The Hawaii hotel market has shifted from a scarcity of available properties to a pricing standoff, with buyers and sellers unable to bridge a gap in expected returns. In Waikiki, several hotels are on the market, but only for buyers willing to accept a first-year return of around five percent. The broader market, however, is underwriting closer to seven percent, leaving a two-point spread that has stalled transactions.
Activity is now concentrated at opposite ends of the investor spectrum. Independent investors and family offices are active, drawn by the market's structural strength, while institutional capital, particularly publicly traded REITs, has pulled back. Many REITs have seen their share prices drop by a quarter to a third, limiting their ability to raise capital. As Mark D. Bratton, CCIM, of The Bratton Team at Colliers International Hawaii, explains, "As a stock investor, why not go buy Nvidia?" Equity holders in a REIT weigh hotel positions against alternatives, whereas owner-operators underwrite a business they understand.
Recent transactions illustrate this range. PACIFIC 19 Kona, formerly the Kona Seaside Hotel, was acquired by Nine Brains, a Santa Monica-based firm backed by individual investors and family offices. At the other end, Host Hotels acquired Turtle Bay Resort and repositioned it under the Ritz-Carlton flag. Both buyers changed the business plan substantially, but they came from opposite ends of the capital market.
The gap between five and seven percent returns is not irrational; it reflects the cost of debt. With borrowing costs at around six and a half percent, a seven percent return produces a modest positive spread, while a five percent return results in negative leverage. Buyers are not holding out for better prices but are declining to invest in negative leverage. Most Hawaii acquisitions are underwritten not on day-one leverage but on a future position buyers intend to create through operational improvements.
Equity requirements in Hawaii are significantly higher than the conventional 20-30 percent. The practical floor is 30 percent, with 30-50 percent common. At 50 percent down, lenders offer better terms, so buyers who can stretch on equity often secure cheaper debt. Time is also a critical factor. Supply is visible years in advance, and deals move slowly, often taking longer than mainland buyers expect. Bratton describes the typical buyer's posture at closing as accepting a price that feels full in exchange for a plan: a better operating model, a repositioning, or a path to positive leverage over two or three years.
Hotels are a unique asset class, as Bratton notes: "I like to describe hotels as a business inside of a piece of real estate." Unlike apartments or office buildings, hotels are resold nightly, with staffing and payroll attached. Operating experience is essential in underwriting. Labor structure often surprises mainland buyers. Two major unions operate in Hawaii hotels, with renegotiation cycles every three or four years. Somewhat more than half of the state's hotels are non-union, but larger and legacy properties are more likely to be organized. Investors split: some underwrite union properties and price in the constraints, while others will not consider them. Discovering the answer after closing is costly.
Fee simple beachfront hotel product is nearly unavailable. Much of Waikiki sits on leased land, with families who assembled positions generations ago leasing rather than selling. Buyers seeking fee simple oceanfront ownership compete for a very small pool.
Where price expectations diverge, transactions often close by giving the buyer control before title. PACIFIC 19 Kona is a prime example. A Hawaii family took back the property at the expiration of a ground lease in January 2020, with no interest in operating it. The seller required a 1031 exchange, which was difficult during the pandemic. The structure that resolved it gave Nine Brains a leasehold position with the right to acquire the fee at a stepped-up price. They spent about $10 million upgrading the hotel from two-star to three-star, rebranding it, and absorbing an adjacent parcel to bring the room count to 150. The fee purchase closed in July 2026 at $23 million, six years after the process began. The same mechanism has been applied to a Honolulu office building, and it shows up regularly in recently closed Hawaii transactions, particularly on assets with deferred capital. For sellers, the trade is time for a materially better outcome, often 30 percent above an as-is sale. The risk is small, as a buyer who has spent millions improving the asset has little incentive to walk.
The market is currently quiet but not stressed. Debt levels across Hawaii hotel ownership are conservative, which is why the two-point pricing gap has produced a slowdown rather than forced sales. Owners are absorbing lower distributions rather than facing maturity problems. This combination of visible supply, disciplined balance sheets, and a spread that closes when debt costs move describes a market waiting on a catalyst, not one working through a correction.
