WESTERN SNAPSHOT, JUNE 2005

Hawaii Retail Market

Hamasu

More than 220,000 square feet of absorption occurred among Oahu’s retail shopping centers during 2004. Retail vacancy rates fell by nearly 3 percentage points from 8.53 percent at year-end 2003 to 5.83 percent at year-end 2004. Vacancy rates are projected to continue to decline as retail expenditures have increased by nearly 12 percent in the past year. As a result of the favorable conditions, a number of retailers are planning to expand in the near term.

The Hawaii retail market comprises two very diverse consumer segments — tourist and residential. In many regards, they both benefit from the strengthening economic growth that is occurring in the islands. Bolstered by strong job growth, rising personal incomes, military and federal government spending, and a robust tourism market, Hawaii’s retail and commercial real estate is attracting active interest from mainland investors. In fact, more than $3.5 billion in commercial real estate transactions occurred in 2004 and this is anticipated to continue through 2005.

Among real estate investments, more than $1 billion in retail shopping centers sold in the past 3 years. This is equivalent to 35 percent of Hawaii’s total inventory for retail shopping centers, a dramatic amount of ownership changes considering the relatively small size of this market. Historically, the principal investor population in Hawaii’s commercial real estate market had been local residents, followed by the Japanese. This has changed as U.S. mainland REITs and investment funds have scoured the islands to purchase many of the state’s premier shopping centers. Several of the notable retail transactions that recently occurred include Waikele Center, Pearl Highlands Center, 2100 Kalakaua, Queen Kaahumanu Center, Waianae Mall, Marketplace @ Kapolei, Kauai Village, Poipu Village, Piilani Village, Lahaina Cannery, Whalers Village and Koko Marina Shopping Center.

Billions of dollars are being spent to redevelop Waikiki; these efforts have already regenerated visitor interest in visiting and staying near this world famous beach. The revitalization of the area drew a record number of tourists in 2004. As a result, retailers along world famous Kalakaua Avenue reported a double-digit increase in sales over the past year. Rents are trending upward for the first time in 6 years. Several retail development projects will lend greatly to the improved image and aesthetics of the area: Royal Hawaiian Shopping Center by Kamehameha Schools; Waikiki Beach Walk by Outrigger Enterprises and DGM Group; International Marketplace by Queen Emma and Madison Marquette; and Waikiki Theaters redevelopment by Robertson Properties LLC.

The state of Hawaii’s economy is heavily dependent upon the success of its hospitality/travel industry, which comprises roughly 25 percent of the gross state product. After recessions to the U.S. and Japanese economies from 2000 to 2002, the terrorist attacks of September 11, 2001, and the impact of SARS on international travel, survival mode kicked in for many retailers. This mentality helped many to survive and to later benefit from the positive changes that are currently occurring in Waikiki.

Besides the improvement experienced among resort retailers, retail shopping centers throughout the islands are benefiting from an economic boom. After nearly a decade of stagnant, virtually non-existent economic growth, the Aloha State roared to life.

Low interest rates and a pent-up demand for housing resulted in record residential home sales and increased housing starts. Both the construction and real estate industries flourished, boosting job counts and personal income growth for the state. Retail developments are following the rise in residential development that continues to occur in central and West Oahu, in west and south Maui and Kailua Kona on the Big Island.

There are a number of retail projects slated for West Oahu, The MacNaughton Group announced plans to construct a lifestyle center on 20 acres in Kapolei, Bristol Group plans on building Laulani Village in Ewa Beach, and there are plans for another 200 acres of retail and commercial development in East Kapolei.

All this population and household growth in these selected areas of Hawaii is peaking the interest of new and existing retailers. Several of the retailers newly entering or expanding in the market are: Best Buy, Cost Plus Imports, Linens ‘n Things, Tommy Bahamas, Christian Dior, P.F. Chang’s China Bistro, Hermes, Diesel, Movie Gallery and Tori Richard.

Hawaii’s economy is booming and real estate is one of its major economic drivers. Both resort and resident markets are generating strong gains over last year, and rental rates are finally edging upward. Forecasts are positive for retail with many retail investors poised to capitalize on property appreciation and rental rate growth over the near term.

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

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