The Hawaii hotel market, once characterized by scarcity and rapid deals, is now facing a different challenge: a pricing disagreement that has led to a transaction slowdown. According to Mark D. Bratton, CCIM, of The Bratton Team at Colliers International Hawaii, the market is currently seeing a gap between what sellers are willing to accept and what buyers are willing to pay.
Bratton explains that the market is largely underwriting returns at around seven percent, while sellers are holding out for initial returns closer to five percent. This two-point spread is not irrational; it reflects the cost of debt. With borrowing costs at six and a half percent, a seven percent return offers a modest positive leverage, while a five percent return results in negative leverage. Consequently, buyers are declining to invest in properties that would yield a loss on their equity.
The buyer pool has also shifted. Independent investors and family offices are now active, drawn by the market's structural strength. In contrast, publicly traded REITs have stepped back, a national trend. Many REITs have seen significant share price declines, limiting their capital. Bratton notes that stock investors might prefer to invest in high-growth tech stocks like Nvidia rather than hotel positions, whereas owner-operators view assets differently, underwriting businesses they understand.
Recent transactions illustrate the range of buyers. PACIFIC 19 Kona in Kailua-Kona, formerly the Kona Seaside Hotel, was acquired by Nine Brains, a Santa Monica-based hospitality investment firm backed by individual investors and family offices. On the other end, Host Hotels acquired Turtle Bay Resort and repositioned it under the Ritz-Carlton flag. Both buyers significantly changed the business plans but came from opposite ends of the capital market.
Equity requirements for Hawaii hotel deals are higher than the conventional 20-30 percent. The practical floor is 30 percent, with 30-50 percent being common. At 50 percent down, buyers often secure better debt terms, as lenders face less risk. Time is another crucial factor; deals in Hawaii move slowly, and supply is visible years in advance. Buyers must accept a price that feels full in exchange for a plan that may involve repositioning or improved operations over two to three years.
Hotels are unique in real estate, described by Bratton as “a business inside of a piece of real estate.” Unlike apartments or offices, hotels are sold nightly, requiring staffing, food and beverage operations, and full payroll. Operating experience is critical in underwriting. Labor structure is a common surprise for mainland buyers: two major unions operate in Hawaii hotels, with renegotiations every three to four years. About half of the state's hotels are non-union, with larger legacy properties more likely to be organized. Some buyers underwrite union properties, while others avoid them entirely.
Another challenge is the scarcity of fee simple beachfront hotel properties. Much of Waikiki sits on leased land, and the families who own it have leased rather than sold. Buyers seeking fee simple oceanfront ownership face a very small pool.
To bridge the pricing gap, some transactions structure deals to give buyers control before title. PACIFIC 19 Kona is a prime example. The seller, a Hawaii family, took back the property after a ground lease expired in January 2020, with no interest in operating it. Buyers emerged, but the pandemic hit. The seller required a 1031 exchange, which was difficult during travel disruptions. The solution was a leasehold position with the right to acquire the fee at a stepped-up price. Nine Brains spent about $10 million upgrading the property from two-star to three-star, rebranding it, and absorbing an adjacent parcel to reach 150 rooms. The fee purchase closed in July 2026 at $23 million, six years after the process began. This structure has been applied to other transactions, benefiting sellers with outcomes about 30 percent above as-is sales.
The current market is quiet but not stressed. Debt levels are conservative, preventing a wave of forced sales. Owners are absorbing lower distributions rather than facing maturity problems. The market is waiting for a catalyst, such as a drop in interest rates, to close the pricing gap and resume activity.
