Hotel investors relying on mainland pro forma models for Hawaii properties risk underestimating expenses by 15 to 25 percent by year two, according to Mike Perkins of The Bratton Team at Colliers International Hawaii. The divergence stems from Hawaii's distinct economic environment, where labor, insurance, shipping, and deferred capital costs escalate faster than on the mainland. Perkins notes that while a typical mainland pro forma assumes a 3 percent annual increase in operating expenses, several lines in Hawaii move at 6 to 7 percent. This compounding effect can quickly erode projected returns, making early adjustments critical for accurate underwriting.
Shipping costs exemplify the challenge. Hawaii imports over 90 percent of its consumables, so food and beverage costs carry a freight component absent from mainland comparables. Inter-island shipping recently saw a 26 percent rate increase, yet carriers still operated at a loss, indicating that underlying cost structures, not opportunism, drive these numbers. Moreover, items that take six weeks to arrive on the mainland often take 10 to 14 weeks in Hawaii, affecting everything from supplies to capital improvements. These logistics realities demand that buyers build in longer lead times and higher carrying costs.
Labor, the largest operating expense, is shaped by two factors: a union framework and scarcity. Union hotels pay a base of roughly $30 per hour, with further increases anticipated. The framework limits staffing flexibility, making it difficult to adjust payroll during slow periods. However, Perkins points out that union terms are negotiable on a deal-by-deal basis; for instance, a client's entitlement approvals required union construction and hotel operations, but restaurants within the property remained non-union. Additionally, the pool of experienced hospitality staff is limited, especially on the Neighbor Islands, driving up quality premiums. These dynamics mean that labor costs cannot be modeled with mainland assumptions.
The entitlement process also diverges significantly. Mainland approval timelines often underestimate the carry costs and delay stabilization for Hawaii developments. For buyers evaluating income-producing assets, the entitlement position can be as material to value as physical condition. Perkins advises looking first at average daily rate, revenue per available room, and expenses as a percentage of RevPAR. The expense ratio is where the Hawaii premium is most visible; rate and occupancy may look comparable to mainland assets, but the expense ratio reveals whether a model uses local or imported inputs. Owners tracking Hawaii market statistics can benchmark these figures.
Despite these challenges, Hawaii hotel investment remains viable. Planning is the largest lever to reduce the premium: working with locally established groups that hold supplier relationships and can source from Asia as well as the mainland compresses lead times. Tariff changes have prompted developers to re-source across countries, and those with existing relationships have adapted faster. Operating efficiencies from the pandemic, such as housekeeping on request and technology to reduce costs, have proven durable. The market is also showing a K-shaped recovery, with luxury properties absorbing cost increases through rate, while mid and lower tiers innovate more aggressively to compete. Perkins's advice to first-time Hawaii hotel modelers 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 more predictable than its reputation suggests, and Hawaii has historically recaptured cost increases through rates in a way few markets can.
