market evaluation and development recommendatinos for kau ha

7/27/2019 Market Evaluation and Development Recommendatinos for Kau Ha

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ii

V RESORT REAL ESTATE MARKET..................................................... V- 1Housing Market Trends ..................................................................... V- 1

MLS Sales Statistics .......................................................................... V- 1

Resort Real Estate Overview ............................................................. V- 3

Analysis of Resort Residential Lot Sales........................................... V- 13Non-Resort Residential in Kona/Kohala ........................................... V- 17

Large Lot Transaction Data ............................................................... V- 20

Development Approach and Positioning ........................................... V- 21Target Market Segment...................................................................... V- 22

Residential Programming and Pricing ............................................... V- 22

Phasing Strategy................................................................................. V- 26Development Plan Features ............................................................... V- 27

Illustrative Development Scenario and Absorption........................... V- 29

VI COMMERCIAL RETAIL ANALYSIS .................................................. VI- 1

General Market Conditions................................................................ VI- 1Visitor Expenditures .......................................................................... VI- 2

Overview of Selected Centers............................................................ VI- 3Retail Demand Analysis .................................................................... VI- 6

Estimated Retail Demand .................................................................. VI- 10

Program Recommendations ............................................................... VI- 11


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Kahuku Ranch Market Assessment I-1

Introduction and Site

S E C T I O N I : I N T R O D U C T I O N & S I T E R E V I E W

Introduction

Economics Research Associates (ERA) has been retained by KCOM, LLC as a market

consultant to assess market conditions and review the development program for a new resortcommunity in the Kau district of the Big Island, Hawaii.

The site, known as Kahuku Ranch, is located on the southern tip of the island. The siteencompasses about 17,000 acres with 5.5 miles of oceanfront and 5 miles of highway

frontage. The preliminary concept includes several resort hotels, resort residential lots,

fractional residential, 2 golf courses and supporting commercial development.

The overall objectives of the study are to assess the market affecting the proposed land uses,verify that the concepts are marketable, refine the development program, determine market

positioning and phasing based on our findings and estimate pricing and absorption for thereal estate products. Specifically, we have undertaken the following categories of

investigation:

Evaluation of the site, its surroundings and nearby tourism and recreation resources todevelop a basis for evaluating the proposed land uses and their ability to attract

visitors;

Analysis of the depth of the potential market based on trends in the market area; Research on the resort hotel market on the Big Island to determine pricing,

occupancies, amenities, guest profiles, lengths of stay, etc.;

Development of a set of findings regarding a supportable development programincluding a phasing strategy;

Recommendations pertaining to the size, character and star positioning of the hotel(s); Recommendations pertaining to mix of residential product types and pricing by phase; Estimated absorption of residential units by product types.

This study incorporates a wide range of data both directly related to market demand and local

and regional competition. It is intended to indicate the market potential for the property andprovide recommendations for proceeding with planning and marketing. ERA has researched

the market and come to a variety of conclusions. Data for this project has been provided by

various government and commercial sources. This information, combined with discussionswith industry experts and our experience, has provided the basis for the conclusions in this

report.

This study has been conducted by Mr. Bob Chickering, Vice President of ERA. Ms. KateWittels, Senior Analyst, conducted research and assisted with report preparation.

Property Location

The site is located on the southern tip of the island, in the Kau district, near the intersection

of the Mamalahoa Highway and South Point Road. Figure I-1 shows a map of Hawaii, withthe location of the site. The site is located below the Highway and extends to the ocean.


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Property Description

Figure I-2 shows a diagram of a preliminary concept that has been developed for the project.

The property is virtually entirely black aa lava. The site slopes down from the highway tothe oceanfront. This provides good views to the ocean from virtually everywhere on the site.

There are several small beaches on the site. These beaches are used for nesting by hawksbill

turtles. There are also several natural anchialine pond areas surrounded by native treesdirectly behind the oceanfront. Otherwise, most of the site is wide open lava slope.

Figure I-1

Site Location


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Figure I-2

Preliminary Concept Diagram

Special Features and Preliminary Concepts

As mentioned, the site has several small beaches. These beaches have been protected and

maintained as turtle sanctuaries. Initial concepts for the project plan for protection of

these natural resources. This area of the site would be designated at the Pohue BayWildlife Refuge and Marine Science Lab. This area would be dedicated to the

preservation of the turtle habitat and will also serve as an attraction for visitors to

experience.

The concept also calls for a Hawaiian Heritage Village. This area would celebrate

ancient Hawaiian traditions and would also serve as a visitor attraction. Concepts include

education and preservation, historical sites, museum, agricultural demonstration areas andother cultural features and attractions.

The site also features significant petroglyphs, fish ponds, ancient stone trails and rugged

coastline and sea cliffs. The development concept also includes an equestrian center androdeo grounds.


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The preliminary concept plan also includes a general aviation airport and a residential

community for local residents and employees. The community is intended to supportlocal residents and establish a local commercial center for this part of the island.

The developer has been in discussions with the regional veterans clinic that is interested

in relocating to the proposed Kau town. This facility would provide medical care forveterans as well as others in the community. The air strip is considered to be very

important for this facility.


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Kahuku Ranch Market Assessment II-1Executive Summary

S E C T I O N I I : E X E C U T I V E S U M M A R Y

The following summary provides an overview of the key sections of this report. Theheadings below generally correlate with the sections of the report.

Overview of Hawaiian Tourism Trends

Visitation to the state of Hawaii reached an all-time high in 2005, with an estimated 7.3million visitors. Tourism throughout the world, declined sharply after September 11, 2001,and consequently the annual number of visitors to the state declined to about 6.3 million forthe year. The three year decline in total visitation can be attributed to the decrease in thenumber of international tourists. According to a report by the Bank of Hawaii, internationalvisitor arrivals were already down 2.1 percent in 2001 prior to September 2001, and fell 45percent after the terrorist attack to finish the year 26 percent below 2000 levels. Accordingto the same report, business meetings and convention travel were down 27.1 percent in thedomestic market in 2001, but domestic leisure travel (3.0 million visitors in total) declinedonly 2.5 percent. Domestic visitor counts fell only 5.1 percent to 4.2 million during 2001,despite the decline in visitation after September 11.

Visitation to all of the islands increased between 2001 and 2005. While the Big Islandreceives less total arrivals than Oahu or Maui, it experienced the greatest increase in totalarrivals between 2001 and 2005 of the four counties. Furthermore, in 2005 the Big Islandexperienced a 16 percent annual increase in total arrivals, while Oahu and Kauai onlyexperienced a 6 percent increase and Maui experienced a 4 percent increase. Visitation to theBig Island is typically comprised of 75 percent domestic arrivals and 25 percent internationalarrivals. In comparison to the other islands, the Big Island has the second highest percentageof international arrivals annually.

Statewide Annual Visitor Arrivals by County, 2001 to 2005.

Year Oahu Kauai Maui Big Island

2001 4,257,536 1,008,699 2,104,478 1,181,552

2002 4,276,077 1,005,897 2,139,427 1,243,313

2003 4,090,483 975,868 2,196,447 1,207,164

2004 4,464,551 1,020,921 2,207,826 1,281,156

2005 4,731,843 1,090,147 2,364,480 1,521,537

% change 11.1% 8.1% 12.4% 28.8% Source: Hawaiian Department of Business, Economic Development and Tourism.

Tourism is expected to remain strong with an estimated 6.8 million visitors in the first eleven

months of 2006. Of the 2006 visitation, the Big Island received an estimated 20 percent ofthe visitors, approximately 1.4 million visitors, while Maui received 32 percent and Oahureceived 64 percent.

According to the DBEDTs 2030 projections, total visitation to Hawaii is projected tocontinue to increase. The projections forecast that total visitation will reach 8.6 million by2015 and will break the 10 million mark by 2025.


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Overview of the Hotel Market in Hawaii

In 2005, the DBEDT reported that there were 11,000 visitor accommodation units on the BigIsland. Hotels represented the greatest percentage of visitor accommodations, with almost7,000 units, while condominium hotels and timeshares are also very prevalent on the island.

Kona contains the largest concentration of visitor accommodation units, with 45 percent ofall visitor accommodations. The Naalehu/ Kau region have the lowest concentration ofvisitor accommodation units with 1 percent of all units on the island. The majority of thehotel units are located in Kohala/Waimea/Kawaihae and Kona.

Distribution of Visitor Accommodations, 2005.

Kona, 45%

Kohala/

Waimea

/Kawaihae,

41%

Hilo/

Honokaa,

12%

Volcano

Area, 2%

Naalehu/

Ka'u, 1%

Source: DBEDT

Of the total visitor accommodations on the Big Island in 2005, 34 percent of the units wereclassified as standard units, charging between $101 and $250 per night, while over 47 percentof the units were classified as deluxe or luxury commanding over $250 per night.

In 2005, the occupancy rate on the Big Island averaged 72 percent with the highestoccupancy occurring in February 2005, with 82 percent occupancy. In 2005, the averageoccupancy rate for the Big Island was the lowest of the four islands. As of October 2006, theyear to date occupancy rate was 70 percent, a decrease of 0.1 percent compared to the firstten months of 2005.

The average daily room rate (ADR) for the Big Island, in 2005, was $173.67 per night andthe average revenue per available room (RevPAR) was $125.39 per night. The average daily

room rate on the Big Island was higher than the statewide average of $166.86 in 2005. TheADR for the first ten months of 2006 was $168 and the RevPAR was $118 per night. Boththe ADR experienced a seven percent increase over the first ten months of 2005.

The high-end hotels are concentrated along the Kohala and Kona coasts. There are over4,000 rooms among the major eight hotels. Among these hotels occupancy ranged from 70percent to 90 percent and ADR ranged from $250 to $700 per night.

The following room counts for the key high-end hotels on the Big Island.


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o Hapuna Prince Beach Hotel: 350 roomso Mauna Kea Beach Hotel: 310 roomso Mauna Lani Bay Hotel: 347 roomso Fairmont Orchid: 540 roomso Hilton Waikoloa Village: 1240 roomso Waikoloa Beach Marriott: 545 roomso Sheraton Keauhou Bay: 521 roomso Four Seasons Hualalai: 243 rooms

The DBEDT reports the number of visitors to Hawaii in 2005 was 1.5 million. Hotel visitorsare estimated to account for 66 percent of total visitation to the Big Island. Asthere over4,000 high-end hotel rooms on the Big Island, ERA estimates that there were 360,000visitors staying at high-end resorts in 2005, or approximately 36 percent of total visitation to

the island stays at high-end resorts.

Projected Hotel Roomnights, Big Island, 2007 2017

The following are key assumptions and projections pertaining to our projections ofsupportable rooms by 2017:

As of 2005, there were approximately 4,100 4- and 5-star hotel rooms on the island. As mentioned, annual visitation to Hawaii in 2005 is estimated at nearly 1.5 million

people.

DBEDT estimates that visitation to Hawaii will grow at 1.6 percent annually between2005 and 2010, two percent between 2010 and 2015. For the purpose of estimatingfuture growth in visitation, ERA has incorporated an assumption of average annualgrowth in visitation ranging from 1.6 to three percent. ERA believes the Big Islandwill experience a greater than projected annual growth rate after 2009, when the firsthotels in the Kau development come on line.

Key visitor and hotel projections are as follows:o ERA projects that annual visitation to the Big Island to increase from 1.5

million to about 2 million by 2017.

o The number of annual hotel visitors is projected to increase fromapproximately 1 million in 2007 to about 1.4 million by 2017.

o Based on industry-standard and Hawaiian-specific assumptions for averagehotel occupancy, average party size, and average length of stay, the totalnumber of supportable four and five-star hotel rooms on the Big Island isprojected to range from approximately 4,400 in 2076 to about 5,800 in 2017.


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o This compares to existing supply of about 4,100 four and five-star hotel roomsand represents an increase in supportable rooms of about 1,500 over the ten-year projection period, which equates to an increase of nearly 37 percent.

o The cumulative annual number of supportable new 4- and 5-star hotel roomson the Big Island is shown by year with key dates summarized as follows:

2009: 460 new supportable 4- and 5-star hotel rooms 2012: 873 new supportable 4- and 5-star hotel rooms 2016: 1,525 new supportable 4- and 5-star hotel rooms

o ERA has set forth a hotel development phasing scenario that we believe wouldbe appropriate and supportable at the Kau site. The phasing scenario matchesthe introduction of new rooms to the projected demand for rooms over time.

o Based on the development scenario, the implied market share for the proposedKau hotel properties within the 4- and 5-star segment of the Hawaiian market

are calculated. The implied market share of the three properties is shown torange from 5 percent to 14 percent over the analysis period, which isconsidered reasonable.

Recommended Hotel Development Program at the Kau Resort

The location of the site on the southern tip of the island is outside the predominant resortzone that stretches from Kona to Kawaihae. Therefore, the project will have to develop acritical mass of accommodations, attractions and marketing features to establish the locationas an alternative to the Kona / Kohala coast.

We believe this can be achieved with an attractive master plan and development of the

existing resources and surrounding attractions. There are precedents for successfuldevelopment of new resort locations in previously undeveloped areas of Hawaii includingPrinceville, Kauai, Turtle Bay, Oahu and Ko Olina, Oahu.

Access time from the commercial airports in Kona and Hilo is a concern, as the site is aboutand hour and a half from the Hilo airport and almost 2 hours from the Kona airport, given thetypical traffic congestion and stop lights in Kona. The airport on-site could provide access toa limited number of travelers, particularly kamaaina coming from other islands in privateplanes and/or high-end travelers in private jets. Eventually, commercial service might getdeveloped from Oahu on small inter-island carriers such as Island Air. However, the massmarket that would constitute the large majority of resort guests can be expected to arrive by

commercial jet from the mainland and will arrive at the Kona or Hilo airports.The developer of the project has established a vision for the resort as a high-end luxurydestination befitting its world-class scenic coastal and beachfront setting. In order todifferentiate from other existing and proposed resorts on the island, the strategy is toemphasize the cultural and ecological resources currently present on the site. The vision is toposition the resort as a lifestyle resort that combines the natural beauty of the site, 4 and 5-star hotel accommodations, internationally renowned spa services, and luxury living in a


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cultural and eco-friendly design environment. ERA concurs with this positioning given theaesthetics of the site and the strength of Big Island tourism.

ERAs recommendations pertaining to the proposed hotel development program at thesubject Kau Resort are based, in part, on the following:

Over the next ten years, visitation to Hawaii is expected to continue to increasesignificantly.

Assuming well-known branded operators and the development of first class facilitiesand amenities, it is expected that the subject properties will capture a significant shareof the regional market for 4- and 5-star hotel properties.

While we believe the hotel market will be strong over the next 10 to 20 years, wehave reduced the hotel development program from what was included in thepreliminary concept plan. The hotels will be important to bring guests and buyers tothe project and to support the commercial outlets and amenities. However, they areless attractive to investors than the residential land uses.

Overall Strategy

The large majority of resort hotels on the island are in the 4-star quality rating. This isconsistent with resort hotels in the entire state. We believe the overall positioning strategyfor the project should be to appeal and be attainable to a broad segment of the market. Thiswill allow a range of real estate products to be sold and will make the resort appeal to a broadmarket. This will accelerate absorption and improve occupancies and help to overcome thefact that the project site is outside the traditional resort zone of the Big Island and is fartheraway from the commercial airports. Accordingly, we would look to Waikoloa and MaunaLani as comparable integrated resorts rather than Hualalai or Kukio. This allows for a widerrange of hotel and real estate offerings even up to the very high-end oceanfront real estate,

and exposes the project to a broader market. For this reason, we believe the majority of therooms should be in 4-star resort hotels with a relatively low number of upscale 5-starboutique rooms. This roughly reflects the profile of the upper income visitors to the island.That is, majority 4-star with a smaller contingent of 5+ star visitors.

As mentioned earlier, we do not believe it is necessary to plan for more than 3 to 4 hotels. Infact the large integrated resorts on the island only have 1 to 2 hotels. Waikoloa actually has 3hotel sites with the Hilton occupying 2. In addition, Waikoloa offers the Bay Club timeshareand the new Hilton timeshare. Hotel sites should be planned so that they can be flexibly usedfor hotel or timeshare / fractional projects.

Initial Four Star Hotel

The initial hotel is positioned at the 4-star level to be consistent with most of the other high-end hotels on the island. The hotel is not overly large as the location will need some timeand marketing to attract large groups and significant numbers of FIT guests. Initially thehotel may be able to attract shorter stay visitors that are also staying on the Kona / Kohalacoast during part of their stay on the island. These guests might form an itinerary to visitvarious parts of the island. As the destination gets established, longer lengths of stay can beexpected. The property will also be able to attract small to medium sized groups looking fora new experience in Hawaii or an alternative to Kona / Kohala or proximity to the natural


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attractions of Kau and Volcano. The following are key recommendations and projectionspertaining to the first planned hotel at the Kau Resort:

Date of Opening: 2010 Number of Rooms: 250 total rooms including a mix of about 225 regular rooms (600

square feet) and 25 suites (800 to 1,000 square feet).

Market Positioning: 4-Star Small amount of indoor/outdoor event space for small corporate events and private

receptions. This would include a 2,000 to 3,000 square foot indoor events space thatis connected to outdoor terraces.

Food and Beverage Facilities:o Main dining room: 100 seats indoor, and 75 seats outdooro Casual restaurant: 50 to 75 seatso Main lobby bar / lounge: 50 seatso Poolside bar and grill: 30 seats

Other Facilities / Amenities:o Large free-form pool with swim-up baro Spa, 8,000 square feet, 10 to 12 treatment roomso Fitness center: 1,500 square feet

Rack Room Rates:o Regular Rate: $250 to $350 for regular rooms and $450 for suiteso ADR: $275

Market Mix:o 70 percent FIT (free independent travelers)o 30 percent group (primarily wholesale package and incentive groups)

Primary Target Markets:o

North America: 90 percento Japan: 10 percent

Characteristics of Stay:o Average length of stay: 6 nightso Average party size: 2.5

Annual Occupancy (Stabilized Level of Operation):


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o Annual Average: 75 percentHigh-End, All-Suite or Cottage Boutique Hotel

An all-suite or cottage hotel is recommended in 2012. This will provide an option for the

high-end clientele that has shown increasing demand for variety in recent years. This hotelmight follow this format to provide an experience that is differentiated from others on theisland and elsewhere in Hawaii. At this price level it will be important to maintain privacy,provide spacious rooms and provide top notch service. The following are keyrecommendations and projections pertaining to the high-end, all-suite or cottage boutiquehotel at the Kau Resort:

Date of Opening: 2012 Number of Units: 75 suites (900 to 1,100 square feet) Market Positioning: 5-Star + Food and Beverage Facilities:

o Main three-meal restaurant: 50 seatso Fine dining: 35 seatso Main lobby bar / lounge: 30 to 40 seatso Poolside bar and grill: 20 seats

Other Facilities / Amenities:o Free-form pool with swim-up baro Fitness center: 1,000 square feet

Rack Room Rates:o $800 to $1,000

Market Mix:o 98 percent FIT (free independent travelers)o 2 percent group (primarily corporate groups)

Primary Target Markets:o North America: 98 percento Other: 2 percent

Characteristics of Stay:o Average length of stay: 6 nightso Average party size: 2.2


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residential components of the project. These recommendations are pro-forma and do notrelate to a specific land plan. Adjustments will need to be made when a more definitive landplan is developed.

The market research along with successful development approaches at other master plannedresort projects indicates a possible viable approach for developing the resort. Given the

resort real estate conditions on the island, the topography of the land, and the preferences ofthe market, ERA would recommend a mix of built product and lots sales. The built productshould be a mix of condominiums, attached products and detached single family products.

ERA would recommend abiding by the following rules of thumb for resort residentialdevelopment at the project.

Hold the highest value parcels, such as those with water frontage or premium views,to let values build over time. An exception to this is when high initial infrastructurecosts require cash flow generation.

Hold the lowest value parcels, such as those with no water view to let the value of theresort and the cachet of being inside the gate build over time;

Offer a range of product types and price points to appeal to different market segmentsat any given time;

Capitalize on the high value cachet of being located on the Big Island. Develop a resort core with hotel, residential, golf and associated amenities from the

start of the project

Make sure that residential in the first phase has good ocean views; Provide some limited commercial support for the project, keeping in mind that it may

need to be subsidized in terms of minimal rent initially.

Develop natural amenity features such as access to the beach and maximization ofviews.

The recommended development program includes a mix of residential products with anoverall high-end positioning. We would recommend positioning at a level that ranges fromslightly below that of the Hualalai down to Waikoloa. We expect, however, that oceanfrontlots will fetch very high prices, as has occurred elsewhere on the island. It must be kept inmind that, generally, the higher the positioning the slower the sales pace. A mid to upperlevel positioning, similar to Waikoloa or the recent developments at Mauna Lani can bringlarger numbers of buyers to the project to populate it and support the amenities andcommercial facilities. This will enhance absorption of the real estate and populate the resort.

While projects such as Hualalai, Kukio and Hokulia have maintained a more narrow rangehigh-end and exclusive positioning, the resort projects of Waikoloa, Mauna Lani and MaunaKea offer a wider range of real estate, resort hotels, public amenities and retail. We wouldexpect that with the mix of hotels proposed for this project and the commercial facilities andamenities that will need support, this project should be positioned more akin to these latterresort projects.


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This does not preclude high-end residential. Projects such as 49 Black Sand Beach andPauoa Beach in Mauna Lani; Kolea in Waikoloa; and Kaunaoa and the Bluffs in Mauna Keaare examples of high-end residential in broader range resort projects.

Target Market Segment

The target market for the proposed resort will be the continuingly burgeoning baby boomers.The majority of these buyers will be residents of the western US, primarily California. Thebaby boomers (currently those over 43 years old to about 65), have driven the boomingmarket on the Big Island, and across North and Central America over the past 8 years. Thenumber of people entering the peak second home purchasing age groups of about 50 to 55years old will continue to grow through about 2015.

Several trends have started to emerge that distinguish the purchasing habits, use patterns andbuying motivations of the baby boomers. This generation is showing patterns that aredifferent from that of their parents. The previous generation purchased second homes toescape, rest, and hideaway. On the other hand, baby boomers can be characterized in thefollowing ways.

Interest in community rather than exclusivity seeking out body heat; Desire for self improvement through education, health and fitness, outdoor pursuits

and spa treatments;

Desire to be with friends and family for recreation, entertaining at home and diningout;

Desire for authenticity in a destination and in resorts; Wanting to connect with and understand the history and culture of the place they are

visiting;

Interest in green and sustainable resorts and environmental stewardship;The proposed concept for the Kau resort is particularly well suited to appeal to this targetmarket given its authentic Hawaiian setting and theme, the environmental programs and thecultural and historical programs that are being proposed.

Residential Programming and Pricing

Following the above positioning, a range of product types could be developed at the Kauresort. Products and phasing will depend on a number of influences including but not limitedto:

Master plan layout and orientation of development parcels near golf, oceanfront orother features and amenities that bring price premiums and dictate productpositioning;

Need to generate cash flow immediately to cover infrastructure costs; Development deals with hotel developers that typically require residential

components to augment cash flows;

The preferences of developers and development partners; and,


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Changing market preferences.Therefore, the following program is illustrative and is intended to follow the positioningdescribed above. It should be noted that the pricing recommendations are based on currentmarket conditions. We believe the subject project with its sweeping coastal views cancommand relatively high prices. Pricing also assumes that the prestige and amenities of

resort hotels will add value to the real estate. Significant price escalation has been occurringrecently and could likely occur in the future. ERA has based its pricing upon the assumptionthat the vast majority of the real estate products will offer excellent ocean views. As innearly all destination resort markets, ocean views command a considerable premium. As aresult, the developer should do everything possible to preserve views in order to maximizeachievable value for the real estate products and the project as a whole.

The product mix is based on ERAs industry knowledge, current market conditions, currentpractices in resort real estate development and inputs from local professionals in the industry.The mix of products is intended to provide a range of products and price points in order tobroaden the market reach of the resort. The product types are intended to maximizeflexibility by allowing for adjustments based on market response.

Lots

There has been mixed signals about lot sales in recent months. High-end projects such asKukio and Hokulia continue to sell lots. There also continues to be a market for largeagricultural lots. However, realtors note that buyers are hesitant about the building process inHawaii characterized by expensive material costs, expensive and overbooked contractors andmanaging projects from distant primary homes. Other developers, notably Hualalai, havestated that they prefer to capture the profit from building rather than to just sell lots.Nevertheless, there is a segment of the second home market that seeks to pursue the dream ofdesigning and building custom homes within a resort setting. Therefore, it is recommended

that a range of lot products be offered in the resort. These would be as follows: Golf Lots The golf lots should range from half an acre to an acre. These lots should

be developed in enclaves no larger than 50 units. Golf frontage or at least golfforeground views would add value to these lots. It is assumed that these lots wouldalso have ocean views.

View Lots View lots would not be as close to golf and would be larger rangingfrom 1 to 3 acres. These would be similar to the lots in Hokulia. These lots would bereleased in 8 to 10 unit development parcels similar to Anea, Lipoa and LauekiEstates in Hualalai.

Oceanfront Lots - The oceanfront and near-ocean lots can be some of the highestvalue products sold within resort communities. These lots should average one acre insize. Frontage on the ocean is obviously quite limited, and other land uses willcompete for this premium value.

Ag Lots Large agricultural lots could be offered in the mauka portions of the site.These could range from 5 to 20 acres and would provide buyers the low densityranchette product within a resort community. This is something that is not yetavailable on the island, although the Hokukano Ranch project near Kealakakua iscurrently planning to offer this product in a private golf community setting.


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Pricing for these products based on todays market conditions could be as follows:Unit Type Size Range Price Range

Golf Lots to 1 Acre $1 - $2 million

View Lots 1 to 3 Acres $1 - $2 million

Oceanfront Lots 1 Acre $3 $10 million

Ag Lots 5 - 20 Acres $2 - $4 million

Multi-Family Condominium Units

Condominiums are a popular product type at resorts in Hawaii. Multi-family products havebeen developed in Mauna Lani, Waikoloa and Mauna Kea by third party builders who

purchase development parcels from the master developer. Actual product types and pricingare determined by the builders with the approval of the master developers. We recommendoffering various development parcels that can accommodate a range of multi-family housingtypes as follows:

Mid Level Condos Using Kulalani at Mauna Lani and the Waikoloa Beach Villasan as an analog, these units would range from 1,300 square feet to about 1,800 squarefeet. There should be a mix of 2 (dual-master) and 3-bedroom models with 3-bedroom being most prevalent. Unlike Mauna Lani, these units would have oceanviews.

Higher End Condos These units would be similar to Nohonakai at Mauna Lani butwith ocean views. They would be larger 3-bedroom 3+ bath units with sizes rangingfrom 2,000 to 2,800 square feet. These units would also feature more luxuriousspecifications, appliances and finishes and have higher ceiling heights and appointedoutdoor lanais / patios.

Pricing for these units is based on todays market conditions. The higher pricing ofthe high-end condos is a function of more luxurious appointments, higherconstruction costs such as for higher ceilings, larger kitchens and bathrooms andlarger more appointed outdoor spaces. Prices could be as follows:

Unit Type Avg. Size Avg. Price Price / s.f.

Mid Level 2-bed 1,400 $800,000 $575

Mid Level 3-bed 1,800 $1,000,000 $550

High-End 3+ bed 2,000 $1,500,000 $750

High-End 3+ bed 2,800 $2,050,000 $730


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Townhouses and Villas

Townhouses The townhouse product would provide a step up in size and price fromthe high-end condominiums. These units would range from 2,500 to 3,500 squarefeet. They would offer luxurious finishes and specifications.

Duplex Villas This would be another form of the townhouse product built in pairs.These units would have the same size and price ranges as the townhouses.

Detached Condominium Villas This is a product that has been increasingly popularin Hawaii. It is a detached single-family product that is maintained under acondominium regime with an HOA available to handle outdoor maintenance. Theseunits would have private outdoor spaces and plunge pools. The HOA maintainslandscaping, streets and even building exteriors. We would recommend a range ofsizes and prices for this product. Smaller lower priced units might range from 2,000to 2,400 square feet. Larger units could range from 3,000 to 4,000. These types ofproducts are often sold as cottages at resorts such as Kukio and Hualalai in Hawaii.Lower priced examples can be found at Kaanapali on Maui.

Pricing for these units based on todays market conditions could be as follows:Unit Type Avg. Size Avg. Price Price / s.f.

Townhouses 3,000 $3,000,000 $1,000

Duplex Villas 3,000 $3,000,000 $1,000

Detached Villas (sm) 2,300 $3,000,000 $1,300

Detached Villas (lg) 3,500 $4,000,000 $1,140

Fractional Condominiums

Once the destination gets established, it may be possible to sell shared ownership productswithin the resort. Fractional ownership, distinguished from timeshare by offering more thanone to two weeks of use, is just now being introduced in the Hawaiian market by Ritz Carltonat Kapalua, Maui. Ritz is offering its typical 1/12

thshare product at Kapalua. We would

expect a 1/10th to 1/12th share would be appropriate for Hawaii, giving owners 4 to 6 weeksof use.

Unit types that could be sold as shared ownership could include the higher end condos and

townhomes. Generally, fractional projects should be located on top notch sites close toamenities or key natural features. They are typically high-end products in high-end locationsthat allow buyers to buy into this level of location, size and luxury at a reduced price due tothe shared ownership.

Fractional projects tend to have a limited number of units up to say 20 or 30 units at a time.Too many units divided into shares (20 units x 10 shares = 200 shares) creates an inventoryof product that can be challenging to sellout.


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Fractional ownership requires a strong sales and marketing effort and is generally mostsuccessful when it developed and sold by the major hotel brands. Major flags such as Ritz orFour Seasons can sell the appeal and recognition of their brands and have the majoradvantage of having large customer data bases and adjacent lodging.

Fractional pricing is typically a function of the pricing of whole-ownership units. The whole

ownership price is divided by the number of shares and then factored up at 1.5 to 2 times toaccount for increased sales and G&A costs and increased profit. Accordingly, if wholeownership 3-bedroom condominiums were priced at $1.5 million, a one tenth share would bepriced at $1.5 million / 10 times 1.75 or $262,500.

Timeshare

Timeshare has become increasingly popular in Hawaii with strong sales by the major hotelbrands such as Marriott (Maui, Oahu, Kauai); Westin (Maui, Kauai); Hilton (Waikoloa andWaikiki). For a number of years, timeshare gained the reputation of being low-end to middlemarket and cheap. However, these upscale brands have developed high-end projects inluxury resorts such as Kaanapali, Maui; Princeville, Kauai and Koolina, Oahu. They have

performed quite well in these locations and have not reduced the cachet of these resorts.

Again, timeshare is not typically an early phase development. The above mentioned projectswere added to the resorts after they were mature. Since timeshare is a higher densitydevelopment, it is best suited for hotel sites or near hotel areas of the site. It should be keptseparate from lower density areas of the project. Timeshare can occupy both upscale sitessuch as Marriotts Hawaiian properties or lower value sites such as the new Hilton project atWaikoloa.

Phasing Strategy

The phasing strategy is based both on the layout of the property as well as the development

strategy for the project. The overall strategy will be to establish a core of accommodations,facilities and amenities to drive initial sales in Phase 1. There will also be an immediate needfor cash flow to help cover the high initial costs of infrastructure and amenity development.Therefore, it will be important to initiate and sustain strong real estate sales from the start.Phase 2 will then build from and continue the momentum of the first phase. It will benecessary to make significant expenditures on initial infrastructure, amenities and resort corefacilities in the first phase. However, the phasing strategy seeks to minimize infrastructureexpenditures until they are required to open new revenue generating real estate zones.

Phase 1

It would be optimal to include the smaller 4-star resort hotel in Phase 1 in order to develop

the resort core facilities and amenity features. Real estate products included in Phase 1would consist of both lots and built products. Lots would require less investment in terms ofconstruction and would help generate cash flow. Condominiums and town homes locatednear the resort core would help establish the resort core and would be attractive to hoteldevelopers as part of their development deal. A beach club facility for the use of real estateowners would enhance real estate values. At least the first 9 holes of the golf course shouldbe constructed in phase one. This will create the resort environment and add value to the realestate. It would be optimal to build the entire course.


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Amenities

Trail systems are consistently cited in surveys as the most desired amenity of resortsand residential communities. There should be an extensive trail system that connectskey features on the site including the oceanfront, the petroglyphs, the turtlesanctuaries and the Hawaiian heritage park.

A beach club that is accessible only to residents would be beneficial. This should belocated down next to the beachfront. The beach club should have a small lap pooland a small fitness center. Indoor facilities should include changing rooms, and asmall kitchen and indoor living / dining area for members to entertain and/or forsocial gatherings.

Individual enclaves can offer small pool / recreation centers within theirdevelopments.

A spa located either as a stand-alone feature or within one or all of the resort hotelswill be a popular feature(s) as an amenity for the residential buyers as well as hotel

guests. The preliminary development program includes a Hawaiian Heritage Center. This

facility would provide an interesting attraction to draw hotel guests and particularlyother day visitors to the project. It also will provide the connection to history andculture that baby boomers are increasingly seeking. However, this facility should becarefully sited so as not to occupy too much high-value real estate. Public parkingand traffic flows have to be kept separate from private residential areas.

Beaches on the site are largely protected as turtle sanctuaries. Beach access is clearlycritical to values at the project. If beach access is limited or cannot be provided, itwould be beneficial to create lagoons that bring water into resort sites or otherwiseprovide ocean access.

The preliminary development program includes an equestrian center and rodeoground. This facility might provide an amenity more for the existing localcommunity rather than for new residents or resort guests. The land form that existson site is not particularly well-suited for equestrian activities. This is in contrast tothe northern and central portions of the Big Island where there are vast areas ofpasture lands, forests, public lands and riding trails. Therefore, it is likely that horseenthusiasts would choose equestrian oriented properties in these regions rather thanthe subject site. For this reason, we suggest limiting the size and scope of theequestrian facilities.

The preliminary program includes an airstrip that could accommodate private jets andother smaller planes. We would expect this feature to enhance real estate sales for thehigher priced real estate products.

Unit Configuration

Built units should have wide profiles facing the ocean in multi-story construction. If possible, it is desirable to create neighborhood enclaves to preserve privacy and a

sense of community within subareas of the project.


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Protection and shielding from the wind will be important. South and west facing orientations should be maintained. Most of the site slopes to

the south, so this will be easy to achieve.

Unit Design Features

Unit design features will vary by target market segment. Some of the features, especially forthe high-end market, that are appealing include:

Large covered or sheltered outdoor spaces when possible that emphasize outdoorliving and entertainment;

Access to patio (dining) from kitchen and family/living room using pocket doors; Grand, maximum impact entry, ideally with see through (to the ocean) views; Twin master suites/ separated bedrooms are highly desired; High ceilings, preferably 9-10 feet, including ceiling fans would be necessary for

upscale housing;

High quality kitchen appliances and gourmet kitchen elements; Five fixture master bathroom with outdoors area and quality bathroom fixtures; Emphasis within the unit layout for entertaining and family gatherings; Technology friendly design; and Availability of upscale furniture packages.

Illustrative Development Scenario and Absorption

Based on the above recommendations regarding positioning and product types, Table II-1shows a possible development scenario and mix of unit types that we believe would besupportable based on prevailing rates of development and absorption on the island.Comparable resorts such as Mauna Lani and Waikoloa have achieved absorption that exceedsthese levels. However, the timing of new releases of product can vary significantly due tothe variety of builders active in these projects and their individual scheduling considerations.

Table II-2 shows a reasonable absorption schedule of the above development scenario. Thevariety of products and price points allows for increased absorption as various demandsegments are tapped. It is significant to note that the comparable resorts on the Kona /Kohala coast are approaching build-out. Kohanaiki will open with new units and golf, but itis more a private golf community than a resort. We believe this will enhance the ability of

the Kau resort to sell resort real estate over the next decade.

Overview of Commercial Retail Market

The main shopping areas on Hawaii are Kailua-Kona and Hilo. There is also retail in thevarious towns and in several of the resort communities. Kailua-Kona contains bothneighborhood community centers and tourist oriented retail. Most of the entertainment andrestaurant retail is located along Alii Drive in Kona Village, while the big box stores andservice oriented retail is located in the community centers located off of Queen Kaahumanu


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Kahuku Ranch Market Assessment II-19

Table II-1

ILLUSTRATIVE DEVELOPMENT PHASING AND ABSORPTION FOR KA'U RESORT

2007 to 2017

Development Phasing Totals 2007 2008 2009 2010 2011 2012 2013 201

4-Star Hotel 250 250

5-Star Boutique 100 100

4-Star Conference Hotel 400 40

Mid Market Condos 320 60 60 7

High End Condos 240 30 30 30 30 3

Townhouses 150 30 40

Duplex 120 40 4Villas 170 30 40

Golf Lots 200 50 50 5

View Lots 200 50 50 5

Oceanfront Lots 60 20 20 20

Ag Lots 30 10 10 1

Fractional 20

Timeshare 150


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Kahuku Ranch Market Assessment II-20

Table II-2

ILLUSTRATIVE ABSORPTION FOR KA'U RESORT

2007 to 2017

Development Phasing Totals 2007 2008 2009 2010 2011 2012 2013 2014

Mid Market Condos 320 60 60

High End Condos 240 30 30 30 30

Townhouses 150 30 40

Duplex 120 40 40

Villas 170 30 40

Golf Lots 200 25 25 25 25 25

View Lots 200 25 25 25 25 25

Oceanfront Lots 60 20 20 20Ag Lots 30 10 10 10

Fractional 20

Timeshare 150


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Highway. Retail in Hilo is mostly oriented to the local residents. Waikoloa and MaunaLani have each developed retail centers to service the tourists and second-home residents.

Retail Demand Analysis

Available Markets

ERA has identified four available markets for the retail component of the Kau resortdevelopment. These include:

Hotel Guests: people who will be staying at the hotels within the Kau resort. Resort Residents: property owners of the resort real estate and their guests. Primary Residents: people who are residents of the Kau district. Travelers: people who are traveling through Kau.

The four available markets each represent a specific consumer type that will utilize theretail component differently. ERA evaluated the spending habits of each type ofconsumer and determined capture rates for each. The analysis evaluated three types ofretail categories: prepared food & beverage, groceries and merchandise retail.

Projected Estimated Size of Available Markets

The following are the estimated size of each available market for key years of theprojects development:

Hotel Guests: 144,000 visitor days in 2010, 434,000 visitor days by 2017. Residents: 3,500 visitor days in 2010, 103,000 visitor days by 2017. Primary Residents: 4,600 population in 2010, 5,000 by 2017 Travelers: 240,000 people annually.

Capture Rates of Available Markets

Regardless of the quality of the shops and establishments, the commercial retail at theKau development will not capture 100 percent of the spending power of the availablemarkets. As a result of the competition on the Island, ERA determined potential capturerates for each available market. The hotel guests and resort residents are more of a

captive audience and thus it is assumed that they will utilize certain elements of the retailmore so than the primary residents and the travelers. However, there is a lack of existingretail near the site, primary residents may utilize the prepared food and beverage andgrocery retail at a substantial rate. The tourists driving passed the Kau site on route toVolcano or Kona may utilize the retail but at a significant lower rate. The following areERAs estimates for capture rates for each available market and retail category.


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Estimated Capture Rates for Available Markets

Capture Rate for Hotel Guests

Prepared Food and Beverage Space 60%

Grocery Space 65%

Retail Merchandise Space 85%

Capture Rate for Resort Residents


Grocery Space 90%


Capture Rate for Primary Residents


Grocery Space 60%


Capture Rate for Travelers


Grocery Space 5%


Estimated Retail Demand

Based on the assumptions utilized, it appears likely that the four available markets couldinitially support an estimated 24,000 square feet of new commercial space, but thatdemand will grow quickly if the resort is successfully developed and marketed asenvisioned. By 2014, the identified available markets are expected to represent sufficient

demand to support about 68,000 square feet of new shops and restaurants and by 2017support over 75,000 square feet of retail and restaurants.

Based on the ERAs analysis, it is estimated that 34 percent of the demand will supportprepared food & beverage space, approximately 10 percent will support grocery storespace and a about 56 percent will support retail merchandise space. The distribution isnot expected to change significantly over the next ten years.

While demand for most of this space is not expected to materialize until 2014, it will benecessary to develop most key facilities (main restaurants, primary shops, etc.) by thetime the resort opens in order to make the resort a sufficiently attractive place to stay forinitial sales prospects and other visitors.

Retail and Restaurant Program Recommendations

ERAs key conclusions and recommendations by retail category are summarized below.

Food & Beverage

To establish the Kau resort as a destination it will be absolutely critical to offer anappealing mix of highly attractive restaurants and bars within the resort, ranging from a


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casual beach club grill to a high quality, oceanfront fine dining venue. Several food andbeverage tenants that would be appropriate include:

Fine Dinning

Bar and Grill

Casual Dinning

Japanese / Sushi

Coffee House

Ice Cream Shop

Chain such as Roys

Grocery Store Space

Given the subject sites remoteness, it will also be important to have a grocery store, toservice the resort residents and the primary residents. The grocery store could include apharmacy and provide other general household supplies. The grocery store does not need

to be built until there is a sufficient resort resident population. ERA recommendsconstructing the store in Phase II and allocating 8,000 to 10,000 square feet to the store.

Retail Shops

Given the subject sites remoteness, it will also be important to offer an appealing mixretail shops at Kau, ranging from a convenience-oriented beachware shop to some small,high-end retailers:

Casual Apparel Shops

Art / Cultural Shops

Jewelry ShopBeach Wear

Souvenirs

Sundries

High End Apparel Shops

Home Dcor / Lifestyle

Summary of Key Planning Inputs

A number of key issues have arisen from the research and analysis. These conclusionsare both comments on the preliminary land-use plan as well as suggestions for the newconcept master plan.

ERA recommends a market positioning similar to that of Mauna Lani whichallows for 4 to 5 star hotels as well as a range of real estate offerings ranging frommoderately priced condominiums to very high-end lots and housing.

ERA recommends that not more than 4 hotels and preferably 3 be developed atthe resort. More hotels are not necessary to bring notoriety and cachet to the


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project or to support the amenities. Condominiums, timeshare and fractionalcondominiums can serve as alternative means of increasing on-site population butwith lower risk and faster return on investment.

The proposed airport is beneficial as a prerequisite for the proposed VA clinic. Itwill also be a benefit for marketing to the very high-end real estate market.

However, ERA does not believe it will have a significant impact on hotelvisitation, as most visitors will need or want the commercial airports at Kona orHilo.

As mentioned in the real estate discussion, land dedicated to the HawaiianHeritage Center should minimize impact on high value property. This isparticularly true of oceanfront property.

If beach access is limited or cannot be provided, it would be beneficial to createlagoons that bring water into resort sites or otherwise provide ocean access.

We recommend limiting the size and scope of the equestrian facilities, as the aalava landform of the site is not particularly suitable for this activity and equestrianenthusiasts will have other options on the island that are far better for equestrian.

The proposed Kau town at the mauka portion of the site near the highway doesnot directly relate to the resort portion of the property, except to create acommunity base to support resort employees. This town can be done in anattractive manner; however, it must remain affordable in order to function as acommunity for employees. Like any employee housing, it should be separatefrom the resort and should not detract visually from the arrival experience ofresort guests and property owners. Like Waikoloa Village, it should be entirelyseparate and serve separate functions from the resort.

The mauka portions of the site between the proposed Kau town and the resortcould be subdivided and sold as large agricultural lots. While the aa landformwould not be as desirable as the pasture lands of Kohala and Kona, these lotswould offer large lots in a golf and amenity oriented resort setting.


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Kahuku Ranch Market Assessment Page III- 1Market Overview

S E C T I O N I I I : M A R K E T O V E R V I E W

This section provides a summary of key socio-economic and tourism conditions. Thesedata provide a basis for projecting future demand for lodging, retail and commercialdevelopment potential. Topics covered include:

Demographic trends, including population and household growth; Economic activities and growth, including employment; Trends in tourism, including visitor profiles and characteristics; Real estate market information, including residential and retail markets.

Demographic Trends

Population Growth

Hawaii is the largest of the Hawaiian Islands in terms of land, but ranks second in

population, after Oahu. According to the Hawaii State Department of Business,Economic Development and Tourism (DBEDT), from 2004 to 2005, the Big Islandexperienced a 2.9 percent growth in population, the greatest growth rate among the fourislands. Historically, the resident population of the Big Island has grown steadily since1990, with annual increases of greater than two percent between 1990 to 1995 and 2000to 2005. The population of the Big Island was approximately 167,293 residents in 2005,and is expected to grow to about 190,300 residents by 2015, and 216,150 residents by2025. These projections were published in the DBEDT 2030 series.

Because Hawaii receives a significant number of tourists each year, population isevaluated in both resident population and de facto population. 1 On the Big Island the defacto population was only 11 percent greater than the resident population in 2005. The defacto population on Maui and Kauai was 28 and 26 percent greater than the residentpopulation, respectively.

The de facto population tends to follow a similar pattern, with slightly greater variabilitydue to fluctuations in the number of visitors from year to year. The de facto populationwas estimated to be 180,800 in 2005, and is projected to grow to 212,250 in 2015 and241,800 in 2025. Figure III-1 shows historic population statistics for Hawaii County.

According to the DBEDT, the growth of the Big Island population in recent years ispartly due to the fact that more people move to the island from other islands and from theU.S. mainland. An average of 2,260 more people moved (from U.S. mainland orHawaii neighbor islands) to the Big Island per year than those moving out of the island

during the 2000-2005 period.

1 De facto population figures include all persons physically present in area, regardless of military status orusual place of residence. Includes visitors present but excludes residents temporarily absent, bothcalculated as an average daily census.


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Figure III-1: Historic Population Trends, Hawaii County, 1990 to 2005.

100,000

110,000

120,000

130,000

140,000

150,000

160,000170,000

180,000

190,000

200,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Resident Population De Facto Population

Source: Hawaii State Department of Business, Economic Development and Tourism

Population By District

Table III-1 presents a breakdown of growth within the island. As shown, growth hasbeen concentrated in the Puna, South Kohala and North Kona areas. Combined, theNorth Kona and South Kohala districts received more than one third of all newpopulation on the Big Island between 1990 and 2000. The Kau district contained fourpercent of the islands total population, however, it experienced over a 31 percent changein population between 1990 and 2000. The distribution of growth between the 1990 and2000 censuses is presented in Figure III-2.

Table III-1: Resident Population by District, 1980 to 2000.

District 1980 1990 2000 80 to 90 90 to 00

Puna 11,751 20,781 31,335 76.8% 50.8%

South Hilo 42,278 44,639 47,386 5.6% 6.2%

North Hilo 1,679 1,541 1,720 -8.2% 11.6%

Hamakua 5,128 5,545 6,108 8.1% 10.2%

North Kohala 3,249 4,291 6,038 32.1% 40.7%

South Kohala 4,607 9,140 13,131 98.4% 43.7%

North Kona 13,748 22,284 28,543 62.1% 28.1%

South Kona 5,914 7,658 8,589 29.5% 12.2%

Ka'u 3,699 4,438 5,827 20.0% 31.3%

Percent Change



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Figure III-2: Distribution of Population Growth between 1990 and 2000.

Nort h Kona,

28%

South Kona, 12%Ka'u, 31%

South Kohala,

44%

Nort h Hilo, 12%

Hamakua, 10%

Nort h Kohala,

41%

South Hilo, 6%

Puna, 51%


Employment and Economic Trends

The economy of the Big Island is dominated by the tourism and service industries. From1990 to 2006, total wage and salary jobs on the Big Island increased by 26,000 jobs, anincrease of 46 percent or an annual increase of 2.4 percent. (Table III-2) The economytends to be cyclical, rising and falling with the economic health of the nation, especiallythe western states. The island experienced a period of sustained growth beginning in themid-1990s, but was impacted due to the combined effects of the recession, terroristevents and the wars in Iraq. However, the economy of Hawaii recovered faster than

originally expected, after September 11th

. The biggest losses were concentrated in thetourism sector, especially the Japanese market. Weakness in the tourism sector wasoffset by strong construction activity due to low interest rates and uninterrupted strengthin the upscale second home market.

Table III-2: Hawaii County Labor Market, 1990 to 2006.

Labor Force Employed % Unempl.

1990 58,900 57,350 2.7%

1995 65,100 59,500 8.6%

2000 73,500 70,350 4.2%

2001 77,100 72,800 5.5%

2002 76,250 73,150 4.1%

2003 78,900 75,550 4.2%

2004 79,450 76,700 3.5%

2005 82,200 79,650 3.0%

2006 85,950 83,700 2.6%

1Data is for November of that year.



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As of November 2006, the State of Hawaii had one of the lowest unemployment rates inthe nation, with a rate of 2.9 percent, as compared to the national rate of 4.5 percent. TheBig Island had the highest unemployment rate of the four counties of Hawaii; howeverthe rate is still significantly lower than the national unemployment rate for November2006.

Furthermore, for the third quarter of 2006, the seasonally adjusted labor force, accordingto the Hawaii State Department of Labor and Industrial Relations was 655,000.Compared to the third quarter of 2005, the number of employed persons in Hawaii grewby 16,550, or 2.6 percent, the highest rate of growth since 1990. Among the counties,Hawaii County had the highest growth in wage and salary jobs, while Kauai had thelowest. In the third quarter of 2006, Hawaii County added 2,000 wage and salary jobs, a3.1 percent increase from the third quarter of 2005. The tourism-related sectors, RetailTrade and Food Services & Drinking Places added 400 and 300 jobs, respectively.Natural Resources, Mining and Construction and Government each added 300 jobs inHawaii County, while Agriculture lost 150 jobs. All factors indicate that the economicstrength of the state and the county is expected to continue.

Households and Home Ownership

Households

According to the US Census, there were 52,985 resident households in Hawaii County in2000. The number of households increased 28 percent between 1990 and 2000. Asindicated in Table III-3, during the same time period, the average number of persons perhousehold declined slightly, from 2.86 to 2.75 persons.

Table III-3: Hawaii County Households, 1990 and 2000.

Additional Percent

1990 2000 Households ChangeTotal Households 41,461 52,985 11,524 28%

Average Household Size 2.86 2.75 n/a -4%

Source: US Census

Housing Stock

Table III-4 compares the Hawaii County housing stock in 1990 with the housing stock in2000. As shown, the total number of housing units increased by 30 percent between1990 and 2000. It is interesting to note that the number of households did not increase asmuch as the number of units due to declining household size. The distribution of units

among tenure and unit size remained about the same over the decade. One notableexception is the increase in the number of housing units for seasonal, recreational oroccasional use, which nearly tripled during the period, to 5,101.2 Most of these unitswere second homes (along with some units classified by the Census as vacant for rent).

Other key characteristics of the 2000 housing stock are as follows:

2 Note: for the Census, households only include persons whose primary place of residence is in the area;hence seasonal units are counted as vacant or for-rent units.


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About 55 percent of units are owner occupied, and 30 percent are renter occupiedagain, this does not include second home units (discussed above), which representat least 8 percent of the housing stock.

The majority of housing units, about 77 percent, are single-family detachedhomes. Only about 11 percent of units are in buildings with 10 or more units.

Table III-4: Hawaii County Housing Characteristics, 1990 and 2000

Total housing units 48,253 100% 62,674 100% 14,421 30%

Occupied units 41,461 86% 52,985 85% 11,524 28%

Owner occupied 25,336 53% 34,175 55% 8,839 35%

Renter occupied 16,125 33% 18,810 30% 2,685 17%

Vacant units 6,792 14% 9,689 15% 2,897 43%

Units in structure

1 unit detached 36,622 76% 48,231 77% 11,609 32%

1 unit attached 1,399 3% 2,066 3% 667 48%

2 to 4 units 2,150 4% 3,185 5% 1,035 48%

5 to 9 units 1,642 3% 2,213 4% 571 35%

10 or more units 5,561 12% 6,592 11% 1,031 19%

Other 879 2% 387 1% -492 -56%

1990 2000 Change 90 - 00

Source: US Census

Tourism Trends

Visitation

Resort tourism began on the Big Island in the 1960s with the development of the MaunaKea Beach Resort and the Keauhou area of Kona. Visitation was initially very limited,but grew rapidly during the 1970s and 1980s. Tourism and related industries have nowdominated the economy of the Big Island for more than 15 years. With development ofother resorts such as Mauna Lani, Waikoloa, Hualalai, and now resort residential projectsof Kukio and Hokulia, the Big Island has emerged as a true resort destination and is nowthe leading Hawaiian location of upscale resort real estate. Visitors come to the BigIsland for the weather, the lack of crowds, the golf, and for the atmosphere. Today, theBig Island is growing in popularity, and visitation has been growing steadily since thedecline in the early to mid 1990s.

As shown in Figure III-3, visitation to the state of Hawaii reached an all-time high in2005, with an estimated 7.3 million visitors. Tourism throughout the world, declinedsharply after September 11, 2001, and consequently the annual number of visitors to thestate declined to about 6.3 million for the year. The three year decline in total visitationcan be attributed to the decrease in the number of international tourists. According to areport by the Bank of Hawaii, international visitor arrivals were already down 2.1 percentin 2001 prior to September 2001, and fell 45 percent after the terrorist attack to finish theyear 26 percent below 2000 levels. According to the same report, business meetings and


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convention travel were down 27.1 percent in the domestic market in 2001, but domesticleisure travel (3.0 million visitors in total) declined only 2.5 percent. Domestic visitorcounts fell only 5.1 percent to 4.2 million during 2001, despite the decline in visitationafter September 11.

Figure III-3: Visitor Arrivals Domestic v. International, Statewide 1995 2005.

Source: Hawaiian Department of Business, Economic Development & Tourism

Three markets: the Western United States, Eastern United States, and Japan are the keycomponents of visitor arrivals to the State of Hawaii. As illustrated in Figure III-4, since2001, visitation from both the Eastern and Western United States increased significantly,with an annual growth rate of 4.5 percent and 5.9 percent respectively. In 2005,visitation from both the Eastern and Western United States achieved record levels, with1.9 million visitors from the Eastern United States and 2.9 million visitors from theWestern United States.

The Japanese market did not rebound as swiftly to the events of September 11th andactually declined significantly between 2001 and 2003. However, in 2004, the Japanesemarket recovered and grew by over 10 percent. By 2005, total Japanese visitation toHawaii finally broke the 1.5 million mark and is forecasted to continue to grow.

Visitation to all of the islands increased between 2001 and 2005, as indicated in TableIII-5. While the Big Island receives less total arrivals than Oahu or Maui, it experiencedthe greatest increase in total arrivals between 2001 and 2005 of the four counties.Furthermore, in 2005 the Big Island experienced a 16 percent annual increase in total

arrivals, while Oahu and Kauai only experienced a 6 percent increase and Mauiexperienced a 4 percent increase. Visitation to the Big Island is typically comprised of 75percent domestic arrivals and 25 percent international arrivals. In comparison to theother islands, the Big Island has the second highest percentage of international arrivalsannually.

1,500,000

2,500,000

3,500,000

4,500,000

5,500,000

6,500,000

7,500,000

8,500,000

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Total

Domestic

International


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Figure III-4: Total Visitation by Market Segment, Statewide 2000 to 2005.

Source: Hawaiian Department of Business, Economic Development and Tourism.

Table III-5: Statewide Annual Visitor Arrivals by County, 2001 to 2005.

Year Oahu Kauai Maui Big Island

2001 4,257,536 1,008,699 2,104,478 1,181,552

2002 4,276,077 1,005,897 2,139,427 1,243,313

2003 4,090,483 975,868 2,196,447 1,207,164

2004 4,464,551 1,020,921 2,207,826 1,281,156

2005 4,731,843 1,090,147 2,364,480 1,521,537

% change 11.1% 8.1% 12.4% 28.8% Source: Hawaiian Department of Business, Economic Development and Tourism.

Tourism is expected to remain strong with an estimated 6.8 million visitors in the firsteleven months of 2006. Of the 2006 visitation, the Big Island received an estimated 20percent of the visitors, approximately 1.4 million visitors, while Maui received 32 percentand Oahu received 64 percent.

According to the DBEDTs 2030 projections, total visitation to Hawaii is projected tocontinue to increase. The projections, indicated in Table III-6, forecast that totalvisitation will reach 8.6 million by 2015 and will break the 10 million mark by 2025.

Table III-6: Visitor Arrival Projections by County, 2000 to 2030

2000 2005 2010 2015 2020 2025 2030Visitor Arrivals (000s)

Hawaii County 1,268 1,310 1,420 1,570 1,700 1,830 1,980

Honolulu County 4,719 4,760 5,120 5,610 6,020 6,420 6,860

Kauai County 1,075 1,130 1,230 1,360 1,470 1,580 1,700

Maui County 2,305 2,390 2,590 2,860 3,090 3,330 3,570

State Total 6,983 6,970 7,810 8,620 9,290 10,010 10,780

Source: Hawaiian Department of Business, Economic Development and Tourism.

1,200,000

1,500,000

1,800,000

2,100,000

2,400,000

2,700,000

3,000,000

2000 2001 2002 2003 2004 2005

US - West

US - East

Japan


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Seasonality

In general, peak visitation months are March, July and December and the slowest monthsare April, May, September and November. However, as seen in Figure III-5, the BigIsland is a popular tourist destination throughout the year with only a 40,000 difference inarrivals between the low and high seasons.

Figure III-5: Seasonality of Big Island Visitor Arrivals, 2005.


Visitor Profiles

A summary of selected characteristics of visitors to the Big Island in 2005 is presented in

Table III-7. During that year, 77 percent of visitors were domestic and 23 percent wereinternational. Of the international visitors 28 percent of visitors were true independenttravelers, and about 67 percent purchased their trip as a package. International visitorsare significantly more likely than domestic visitors to travel as part of a tour group and topurchase their trip as a package.

Both domestic and international visitors preferred to stay in a hotel, with over 66 percentof visitors in 2005 staying at a hotel and 25 percent staying in either a condo or atimeshare.

The vast majority of visitors to the Big Island visited the island for pure pleasure, with 83percent of total arrivals, in 2005, classified as pleasure trips. Compared to Maui and

Kauai, the Big Island is the most popular for meetings, conferences or incentive trips;nine percent of total arrivals in 2005 were classified as meetings, conferences or incentivetrips. Most Big Island visitors have been to Hawaii before (64 percent), and the averagenumber of previous trips is about 4.7. Domestic visitors are slightly more likely to havevisited previously, and have been to Hawaii 5.06 times, on average.

80,000

90,000

100,000

110,000

120,000

130,000

140,000

150,000

JAN FEB MAR AP R MAY JUN JUL AUG SEP OCT NOV DEC


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Table III-7: Big Island Visitor Profile, 2005.

Total % Domestic % International %

Total Visitor Days 10,066,362 8,543,141 1,523,221

Total Visitors 1,521,537 100% 1,173,629 100% 347,907 100%

Travel MethodGroup Tour 229,044 15% 112,979 10% 116,065 33%

Package 636,295 42% 404,757 34% 231,539 67%

Group Tour & Pkg 188,551 12% 91,190 8% 97,362 28%

True Independent 844,749 56% 747,083 64% 97,666 28%

Accommodations

Hotel 1,000,094 66% 704,619 60% 295,475 85%

...Hotel Only 744,012 49% 481,734 41% 262,277 75%

Condo 238,257 16% 206,392 18% 31,865 9%

...Condo Only 146,398 10% 126,046 11% 20,352 6%

Timeshare 135,250 9% 126,955 11% 8,295 2%

...Timeshare Only 87,259 6% 82,650 7% 4,608 1%

Apartment 62,519 4% 57,257 5% 5,262 2%

Bed & Breakfast 39,229 3% 34,247 3% 4,981 1%

Cruise Ship 176,623 12% 162,220 14% 14,403 4%

Friends or Relatives 147,864 10% 131,092 11% 16,772 5%

Purpose of Trip

Pleasure (Net) 1,268,437 83% 976,563 83% 291,874 84%

Honeymoon/Get Married (Net) 101,200 7% 54,995 5% 46,205 13%

MC&I (Net) 135,092 9% 108,523 9% 26,570 13%

...Convention/Conf. 78,753 5% 65,060 6% 13,693 4%

...Corp. Meetings 25,562 2% 20,364 2% 5,198 1%

...Incentive 36,416 2% 27,883 2% 8,533 2%

Other Business 59,231 4% 52,239 4% 6,992 2%Visit Friends/Relatives 128,409 8% 116,166 10% 12,242 4%

Government/Military 11,070 1% 5,747 0% 5,324 2%

Attend School 4,851 0% 3,411 0% 1,440 0%

Sport Events 27,554 2% 19,968 2% 7,587 2%

Visitor Status

First-Time 546,013 36% 396,082 34% 149,931 43%

Repeat 975,523 64% 777,547 66% 197,976 57%

Average # of Trips 4.70 5.06 3.49


Construction Trends

Overall Trends

Residential construction on the Big Island has followed a cyclical trend, with the numberof permits typically ranging between about 1,000 and 3,000 units in each year. As shownin Figure III-7, construction activity increased rapidly during the late 1980s, peaking at a

high of 3,152 units in 1989. Construction activity slowed significantly during the 1990s,reaching a low of 765 units during 1997. Building activity has increased since the late1990s and is quite active during the 2000s, especially in 2004 and 2005.

Since 2002, the real estate market on the Big Island has continued to grow. In fact in2005, there were 5,663 permits issued with a total value of $1.1 billion, representing a 14percent increase in building permits and an 18 percent increase in total value, ascompared to 2004. Further indication that the real estate market is extremely strong on


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the Big Island is that the number of building permits issued between 2000 and 2005 grew10 percent annually.

As of November 2006, private building permits issued in 2006 valued $877 million, withresidential permits valued at $682 million and commercial permits valued at $121million. As illustrated in Figure III-8, of all building permits issued through November

2006, the majority of permits issued were for Puna and North Kona. The smallestnumber of permits were issued for North Hilo and Hamakuna. An estimated nine percentof all of the building permits were issued for Kau. In terms of number of units, as ofNovember 2006, permits were issued for a total of 2,792 units, with 41 percent in Puna.Interestingly, while only 13 percent of the permits were issued for South Kohala, thevalues of those permits represent 21 percent of the total value of all building permitsthrough November 2006.

Figure III-7: Building Permits, Big Island, 1990 to 2005.

Source: DBEDT and Hawaii County Building Division

Figure III-8: Distribution of All Building Permits, 20063

Hamakua

2%

South Kohala

13%North Kohala

3%North Hilo

1%

South Hilo

13%

Puna

35%

Ka'u

9%South Kona

3%

North Kona

21%

3Not including December 2006

Source: Hawaii County Building Division and ERA

0

1,000

2,000

3,000

4,000

5,000

6,000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005


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Kahuku Ranch Market Assessment Page IV- 2Lodging Market Analysis

Figure IV-1: Distribution of Visitor Accommodations by Type, 2005.

Hotel

60%

Condo Hotel

10%

Bed &

Breakfast

3%

Other

2%

Timeshare

14%

Individual

Vacation

Unit

7%

Hostel

4%

Source: Hawaii State Department of Business, Economic Development & Tourism

Kona contains the largest concentration of visitor accommodation units, with 45 percentof all visitor accommodations. The Naalehu/ Kau region have the lowest concentrationof visitor accommodation units with 1 percent of all units on the island. The majority ofthe hotel units are located in Kohala/Waimea/Kawaihae and Kona. Table IV-1 containsthe distribution of visitor accommodation units by type and area.

Table IV-1: Visitor Accommodations by Type and Area, 2005.

Hilo/

Honokaa

Kohala/Waimea

/Kawaihae Kona

Naalehu/

Ka'u

Volcano

Area

Bed & Breakfast 42% 0% 31% 4% 22%

Condominium Hotel 7% 3% 89% 2% 0%

Hostel 4% 95% 0% 0% 1%

Hotel 14% 49% 36% 0% 1%

Individual Vacation Unit 5% 46% 43% 0% 6%

Timeshare 0% 32% 66% 2% 0%

Other 31% 1% 38% 7% 24%

Total 12% 41% 45% 1% 2% Source: Hawaii State Department of Business, Economic Development & Tourism

Of the total visitor accommodations on the Big Island in 2005, 34 percent of the unitswere classified as standard units, charging between $101 and $250 per night, while over47 percent of the units were classified as deluxe or luxury commanding over $250 pernight.


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Occupancy Rates

In 2005, the occupancy rate on the Big Island averaged 72 percent with the highestoccupancy occurring in February 2005, with 82 percent occupancy. In 2005, the averageoccupancy rate for the Big Island was the lowest of the four islands. Oahu had the highestaverage occupancy rate with 86 percent, while the statewide average was 81 percent. The

occupancy rates for all islands is illustrated in Figure IV-2. As of October 2006, the yearto date occupancy rate was 70 percent, a decrease of 0.1 percent compared to the first tenmonths of 2005.

Figure IV-2: Occupancy Rates, All Islands 2005.

65%

70%

75%

80%

85%

90%

Statewide

Maui

Kaui

Big Island

Oahu


Average Daily Rates

The average daily room rate (ADR) for the Big Island, in 2005, was $173.67 per nightand the average revenue per available room (RevPAR) was $125.39 per night. While theaverage daily room rate on the Big Island was higher than the statewide average of$166.86 in 2005, the average revenue per available room rate was ten dollars lower thanthe statewide average of $135.50 per night. As displayed in Figure IV-3 the Big Islandwas behind Maui and Kauai in both average room rates and average revenue per availableroom, in 2005.

The ADR for the first ten months of 2006 was $168 and the RevPAR was $118 per night.Both the ADR and RevPAR experienced a seven percent increase over the first ten

months of 2005.1

1 2006 Year to date occupancy and ADR data was provided by Smith Travel Research.


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Figure IV-3: ADR and Average Revenue per Available Room, All Islands 2005.


Average Length of Stay & Party Size

The overall length of stay on the Big Island is 6.62 days, with visitors spending onaverage 3.47 days in Hilo and 6.65 days in Kona. The length of stay is significantlydifferent between arrivals to the Kona airport and arrivals to the Hilo airport. Arrivals toKona spend significantly more time on the island, staying an average of 6.92 days, withan average of 2.28 days in Hilo and 6.28 days in Kona. Arrivals to Hilo stay an averageof 5.56 days, with an average of 3.47 in Hilo and 3.49 in Kona. The average party sizeon the entire island is 2.12 persons. There is little difference in party size between arrivals

at either air port.

Selected High-End Hotels

The Big Island has several high-end resort hotels. These hotels are mostly located alongthe Kohala and Kona coasts. Constructed in 1965, the Mauna Kea Beach Hotel is theoldest of the selected. Below is a brief overview of each hotel and their associatedamenities. Table IV-2 contains key characteristics of each hotel.

$0.00

$50.00

$100.00

$150.00

$200.00

$250.00

Average Daily Room Rate Average Revenue Per Available

Room

Statewide

Maui

Kauai

Big Island

Oahu


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Kahuku Ranch Market Assessment Page IV- 5

Table IV-2

KEY CHARACTERISTICS OF SELECTED RESORT HOTELS IN THE REGION

Year

Hotel Name Rooms Suites Total Opened Meeting Space Other Facilities / Amenities Low High

Hapuna Prince Beach Hotel 314 36 350 1994

71,00

market evaluation and development recommendatinos for kau ha

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