FEATURE ARTICLE, JULY 2005

HAWAII ACTIVITY REPORT
Not just a place for tourists to flock, the Aloha State has commercial real estate markets in high demand.

Western Real Estate Business recently asked the following Hawaii commercial real estate experts to comment on their market’s growth and direction. Here’s what Jim Piane, CEO of Colliers Monroe Friedlander; Joe Haas, managing director of CB Richard Ellis Hawaii; and Jackson Nakasone, president of Grubb & Ellis|CBI said:

1) What Hawaii submarket is experiencing the most activity right now?

Piane

Haas: That submarket would have to be Kapolei for commercial and Kapiolani Boulevard for condos — Kapolei because it has reasonably priced entitled land, the Kapiolani area [between downtown Honolulu and Waikiki] because it has available land and is a desirable location for condominiums.

Nakasone: The islands of Kauai, Maui and the “Big Island,” especially Kona, are going wild with high-end residential homes, estates and beachfront properties. Kauai’s average home price exceeds $600,000, and so does Maui’s. In Honolulu alone, along a strip called Kapiolani Boulevard and Ala Moana Boulevard, there is estimated to be brand new residential condo construction of more than 5,000 units, with the average price between $400 to more than $600 per square foot.

What is driving this momentum is a very strong global market, a weak stock market, very low interest rates and the highest visitor traffic we have experienced in years, topping 7 million visitors, both east and westbound. Also helping is a huge outsourcing of all military housing on every military base here. With Actus Lend Lease, and the Hunt Group as major players, billions of dollars are being spent on our military. Other market drivers are the huge residential construction; the large money flow from major land trusts being sold like the Campbell Estate, Ward Estate, Damon Estate, etc.; the focus on the new $350 million medical school and the hi-tech and life science projects that will surround it; the lowest unemployment rate in the nation; and the massive amount of money in new construction or renovation in our economic generator, Waikiki. The Outrigger hotel group has started to spend more than $350 million in new construction and renovation on an active Waikiki street called Lewers. The Queen’s Foundation will be starting on its development of International Market Place, Consolidated Amusements will build a new retail center and Kamehameha Schools-Bishop Estate is spending more than $35 million on renovating Royal Hawaiian Shopping Center. The activity is fire hot.

2) What is the strongest commercial real estate property type in Hawaii right now and why?

Piane: It depends on your perspective of what the term “strong” means. The industrial sector is experiencing the tightest market conditions in recorded history with vacancy rates below 2 percent. Rental rates have risen nearly 50 percent in the past 2 years. This market’s severe shortage is hampered by the rapidly rising costs of land and development. Despite industrial development activity starting, the level of demand will continue to far outstrip the availability of supply for quite awhile. The multifamily market is very similar. The state conducted a study that claims that there is a significant shortfall of rental housing in the market. Part of the issue is that the condominium conversions took a large portion of our rental market inventory, and there has been very limited multifamily rental unit development activity. With all the economic cylinders for Hawaii working at high levels, all investment-grade properties are in high demand from both local and mainland investors. A large portion of our premier hotel properties has sold with the popularity of Hawaii as a resort destination a driving factor for that. Additionally, there is only a limited supply of oceanfront properties available, and the cost of entry into our market is a prohibitive factor for hotel development.

Haas

Nakasone: The industrial market has about 2 percent vacancy, but most of the land is owned by land trusts or outside investors. Retail is about 3 to 5 percent vacancy, and office is at about 10 to 12 percent vacancy but getting tighter every month.

3) What is the most underrated property type and submarket right now?

Piane: That’s hard to say. The only property type that has not seen a tremendous run-up in value and demand has been the golf market. There are a number of golf properties that have remained available for sale for a number of years, the result of the overbuilt situation that occurred during the Japanese bubble period. Unfortunately, most of the land for golf is either zoned for agriculture or preservation, which hampers potential development opportunities. For those golf properties with residential zoning, it would be a tremendous opportunity to capitalize on the hot residential market for luxury homes.

Haas: I believe that to be the downtown Honolulu CBD office market. Vacancies will drop below 10 percent this year, turning the market from a tenant market to a landlord market. Rents are increasing at an accelerating pace. Concessions are dropping rapidly. No new office buildings are even contemplated at this time. Sales are still occurring at below replacement costs.

4) What will have a big influence on the market in the near future?

Piane: There are two major influences that will have profound effects on the industrial market: The HRPT purchase of the Damon Estate land and the James Campbell Industrial Park. The Boston REIT now owns more than 25 percent of the industrial land on Oahu. The dissolution of the James Campbell Estate Trust has already resulted in a hundreds of millions of dollars of properties being sold, a trend that is likely to continue.

5) What has been the biggest surprise in Hawaii commercial real estate this year or in the past 12 months?

Piane: The dramatic investment and development market that supports high-rise condominium development.

Haas: The pace of investment sales in all sectors. Right now everything is selling at or above asking prices in all markets and product types (e.g., industrial land has doubled in price in the past 18 to 24 months).

6) What’s the biggest challenge ahead for this market?

Piane: Inflation, the rapid rise in the cost of construction, concerns over the dramatic run-up in housing and land prices, and the shortfall of experienced employees (i.e., unemployment rate of 3 percent).

Haas: Avoiding a speculative market is the biggest challenge ahead. In the 1980s, the Japanese came to Hawaii and overpaid for all property types. When that bubble burst, it took more than 10 years for the market to adjust back to market-driven prices.

©2005 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.