COVER ARTICLE, JULY 2004

HAWAII ACTIVITY REPORT
Retail developers give Waikiki a makeover.
Jennifer Orr

The second phase of the Waikiki Beach Walk in Waikiki, Hawaii, will include a 350-foot mixed-use tower with majestic views over the open park space at the adjoining Fort DeRussy.

The big news in Hawaii commercial real estate development is the revitalization effort currently going on in Waikiki. The area has experienced little development of any kind during the last 30 years, and now more than a billion dollars of development is either planned or occurring. “It’s really very extraordinary,” says Randy Yeager, president and chief executive officer of Retail Strategies. “Rarely does any major international resort destination go through such a complete renaissance at one time like this.”

Yeager is speaking mainly about three major redevelopment projects in Waikiki that are presently in the planning stages: the Royal Hawaiian Shopping Center, Waikiki Beach Walk and the International Marketplace.

The Royal Hawaiian Shopping Center, Hawaii’s destination for luxury-based retail, will receive a $55 million makeover. The 293,000-square-foot shopping center currently includes retailers such as Fendi, Ferragamo, Hermes, ABC Store and Cartier. One of the center’s newest tenants is The Cheesecake Factory, which debuted its largest restaurant at Royal Hawaiian Shopping Center in December 2003.

Royal Hawaiian’s developer, the Festival Companies, plans to open up the shopping center’s view planes. “Right now it looks like a four-story parking garage,” says Mike Hamasu, director of consulting and research at Colliers Monroe Friedlander, the company handling the center’s leasing strategy. “The Festival Companies want to make it less formidable and more open.” Redevelopment efforts are scheduled to begin on the Royal Hawaiian Shopping Center in 2005, with completion slated for December of that year.

Also in 2005, construction will start on Waikiki Beach Walk, a $460 million mixed-use project to be developed by Outrigger Enterprises that will include shops, restaurants, entertainment, and vacation and hotel accommodations. Hawaii-based developer Richard Gushman has partnered with Outrigger Enterprises to develop 100,000 square feet of retail and entertainment venues. The first phase of Waikiki Beach Walk, which includes the removal of three hotels to make room for the new retail, will be complete in 2007.

Probably Waikiki’s most dramatic redevelopment will be the International Market Place, which will be completely demolished. Built in the 1950s, the International Market Place is on property originally owned by Queen Emma, who lived on the site at one time. The Queen Emma Foundation still owns the property and has brought on Madison Marquette to lead the redevelopment effort.

Construction will commence in 2005, and plans call for replacing the current retail center with a series of three-story buildings that surround a central courtyard. The project will be designed to pay homage to Queen Emma’s gardens, says Yeager, whose company, Retail Strategies, is putting together the development’s retail tenanting plan. “We are going to replicate the stream that ran through her property and the famous gardens that she developed there,” he explains. “And the existing banyan trees on the property will remain and provide a shade canopy for the center courtyard area and the gardens.”

The new International Market Place will be completely re-leased with 40 percent of the project featuring restaurant and entertainment venues. Yeager reports that the retailers coming in will all be new to the Hawaii market. When finished in 2007, International Market Place will total 255,000 square feet.

These three projects should dramatically change the landscape of Waikiki, especially since little development has occurred in the area over the last 30 years. “They really represent a renaissance for Waikiki,” says Yeager.

The city and county of Honolulu have also gotten involved with the area’s revitalization. In recent years, Honolulu has re-landscaped and redeveloped many of the beachfront areas. A nightly torch-lighting program and hula ceremony have been initiated, as well as special programs like Sunset on the Beach, where weekend movies are shown. “[These projects] represent a major effort for Waikiki to catch up with contemporary resort standards and position Waikiki to be a major tourism destination, primarily for the Pacific Rim and mainland U.S. for the coming decades,” says Yeager.

In addition to the three major Waikiki developments, other retail projects are in the works for Hawaii. Also in Waikiki, Robertson Properties is redeveloping Waikiki Theatre into a three-story retail and restaurant development. Owned by Consolidated Amusements, the three theaters will most likely be replaced with two big-box retailers. Completion is slated for 2005.

Nearby in Honolulu, Ala Moana, Hawaii’s largest shopping center at 2 million square feet, will be growing even larger. General Growth Properties has recently announced that Nordstrom will open its first Hawaii location there. The three-story, 300,000-square-foot department store will actually open across the street from the retail complex.

Hawaii residents will have to wait until 2007 before they can shop at Nordstrom, but more new tenants will begin opening stores at Ala Moana this fall and through 2005. General Growth has redeveloped the mall’s former JC Penney location into 140,000 square feet of retail and restaurant space. New tenants will include Betsy Johnson, Hollisters and Build a Bear Workshop.

Also scheduled for a fall 2004 opening is Honolulu’s new double-decker Wal-Mart/Sam’s Club project, where the two discount retailers will each occupy 150,000 square feet. The development will include a four-level parking garage and 6,000 square feet of retail space called Shops on Keeaumoku, featuring Jamba Juice, Starbucks, Cold Stone Creamery and Supercuts.

In September, A&B Properties will open Kunia Shopping Center in Waipahu. Colliers Monroe Friedlander is handling the leasing for the 66,000-square-foot project

As evidenced by the developments mentioned above, retail is a strong force in Hawaii’s commercial real estate market. Though the industrial market is also healthy in Hawaii, little development is currently taking place. That situation could change in the near future. “There is so much demand with the shortage of supply that people are buying old buildings, tearing them down and building warehouse space,” says Hamasu. Most of the industrial activity has been dominated by build-to-suit and design-build construction, but with a vacancy rate hovering at 2.6 percent Colliers Monroe Friedlander reports that developers are starting to consider speculative projects.

The same cannot be said for the office market. “We have had an oversupply of office space for a while and everyone is looking now for the demand to catch up with the supply,” says Yeager. One of the few new additions to the office market includes Alakea Corporate Tower, a 31-story tower converted into an office condominium project by A&B Properties. The tower opened earlier this spring with a refurbished lobby, new fountain and landscaping, and a 24-hour security system.

On the multifamily front, high-rise condominium projects are particularly popular. “The trend setter has been a project called Hokua,” says Sanford Murata, a real estate consultant based in Honolulu. This luxury-class condominium project in Honolulu is being developed by A&B Properties, the MacNaughton Group and the Kobayashi Group. Murata reports that the 247 units are “basically sold out,” with construction scheduled for completion in 2005.

The enthusiasm generated by Hokua has spurred other high-rise condominium projects, especially around the Ala Moana retail center, where Moana Pacific has recently opened its first tower. KC Rainbow Development Company is also planning a second tower. When complete, the project will feature more than 700 units.

The upsurge in condominium development reflects Hawaii’s robust residential market. A pent-up housing demand and low interest rates have triggered a construction explosion in that sector. “There are long lines of people wanting to buy houses,” says Hamasu.

In addition, the state has received numerous federal military contracts that will contribute to Hawaii’s economy. Plus, the tourism market is rebounding. “This year, we will have the largest number of westbound tourists that we have ever had,” says Yeager.

All of these factors add up to a thriving economy in the Aloha State and investors are definitely taking notice. “There has been perhaps the strongest interest we have seen since the Japanese bubble period [in the 1980s],” says Murata.

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