COVER STORY, JULY 2006

HAWAIIAN TOPIC
Strong Aloha State trends are sprouting from robust demand.
Michael Hamasu and Nanette Macapanpan

Marriott’s Ko Olina Beach Club is situtated on 30 oceanfront acres at Ko’Olina Resort in West Oahu, Hawaii. At full buildout, the Beach Club will offer up to 750 two- and three-bedroom villas with breathtaking ocean or mountain views.

Wanted: Honolulu Industrial Condominiums

For more than 3 years, industrial tenants have faced extreme difficulties in finding space to lease for expansion or relocation. With industrial vacancy rates falling below 2 percent, warehouse space now comes at a premium with the average island-wide asking rent reaching $0.99 per square foot per month. Rents for urban Honolulu locations often fall into the $1.25 to $1.50 per square foot per month range, forcing many industrial users to seek alternative locations or consider purchasing their own sites.

The typical Honolulu industrial user falls within a 2,500- to 7,000-square-foot size range. That size range makes it extremely difficult to affordably develop a site with land prices and construction costs having skyrocketed in the past few years. It is this phenomenon that has led many industrial developers to consider constructing industrial condominiums.

Hawaii is very familiar with condominiums, having been one of the first markets 30 years ago to start the residential condominium trend. Developers have capitalized on these unique market factors to begin building more than 600,000 square feet of industrial condos in the next year. Interest has been strong with opportunities for industrial users to secure locations ranging in size from a small 2,000-square-foot bay that includes a shared dock and a grade-level door to a 16,000-square-foot stand-alone building with rights for signage.

In addition to meeting the demand from the industrial market, developers see this as a good opportunity to quickly recoup their development costs. Pricing for these industrial condos range from $200 to $280 per square foot and allow for healthy margins for developers who were able to secure inexpensive land for development.

Unfortunately, industrial land prices throughout the island have escalated dramatically. For example, in the past 3 years, prices for West Oahu industrial land rose from $12 to $30 per square foot. Despite industrial rental rate increases that have occurred since 2002, speculative industrial construction is still not financially feasible. The industrial condominium trend is expected to play itself out over the next 2 years.

Residential High-rises Impact Honolulu’s Office Market

The recent boom in high-rise residential development in urban Honolulu is likely to result in more than 4,000 units coming to market for sale in the next 2 years. Already several high-rise condo projects are noted to be sold out or have significant demand to justify proceeding with construction. Pricing for many of these units is in excess of $650 per square foot. A typical 1,200-square-foot unit could easily be priced in the $800,000 range. For units with views of the ocean, pricing would be even higher.

It’s these price points for condo units that have attracted a significant amount of developers to consider building high-rise condominiums in urban Honolulu. From downtown to Waikiki, the inadvertent state bird (construction cranes) is prevalent. Many of these development sites are zoned BMX-3 or BMX-4, which is a business mixed-use classification that allows for a wide range of residential or commercial uses. This zoning is the most flexible and a highly favored zoning classification that also allows up to a 450-foot building height limit. At last count, there were more than nine development sites with plans for high-rise condominium projects. Most of these sites are zoned BMX-3.

The Honolulu office market experienced its strongest 3 years of office absorption in the past 20 years, resulting in vacancy rates falling to an estimated 8 percent. The increasing difficulty for office tenants to secure desired space is beginning to impact office rents, which have risen by nearly 20 percent in the past 2 years. The average Class A, full-service gross asking rent was $2.81 per square foot per month at the end of first quarter 2006. At this rental rate level, it’s still not financially feasible to develop an office building.

Although the immediate impact of all the residential development on the office sector is minimal, over the next 5 to 10 years the loss of BMX-3 and BMX-4 development sites could be dramatic. The continued decline in available office space coupled with rising rents will likely encourage developers to consider office as a development alternative. Unfortunately, by the time office development becomes financially feasible, there is a strong likelihood that available BMX-3 or BMX-4 zoned sites would be in severe short supply. If the office market continues to post strong absorption rates resulting in healthy increases in office rents, the shortfall of development sites will only exacerbate the tight market conditions. Office landlords would benefit from significant increases in rent with little new supply being added to the market.

Timeshares Take Off

With the volume of Hawaii’s visitor arrivals strongly recovering from the tourism-shuttering events of the early 2000s, the entire hospitality sector has reaped the rewards. The timeshare industry is no exception. The number of timeshare units in the state has more than doubled in the past decade to more than 6,000 units currently, with a significant amount of growth occurring within the past few years.

While the timeshare sector was once regarded as the black sheep of the hospitality family, hotel companies have now embraced this product, making it commonplace to incorporate timeshare units into their markets and individual properties. Major hotel brands such as Hilton, Marriott and Starwood have active timeshare projects on all major Hawaiian islands and are continuing to seek additional opportunities.

The resort home-buying boom in Hawaii has prompted luxury brands such as Ritz-Carlton, Four Seasons and Marriott’s Grand Residence to explore possible locations for their fractional-ownership or private residence club programs, where buyers can purchase multiple weeks of time versus one week in a traditional timeshare interval and still own a piece of Hawaii at a fraction of the cost of purchasing an expensive luxury second home or condo. Nationally, Marriott’s Grand Residence Club units range from $83,900 to $550,000 for 3 to 13 weeks, and the Ritz-Carlton Club $136,000 to $510,000 for a 3- to 5-week fractional ownership.

So what type of demand has fueled this growth? According to a 2004 study by the American Resort Development Association – Hawaii Chapter, the total timeshare sales volume increased 24.5 percent annually since 1999 to approximately $665 million in 2003. A public record search of timeshare interval sales yielded more than $1 billion of new interval and interval re-sales recorded in Hawaii in 2005.1 The majority of these sales stemmed from a handful of the roughly 75 timeshare resorts in Hawaii.

The attractiveness of Hawaii as a timeshare vacation destination is evidenced by the continued growth in the industry. Timeshare units now account for nearly 8 percent of the total room count in Hawaii. With several projects under construction or planned for development in the next few years, it is evident that the timeshare sector has become and will remain a permanent fixture of the Hawaiian hospitality landscape.

Michael Hamasu is director of consulting and research and Nanette Macapanpan is consulting projects manager for Colliers Monroe Friedlander in Honolulu.


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