Soaring construction costs have caused Outrigger Enterprises Group to abort plans to build a new 32-story hotel tower at the Outrigger Reef Waikiki Beach Resort.

Construction of a 200-room, 350-foot tower was supposed to have started this year, but it wasn’t economically feasible to build given current construction premiums, the company said. Instead, Outrigger plans to spend its $100 million budget on a new plan that adds a few hotel rooms to the property and creates about a half-acre of open space that runs from curb to ocean.

“Construction costs have risen so high that the amount that we would have invested in the tower will now just cover our improvements. But to keep the resort competitive, we still need to redevelop the site,” said Barry Wallace, executive vice president of hospitality services for Outrigger Enterprises Group. “All the good parts of our original plan remain. The difference is we are going to defer the building of the big tower.”

Outrigger’s latest plan includes the demolition of a dated pool deck and the five-story beach-side Diamond Head Tower, which was built in 1955 as part of the original hotel and hasn’t been used for guest rooms in five years. According to the project’s Draft Supplemental Environmental Impact Statement, the company plans to add a 60-room extension to the Pacific Tower. The 150-foot-high, 17-story extension is within required shoreline setbacks.

The new plan provides a net gain of 39 rooms, which increases the Outrigger Reef’s room inventory by about 10 percent. It also upgrades about 25 percent of existing rooms by improving ocean views, Wallace said Thursday.

The demolition makes way for a terraced green belt that includes a 52,800- square-foot recreation deck with two pools, a 10,100-square-foot beach-side lawn and an outdoor stage. There will also be two new ocean-view restaurants along with 7,500 square feet of garden-view meeting space and a chapel. The existing Shore Bird Restaurant & Beach Bar and Ocean House Waikiki will close, although the popular Kani ka Pila Grille will be moved closer to the ocean.

Wallace said a new conference center will allow the Outrigger Reef to host small to medium-size meetings, including for the lucrative corporate and incentive meeting market. The company also has big plans for the chapel which will allow it make strides into Oahu’s wedding market.

Wallace said the property’s Kalia Road gateway will be improved by a new porte-cochere, walkways and retail. Traffic improvements will include an off-road loading and delivery zone and an additional 48 parking spaces, he said.

“The traffic improvements should be a very popular community benefit,” Wallace said.

The new project also will bring substantial economic benefits to the city and state, he said. The project is expected to generate 1,486 full-time construction-related jobs. Building is expected to start as early as 2018 and could be completed as early as 2020.

“We’ll remain open so there won’t be much impact on jobs while the project is going on,” Wallace said. “Afterwards we’ll gain more than 60 employees.”

Once the project is operational, Outrigger expects it will support 273 full-time and 47 part-time hotel jobs. The project should create 1,094 indirect full-time jobs its first year and 1,361 by 2029. Outrigger anticipates it will generate $5.07 million in tax revenues annually through 2022 and $7.69 million after 2029.

Early reviews from Waikiki interests have been positive.

“I really like how the new design completely opens up that section from the street to the ocean. How refreshing in that dense corridor,” said Waikiki Neighborhood Board member Jeff Merz, who is an urban planner. “Most view corridors are being obstructed in Waikiki. I believe the public will appreciate their sensitive design, and I hope they pursue their more comprehensive plan once the construction market cools.”

Merz said Outrigger’s change of plans isn’t completely unexpected given an environment where construction firms can “pretty much charge what they want.”

This downscaling comes only weeks after Honolulu was named the nation’s third-fastest-growing construction market by the Associated General Contractors of America. As a result of the worker shortage and the boom in general, Hawaii developers are looking at higher overall project costs and delays.

Still, the project remains a great addition to Waikiki, said Waikiki Improvement Association President Rick Egged.

“It helps us provide additional product at a time when Waikiki accommodations have been operating at well over 80 percent occupancy for the last four or five years,” Egged said “This kind of reinvestment by one of our major operators like Outrigger is really a good indication that the future of Waikiki will continue to be bright.”

Eventually, Egged said, he too would like to see Outrigger complete its larger tower, which would add needed capacity to Waikiki’s hotel market. Egged said overall Waikiki accommodation units dropped 8 percent from 31,557 in 2000 to 28,976 in 2015. During the same period, Egged said Waikiki’s hotel rooms contracted more than 18 percent, falling to 22,360 from 27,358.

The soaring tower plan isn’t scrapped, but Wallace said it’s on hold until it makes economic sense. In the meantime Outrigger will rely on its new plan to serve as the capstone linking its Waikiki Beach Walk project to the sands of Waikiki Beach.

“This is our first significant reinvestment in Waikiki in the past five or six years, where we’ve mostly been investing in our international products,” Wallace said.

In recent years Outrigger Enterprises Group has been expanding rapidly to exotic beachfront destinations across the Asia-Pacific region, but the company is rooted in Waikiki. It was here in 1947 that the company’s late founders, Roy Kelley and his wife, Estelle, built their first hotel, the 50-room Islander Hotel on Seaside Avenue. They quickly expanded their business, opening the beachfront Reef Hotel in 1955.

Outrigger now operates and/or has under development 37 properties with almost 7,000 rooms in Hawaii (Oahu, Maui, Kauai, Hawaii island), Guam, Fiji, Thailand, Mauritius, Maldives and Vietnam. Still, Wallace said the Outrigger Reef, which is just one of seven beachfront properties in Waikiki, remains a fee-simple jewel in the company’s ownership portfolio. The company’s latest Waikiki investment is the largest it’s made since undertaking the $500 million Waikiki Beach Walk Project in 2006 and an earlier $100 million Outrigger Reef Renovation in 2008.

“We are very bullish on Waikiki, which has one of the highest occupancies in the world,” Wallace said. “We’re proud to be here, and we want our products to be the best.”

Wallace said that over the next five years, the company also plans to spend another $75 million refreshing other Waikiki hotels, including Outrigger Reef’s existing Ocean and Pacific Towers, the Holiday Inn Resort Waikiki Beachcomber and the Ohana Waikiki East.

“We’ll start renovations to one of the Reef towers next year before the larger project even starts,” he said.