Hamasu

Tight market conditions permeate the Hawaii industrial sector with sub-3 percent vacancy rates projected for the rest of the year. Speculative development will be on the rise this year as industrial developers seriously consider the feasibility of future projects.

“The lack of vacant land for industrial development, coupled with the reduction in warehouse inventory due to government and military redevelopment efforts, further exacerbates the current shortage [of industrial space],” says Michael Hamasu, director of consulting and research at Colliers Monroe Friedlander in Honolulu. The Hawaii housing boom, a change to the state’s Land Use Ordinance allowing churches to receive an industrial designation, the revitalization of the Kakaako and Manana areas and the fact that much of Honolulu’s industrial land is tied up in leasehold tenure have also contributed to the industrial pinch.

In search of leasing alternatives, industrial tenants are targeting redevelopment opportunities that offer owner-user warehouse space, a trend that has boosted sale prices for centrally located warehouse properties. A large percentage of this urban industrial focus consists of small infill construction for build-to-suit and design-build projects. Hamasu reports that the expanding construction industry in the Aloha State places an even greater need on these warehouse/distribution facilities.

“The boom in residential construction and the recent award of more than $2 billion in federal military construction contracts is proving problematic to the construction labor force, which is likely to face manpower shortages in the near future,” says Hamasu. Actus Lend Lease, a California-based community development firm, secured the lucrative military housing contract.

The high prices and lack of available industrial land in urban Honolulu have shifted much of the development focus to outlying areas such as Waipahu, Kapolei Business Park and Campbell Industrial Park, which contain the majority of industrially zoned land in Oahu.

Tenants fueling this market direction are likely to be warehouse, distribution and food-manufacturing companies, which make up most of Hawaii’s industrial sector. According to Hamasu, there is a limited number of technology firms in the Aloha State, but they are primarily research and development businesses that do not manufacture locally. With the premium on industrial space, lease rates definitely favor owners.

“It’s a landlord’s market and there is an increased desire to attract large, financially stable credit tenants,” says Hamasu.

As noted above, Hawaii’s burgeoning residential market has made the housing construction industry the fastest growing industrial tenant. The ensuing consumer need has boosted the amount of warehouse space required by the islands’ retailers.

Industrial rents vary depending on location and proximity to downtown Honolulu and Waikiki. The current direct weighted average asking rate for Oahu is 91 cents per square foot NNN, a 35 percent increase from a year ago. Hawaii’s year-end 2003 industrial vacancy rate fell nearly a point to 2.69 percent, confirming that the market is one of the tightest in the country. Many of the various Hawaii submarkets recorded vacancy rates of less than 2 percent.

The December 2003 sale of the Damon Estate to HRPT Properties Trust, a Massachusetts-based REIT, for $480 million could have a significant impact on both land prices and current tenants. The Damon Estate portfolio, which consists of 220 acres of land zoned predominantly for industrial use, is located in the airport/Mapunapuna and Kalihi/Sand Island submarkets. Hamasu says that the shortage of real estate for industrial development makes the Campbell/Kapolei submarket another one to watch because it is one of the few areas that can accommodate speculative growth.

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