WESTERN SNAPSHOT, FEBRUARY 2005

Hawaii Industrial Market

Kay

Long moribund, Hawaii’s commercial real estate market is back. The strength of Hawaii’s economy, driven primarily by the construction industry, has created a demand for warehouse space that won’t let up. With a vacancy rate of 2.1 percent (according to figures from CB Richard Ellis) the industrial market has never been better. The weighted average asking net rent on the island of Oahu has gone up $0.10 in 2004 to $0.92. Operating expenses are also growing, with the 2-cent increase pushing Oahu’s average to $0.23. With all sectors of Hawaii’s economy — the military, tourism and retail — firing on all cylinders, the industrial market is now in a kind of golden era.

Back from the Dead

Old Hawaii hands know that things haven’t always been so rosy in the Aloha State. To understand how far Hawaii has come recently, it’s useful to study the top of the last cycle, in the late 1980s and early ‘90s, when Hawaii’s residential and commercial markets were in a bubble. This was fueled mainly by Japanese buyers. Buoyed by Japan’s stock-market boom and a strong yen, Japanese buyers poured millions into Hawaii real estate, jacking up prices to unearthly heights.

Alas, when the Japanese stock market crashed so did Hawaii’s entire economy. With it went the commercial and residential markets, which came down in a resounding thud.

Steve MacMillan, CEO of the Estate of James Campbell, a Hawaii-based private real estate trust with a $2 billion portfolio, reckons that a confluence of events in the mid- and early ‘90s conspired to deflate the industrial market.

Says MacMillan, “The post-bubble period created an increase in vacancies and very little demand for Hawaii warehouse facilities. The state experienced a decline in construction, minimal job growth, rising bankruptcies and an overall stagnant economy. External influences also were a factor. There was a sharp drop in Japanese tourism, which decreased numbers of high-rolling visitors who normally would be spending their yen at resorts and upscale retail outlets.”

By the time the new millennium rolled around, Hawaii’s economy began to pick up steam. The state was less dependent on the Japanese tourist market and looked to the U.S. mainland for visitors. Things in general began to look up, that is, until September 11, 2001.

Immediately after the tragedy, Hawaii was emptied of tourists, which reminded everyone how dependent it is on the visitors’ spending. Doomsayers speculated that Hawaii’s visitor industry was finished.

Fortunately, the crisis was short-lived and a year later Hawaii residential real estate became very trendy. Mainland money started pouring in from baby boomers wanting to diversify their post dot-com portfolios with retirement properties and second homes. With 9/11 in the background, it seemed that everybody in the continental USA wanted a home in Hawaii where it was safe and secure. Local buyers, also sensing the time was right, jumped into the marketplace as well. By 2002, Hawaii’s residential market, always a precursor to its industrial market, got very, very hot.

Turning Point

The industrial real estate scene went through a dramatic change in December 2003 when a large block of mostly warehouse property located strategically near Honolulu International airport was sold for $480 million. The land, belonging to the Damon Estate, a 104-year-old private trust, was sold to the Massachusetts REIT, HRPT Properties Trust.

“The size of the Damon sale attracted a slew of mainland U.S. investors, buyers who generally don’t make their way out here,” says MacMillan. “Among the visitors were serious players including major REITs, pension funds and private equity investors. It was obvious to these investors that Hawaii represented a value play. They were looking for a place to get respectable returns. After crunching the numbers, they realized they could make money in Hawaii real estate that was comparable if not better than anywhere else in the country.”

What’s Next?

With the bad old days now a distant memory, the near-term prognosis for Hawaii is exceptionally bright. The strength of the U.S. and Japanese economies bodes well for the Aloha State. With residential and military housing construction booming, the tourism industry robust as ever and retail flourishing, the stage is set for continued expansion in Hawaii’s industrial real estate sector. However, there’s simply no land available in urban Honolulu for new warehouses. Demand will continue to outstrip supply so long as the economy stays on track. According to CBRE, there is only approximately 375,000 square feet of industrial space within a 20-mile radius of Honolulu in the pipeline.

With Hawaii’s economy firing on eight cylinders and economic indicators very positive, the stage is set for continued expansion. For Hawaii’s industrial real estate market, happy days are truly here again.

Robert Kay is a Honolulu-based freelance writer who specializes in real estate.

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