Hotel acquisition models built for mainland U.S. markets often fail to capture the unique cost dynamics of Hawaii, according to Mike Perkins of The Bratton Team at Colliers International Hawaii. In a recent analysis, Perkins outlined how standard assumptions on expense escalation, labor, shipping, and entitlements can lead to significant underwriting errors for Hawaii hotel investments.
The most critical divergence lies in expense growth. While mainland pro formas typically assume a 3% annual increase across operating expenses, Perkins notes that several lines in Hawaii escalate at 6-7% annually. "When we do a three percent annual increase on a mainland pro forma, some elements are six to seven percent here," he said. This compounding effect can create a 15-25% gap between projected and actual performance by year two. The categories most affected include labor, insurance, shipping, and deferred capital.
Shipping costs are a major factor. Hawaii imports over 90% of its consumables, adding a freight component to food and beverage costs that mainland comparables lack. Inter-island shipping recently saw a 26% cost increase, with carriers still operating at a loss even after the hike. Additionally, items that take six weeks to arrive on the mainland often take 10-14 weeks in Hawaii, affecting project timelines and carrying costs.
Labor presents another challenge. Union hotels operate from a base of roughly $30 per hour with further increases anticipated. The union framework also limits operational flexibility, as staffing cannot be easily reduced during slow periods. However, Perkins points out that terms are negotiable deal by deal. He cites a client whose entitlement approvals required union construction and hotel operations, while restaurants remained non-union. Scarcity of experienced hospitality staff, particularly on the Neighbor Islands, adds a premium for quality hires.
The entitlement process in Hawaii is lengthy and should be integrated into financial models rather than treated solely as a scheduling matter. A mainland approval timeline understates carry costs and pushes stabilization earlier than realistic. For buyers, the entitlement position of an asset can be as material to value as its physical condition.
When reviewing Hawaii hotel numbers, Perkins focuses on three metrics: average daily rate, revenue per available room, and expenses as a percentage of RevPAR. The expense ratio is where the Hawaii premium becomes evident. Rate and occupancy may appear comparable to mainland assets, but the expense ratio quickly reveals whether a model uses local or imported inputs. Owners can track market-wide figures through Hawaii market statistics to benchmark performance.
Despite these challenges, Perkins does not advise against Hawaii hotel investment. Instead, he recommends building the model correctly to reduce the premium. Planning is the largest lever: working with locally established groups that hold supplier relationships and can source from Asia 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 pattern where luxury properties absorb cost increases through rate, while mid and lower tiers innovate to compete.
Perkins's advice for first-time Hawaii hotel modelers is direct: don't be too aggressive, be realistic, and apply a premium over comparable mainland assets. Buyers who start from that position find the market more predictable than its reputation suggests. Hawaii has historically recaptured cost increases through rates in a way few markets can. For those evaluating opportunities, the Bratton Team offers commercial real estate services across the islands.
