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MARKET HIGHLIGHT, AUGUST 2012

HAWAII
By Fred Noa, Andy Starn, Matthew Bittick, Keenan Sue, and William Froelich

Hawaii is no stranger to popularity. Whether it’s the tourists or the companies who seek them out, this series of islands is red hot when it comes to retail. Though it’s had its own ups and downs, most product types, including retail, office and industrial, are either in or near recovery in Hawaii.

RETAIL

Noa

In the first half of 2012, Hawaii’s major economic indicators have continued on a positive trajectory. The tourism sector, on which Hawaii’s economy is centered, has outperformed 2011 thus far as both visitor arrivals and visitor expenditures increased. In addition, wage and salary jobs, personal income and state general fund tax revenues all increased in the first quarter as compared to the same quarter last year.

During the second quarter of 2012, conditions supportive of the retail market began to emerge, including employment and tourism growth. However, Honolulu’s retail market did experience some deterioration during this time as well. Net absorption was a negative 46,078 square feet, resulting in an increase in vacancy from 5.5 percent to 5.9 percent.

Starn

According to the latest reports from the Bureau of Labor Statistics, job growth accelerated during the second quarter in Honolulu, with similar improvements taking place statewide. Over the 12 months ending in May 2012, hospitality and leisure employment increased 5.7 percent. This was a higher rate than any other sector experienced during this period. This was a crucial improvement, as leisure and hospitality jobs represent the third largest employment block in the state and its largest metro area.

Hawaii tourism is rebounding, which explains robust growth in leisure and hospitality jobs. In a report released in June, the Hawaii Tourism Authority reported both visitor counts and spending are up to record levels for the month of May. Total visitor expenditures were up 17.5 percent from May 2011, while the total visitor count was up 12.5 percent over the same period. The impact of these improvements is starting to be felt in the retail market. We saw increasing demand for properties located in resort areas and new retailers looking for sites in Hawaii during the second quarter. Notable retailers that are either expanding or in the market for new space include Bed Bath & Beyond, DSW Shoe Warehouse, Men’s Wearhouse and TJ Maxx. In addition, General Growth Properties recently acquired the 319,000-square-foot Sears location at Ala Moana Center. Sears is expected to close in 2013 and General Growth plans to fill the space with new in-line space as part of a mall expansion that will extend out to Piikoi Street.

Waikiki Shopping Plaza will bring a new flagship Victoria’s Secret store
and Sephora to the island.

In Waikiki, Honolulu’s premier “urban retail” market and one of the foremost travel/resort and shopping destinations in the world, the major shopping areas (including hotel and resort retail) are offering more entertainment, restaurant and shopping choices than ever before. Royal Hawaiian Center continues to experience success with new tenants like Tory Burch and Lora Piana, complementing their existing tenants such as Forever 21, Bebe, Fendi, Cartier and Salvatore Ferragamo. Additionally, Waikiki Shopping Plaza has completed construction on their new phase, which will include a 16,000-square-foot, two-story flagship Victoria’s Secret, a two-story Armani Exchange and Tanaka of Tokyo. There is currently a “flight to quality” with all of the incoming national and global tenants competing for the same prime locations along these four blocks of Kalakaua. This strong interest, combined with virtually no available space, have resulted in rents increasing by as much as 30 percent in 2012.

Although some encouraging developments began to emerge in the second quarter, the outlook for retail in Hawaii remains fragile. Hawaii is following the national trend where the top performing retail areas and malls are extremely strong and experiencing significant demand, while the secondary and tertiary markets are struggling and expected to stay flat indefinitely. Further, Honolulu’s economy is highly exposed to events far beyond its borders. Recent slowing of the U.S. and global economies, Europe’s debt crisis, ongoing tensions in the Middle East and election-year dynamics are all producing high levels of uncertainty that could impact Hawaii’s retail markets in the foreseeable future.

— Fred Noa, senior vice president, and Andy Starn, vice president, CBRE’s Honolulu office

OFFICE

Sue

They say if you don’t like the weather in Hawaii, wait five minutes, it will change. The market for commercial office space in Honolulu isn’t so fickle. It has remained staunchly on the tenant side for several years, though it now appears to be turning.

As of mid-July 2012, the vacancy rate in Honolulu’s central business district (CBD) was 14 percent, practically unchanged from 13.77 percent during the same period last year. Weighted average monthly base rents for Class A and B office buildings continue to limp along in the range of $1.32 to $1.51 per square foot. Landlord concessions are yielding low net effective rates, with sweeteners such as base rent abatement for lease terms in excess of five years, as well as turnkey build-outs combined with low base rental rates.

But if things appear largely unchanged year-to-year, that isn’t to say things aren’t shifting beneath the surface. Honolulu has begun to build a $5.8-billion commuter rail system. The Honolulu Authority for Rapid Transit, which is managing the project, has leased office space in the CBD along with a host of other vendors. However, a hotly contested mayor’s race now pits pro-rail candidates against a popular anti-rail candidate who promises to stop the project. The election, which will determine whether support for this project continues at the city level, will have either a highly positive or potentially detrimental effect on the vacancy rate.

One bright note from the landlord perspective is that Honolulu’s medical industry is experiencing renewed growth. Hale Pawa’a, a new professional building primarily for healthcare providers, has enjoyed significant lease-up in the past six months. Job growth in the office sector is also on the upswing and, although technology has impacted space utilization, it has caused a new need for space, another favorable development for landlords.

As a result, the second quarter of 2012 was the first quarter in five years to see positive absorption. The largest blocks of full-floor office space in the CBD have been leased, leaving only one building available for tenants in search of 20,000 square feet of contiguous space or more.

Landlords continue to experience some tenant “rightsizing,” while others choose to renew in place. Both sides of this story have unfolded in two of Hawaii’s largest law firms.

Goodsill Anderson Quinn & Stifel decided to relocate to both revitalize the firm and use space more efficiently. Many attorneys now work from home, and they have done away with the old-style law library that has been made virtually obsolete by the Internet.

McCorriston Miller Mukai MacKinnon, on the other hand, is a long-time tenant in a unique development. In its current location, the firm enjoys ample parking, proximity to the courts, a favorable rate structure and landlord-proposed improvements that will allow downsizing without an interruption to business. Its renewal was easily accomplished.

The future condition of Honolulu’s office market depends on near-term factors such as the mayor’s race and, longer term, a planned development in the Kakaako area by landowner Kamehameha Schools. We also expect “right sizing” to stay with us for the foreseeable future.

— Matthew Bittick, president and CEO, and Keenan Sue, director of office services group, Bishop Street Commercial in Honolulu

INDUSTRIAL

Froelich

The Oahu industrial market appears to have stabilized as improvement in our overall economy and strengthening of our two largest economic drivers (tourism and military spending) create downward pressure on vacancy rates and upward pressure on asking rental rates. This year’s tourism revenue is on pace to break many spending records.

To garner perspective, Oahu has a total industrial building square footage of roughly 39 million square feet serving nearly one million residents. In comparison, Los Angeles has roughly 880 million square feet of total industrial building space serving more than four million people. This creates 39 square feet of industrial space per resident on Oahu as opposed to 220 square feet per resident in Los Angeles. This comparison of available supply lends support to data showing Oahu as having the lowest industrial vacancy rate in the country, which currently stands at 4.3 percent. Oahu’s average monthly asking rental rate is $0.96 per square foot – double the average rate of Los Angeles and triple our average national industrial asking rate.

Between 2007 and 2011, Oahu saw industrial average asking rental rates decline from $1.31 per square foot, per month to $0.92 per square foot, a low we hadn’t seen since 2003. However, since the beginning of 2012 we have enjoyed positive absorption of more than 200,000 square feet, a spike not seen since 2006, and an average asking rental increase of 5 percent.

The unusual availability of well-located warehouse space that, in better economic times, might have barely made it to the open market is now being absorbed or taken off the market. Instead, it’s being used by the prospective lessor as businesses become more comfortable with the signs of economic recovery and more excited about the opportunity to lease space at recent historic lows. This optimism is bolstered by a 17 percent reduction thus far in 2012 of available industrial space between 4,500 square feet and 7,500 square feet.

Two raw land, fee-simple sale projects are also adding momentum and creating excitement. The already-to-market Maui Business Park Phase 2 has created a very rare opportunity to acquire 0.5 acres to 5 acres of industrial-zoned parcels in heart of Kahului, Maui. The park’s flexible M-1 zoning and location next to Costco, Wal-Mart, Home Depot and the major thoroughfares of Maui is creating interest from retail developers, car dealerships, office users and industrial owner-users. In late 2012 or early 2013, Kapolei Business Park Phase 2 will also likely come to market. This Oahu project will add much needed heavy industrial-zoned raw land inventory.

Going into 2013, Colliers’ Hawaii Research and Consulting Division, led by Mike Hamasu, projects continued recovery and positive absorption as industrial vacancy rates are likely to dip below 4 percent.

— William (Bill) Froelich, vice president, Hawaii, industrial and investment services divisions, Colliers’ Honolulu office


©2012 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 553-9037.






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