WESTERN SNAPSHOT, DECEMBER 2005

Honolulu Retail Market

Hamasu

Honolulu's retail vacancy rate fell to its lowest level in more than a decade. Among the island's shopping centers, a 3.2 percent year-end 2005 vacancy rate marks the third consecutive year of falling vacancy. Tightened market conditions placed pressure on rental rates resulting in a dramatic rise in the average asking rental rate. Over the past year, the average asking rent for the island of Oahu increased from $2.53 per square foot per month to $3.23 per square foot per month.

Robust Investment Sales Activity

The retail shopping center investment category continues to be attractive. Lack of available investment-grade properties on the U.S. mainland, Hawaii's strong economic factors and the recent improvement in retail rents enticed many mainland real estate investors to purchase Hawaiian shopping centers. During the past year, more than $900 million in retail investment transactions occurred, including Mililani Town Center, Waipio Gentry, Waianae Mall and Marketplace at Kapolei on Oahu, and Lanihau Center, Kukui Grove Shopping Center and King's Shops on the neighboring islands. Similar to national trends, capitalization rates have compressed as a result of the continued high level of demand for the state's retail shopping centers. It is expected that 2005 will set another record year for retail sales transactions, exceeding 2004's sales volume of $441 million.

Both Retail Markets Healthy

Hawaii's retailers cater to two principal markets, the resident market and the tourist market. During the difficult times that followed September 11, 2001, the island's retailers that principally serviced residential demand remained fairly resilient as opposed to that experienced by the retailers that sold goods to tourists.

Of the nearly 11 million square feet of shopping centers surveyed, roughly 10 percent are resort-oriented retail. Despite this small percentage, the tourist sector spent more than $10.9 billion in Hawaii in 2004.

Waikiki, noted for its white-sand beaches and ever-present sunshine, is also known as a premier shopping destination with a preponderance of premium shops located on Waikiki's Kalakaua Avenue. After September 11, Waikiki's retailers faced a dramatic downturn in sales, the direct result of the decline in air passenger arrivals and low hotel occupancy. During this time, vacancy rates surpassed 20 percent and many retail tenants required concessions from their landlords to survive the downturn.

In only a few short years, Waikiki has shown great resiliency as reflected in record-high 2005 hotel occupancy rates, the nation's best average daily room rates and bulging air passenger arrival counts. As a result, Waikiki rental rates are on the rise again. In fact, for prime Kalakaua Avenue retail frontage, rents have been negotiated in excess of $30 per square foot per month. Waikiki vacancy rates dropped from nearly 17 percent to 7.3 percent, the result of more than 100,000 square feet of absorption in the past year.

In addition to strong resort retail market growth, shopping centers that serve Oahu's residents posted strong growth of nearly 180,000 square feet of new occupancy in the past year. The 2004 closing of JC Penney resulted in nearly 300,000 square feet of new vacancy for Ala Moana Center and Pearlridge Mall, two of the island's largest regional malls. After reconfiguring these spaces for smaller tenants, both regional centers reported strong leasing activity resulting in the regional mall vacancy rate falling to 3.33 percent at year-end 2005.

Increased Development Activity

Several of Waikiki's property owners are banking on the continued improvement of the retail environment. In fact, hundreds of millions of dollars are being spent by the Royal Hawaiian Shopping Center, Outrigger Hotels & Resorts' Waikiki Beachwalk project and Consolidated Theaters' Center of Waikiki project to upgrade the shopping experience for Waikiki's visitors.

In addition to the retail development occurring in Waikiki, there are a number of retail shopping centers being proposed for the growing West Oahu market. The West Oahu market, which includes Kapolei, Makakilo, Ewa Beach and Ko Olina, posted the island's fastest population growth rate over the past decade. Additionally, this region is projected to add more than 10,000 new homes over the next 10 years. As a result, more than 1.8 million square feet of retail/commercial developments are proposed for this area.   Several projects underway are: Kapolei Commons, Laulani Village, Kapolei Center, Kapolei Parkway, University of Hawaii Commercial Development and Department of Hawaiian Home Lands Commercial Development.

Black Lining in a Silver Cloud

Despite the tremendous surge in real estate development activity and the positive economic environment, there are three potential factors that are likely to slow the continued rapid growth in development in the Aloha State.  

The September 2005 unemployment of 2.7 percent identified a serious problem for many of Hawaii's businesses. The issue of finding qualified staff to fill vacant positions is prevalent in retail shops as well as on construction jobs. Increased competition for job applicants is likely to result in wage inflation.

Over the course of the next 18 months, more than 17 trade unions will be coming up for contract negotiations. As a result, wages and construction labor costs are predicted to rise.

Lastly, raw material costs for steel, plasterboard, lumber, etc. are rising. Additionally, these raw materials are shipped to Hawaii, and fuel oil costs for container ships remain volatile.

In spite of these inflationary factors, Hawaii's economy will remain strong. Falling vacancy rates, rising rental rates, growing development activity and increasing retail sales all support the belief that Hawaii's retail environment will flourish in the coming year.

Mike Hamasu is the research and consulting director for Colliers Monroe Friedlander Inc. in Honolulu.


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