Western Real Estate Business

For 3 consecutive years, Honolulu’s industrial vacancy rate has been at a record low — in fact, the lowest in the country. Further exacerbating the supply-constrained market has been the economic boom that has continued for the past 7 years. For a 36 million-square-foot market, Honolulu’s industrial sector generated more than 1.5 million square feet of positive absorption during the past 5 years. During this time period, the city’s industrial sector posted strong job growth and increased demand for warehouse and distribution space as various industry sectors such as retail, hospitality, construction and distribution generated solid revenue growth.

At year-end 2006, Honolulu’s vacancy rate remained miniscule. Although the 2.28 percent vacancy is actually slightly higher than the 1.71 percent vacancy rate recorded at year-end 2004, prospective tenants seeking expansion or relocation space are facing frustration and difficulties finding any space appropriate for their companies.

The weighted, average asking rent skyrocketed 56 percent from $0.69 per square foot NNN per month in 2001 to $1.10 per square foot per month NNN at year-end 2006. Normally, such a dramatic increase in rents would spur increased interest by developers for speculative warehouse development, but, unfortunately, two factors weigh heavily against making prospective developments financially viable. Surprisingly, land prices and construction costs have risen at a pace faster than the rise in industrial rents.

The cost of a square foot of land in Kapolei, a submarket in West Oahu, provides a telling example of the rapid rise in land values. In 2004, a developer could pay $12 per square foot for an entitled piece of I-2 industrial-intensive zoned land. Two years later, this land is now selling for $30 per square foot. This is a 150 percent increase in land costs in 2 years! On average, industrial land has risen by an average of 83 percent in the past 2 years.

Being situated in the middle of the Pacific Ocean, Honolulu’s construction industry has to ship most of its building materials. As a result, construction costs are affected by the volatility in energy prices as well as the influence of global demand from places such as China and India. In addition to raw material cost increases, the shortage of trained construction labor has also placed inflationary pressures on pricing from contractors. Upward inflationary wage pressure, coupled with several upcoming labor contract negotiations, has already impacted a number of prospective developments.

Most of the current construction has been concentrated in design-build or build-to-suit projects for owner-users. By penciling in the tax benefits and reduced occupancy costs, owner-users typically are willing to pay more for land and construction prices. As of late December 2006, more than 600,000 square feet of new inventory have been added to the market as owner-users expand out of their older facilities.

Additionally, speculative construction has been principally relegated to the industrial condominium marketplace where developers are willing to capitalize on an industrial tenant base — typical size is less than 7,500 square feet — that has small space requirements, but is willing to pay a premium for a customized location. In fact, several industrial condominium projects currently being marketed for sale have asking prices in the $275 to $300 per square foot range. Margins are healthy for many of the current industrial condominium developers, especially if they had purchased land in the 2003-2004 timeframe prior to the dramatic run up in land values.

In order for the Honolulu market to get back to an equilibrium of 6 to 8 percent vacancy, at least another 2.5 million square feet of new inventory needs to be built in order to alleviate the pent-up pressure of current demand. In all likelihood, this is not going to occur anytime soon with the shortage of developable land and the over-inflated construction costs. Currently, there are only 11 parcels (roughly 20 acres) of fully entitled industrial-zoned land available for development… not even close to the amount needed to satiate the high demand.

On the horizon, there are several large proposed industrial development sites that are undergoing the lengthy entitlement processes to get rezoned and/or filing for appropriate building permits. Optimistically, these developments, which total roughly 450 acres, will be available in the 2008-2012 timeframe at the earliest. Until these proposed sites get entitled and built, Honolulu’s industrial market is expected to remain one of the tightest markets in the country.

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

©2007 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) 554-6054.