Hawaii modelers is straightforward: “Don’t be too aggressive, be realistic, and apply a premium over the comparable mainland asset.” With proper adjustments, Hawaii’s hotel market can be more predictable than its reputation suggests, and it has historically recaptured cost increases through rates better than most markets.
For those seeking expert guidance, The Bratton Team specializes in Hawaii commercial real estate and investment sales, with four decades of experience across all asset classes. More information is available at Colliers International Hawaii.
