WESTERN SNAPSHOT, JUNE 2007
Hawaii Retail Market
For many who visit, the island of Oahu and its major city Honolulu comprise the principal business center for the state of Hawaii. The Aloha State is composed of a number of less densely populated islands, including Maui, Big Island and Kauai. Each of these islands have become increasingly attractive for tourists, retirees and vacation home investors, garnering improved economics in the past few years. These dynamics have boosted residential development and spurred retail commercial activity.
Home to approximately 120,000 residents and visited by more than 2.4 million tourists, Maui is a popular vacation playground, especially among those from the western part of the U.S. mainland. Maui also remains popular as a second home and retirement destination. This demographic trend is a principal driver of the surge in luxury resort community development. Developers have attempted to capitalize on this trend by building million dollar homes in popular resort destinations such as Wailea, Lahaiana, Kapalua and Kaanapali Beach, all of which have experienced increased construction activity.
In the past year, Maui posted roughly 14,500 square feet of positive retail absorption, decreasing its vacancy rate from 5.44 to 4.92 percent. Average net retail asking rates rose for the third consecutive year to $3.86 per square foot per month from $3.32 a year ago.
Retail development is on the upswing with roughly 1.2 million square feet of commercial projects on the drawing boards. In central Maui, A&B Properties Inc. plans to redevelop its Kahului Shopping Center, which was destroyed by fire. The plans include a 140,000-square-foot mixed-use town center incorporating ground-floor retail and multifamily housing. In Wailuku, noted Hawaii-based developer Stanford Carr is developing a 200,000-square-foot mixed-use project named Kehalani Village. Additionally, a 400,000-square-foot Maui Lani Village near Wailuku is being proposed by local developer Bill Mills.
In south Maui, the MacNaughton Group, a prominent local commercial development group, has plans to construct a 360,000-square-foot retail shopping center. The Kihei Commons project is rumored to have secured Maui’s first Target and Whole Foods Market. In addition to this project, there is another 70,000 square feet of smaller commercial developments being considered.
Big Island of Hawaii
The Big Island of Hawaii, also known as the Orchid Isle, is the largest landmass among the state’s eight principal islands. Having a population of about 160,000, the Big Island can be separated into two major urban centers: Hilo, the county seat, is situated on the eastern coast of the island, and Kailua-Kona is located on the western coast.
The largest city on the Big Island, Hilo is noted for its quaint commercial district and sleepy lifestyle. Hilo’s population grew by roughly 4,000 new residents since 2000 and outpaces the statewide average with a 1.7 percent annual rate of growth. A majority of this growth occurred in the Puna district south of Hilo. As a result of this growth, there is a 118,000-square-foot retail development being considered by local developer Kurisu & Fergus. The Keaau Gateway project is to be a grocery-anchored neighborhood retail center. Another project is being considered for urban Hilo — the Pali Uli Marketplace is anticipated to be an 82,000-square-foot lifestyle center with occupancy projected for 2009.
Hilo’s shopping center vacancy rate fluctuated from 7 to 9 percent in the past 6 years. Generally, retail expansion in Hilo has been limited with most of the growth occurring within the area’s largest regional mall and among national big box retailers such as Wal-Mart and Borders Books & Music. Average retail net asking rents rose from $2.03 to $2.17 per square foot per month in the past 6 years.
On the west side, Kailua-Kona — a popular resort town and home of the Ironman Triathlon — and the sunny Kohala Coast to the north attract many new residents and guests staying at the area’s five-star hotels. More than 10,000 new homes, condos and villas have been planned for that part of the island.
Since 2003, west Hawaii’s retail vacancy rate has fallen from 8.93 to 4.6 percent due to healthy net absorption of roughly 25,000 square feet per year. Average net asking rents rose to $2.60 per square foot per month from $2.35 a year ago, as available prime retail space is becoming more difficult to find.
On the development front, the area’s principal shopping center, Lanihau Center in Kailua-Kona, recently was sold to a consortium of mainland investors for an estimated $26 million. The new owners plan to add an additional 250,000 square feet of commercial space. The MacNaughton Group has plans to develop Kona Commons, a regional center rumored to be anchored by Target. Plans are to start with a 130,000-square-foot retail center on the 65-acre site with target occupancy slated for 2008.
The Queens Marketplace, a 135,000-square-foot retail development, is currently under construction on the grounds of the 1,350-acre Waikoloa Beach Resort. The success of the Kings Shops across the street spurred interest in creating this new retail venture. Leasing is underway on the property, which will be anchored by a 23,000-square-foot Gourmet Food and Wine Market. The Shops at Mauna Lani is an 80,000-square-foot retail development that opened in 2006 and is situated within the Mauna Lani Resort. Anchored by Tommy Bahama and a Ruth’s Chris steakhouse, this project includes several upscale retailers, galleries and gift stores.
Populated by about 60,000 residents, Kauai is the oldest of the Hawaiian Islands. Known as the Garden Isle, Kauai is home to Mount Waialeale, the wettest place on earth. Kauai’s retail market comprises roughly 15 shopping centers with a concentration in the island’s principal cities of Lihue and Kapaa, along the eastern portion of the island (Most of the island’s resorts are located along the southern coast near Poipu).
For the third consecutive year, Kauai’s retail vacancy rate remained below 3 percent. Net absorption during this time period averaged 8,000 square feet per year. As a result of these tight market conditions, retail asking rents increased from $3.28 to $4.16 per square foot per month, a sizeable 27 percent increase in 1 year.
These dramatic increases in rents and lack of available retail space spurred a rising tide of interest in retail properties on Kauai. Kukui Grove Center, the island’s only regional mall, consisting of 312,000 square feet, recently sold in 2004 to Steve Case, founder and CEO of AOL. Additionally, Jeff Stone, an active local developer, purchased the Princeville Resort, which includes 9,000 acres of land and the 66,000-square-foot Princeville Shopping Center, in 2006 for an estimated $161 million. Faris Lee Investments, a California-based real estate investment partnership, purchased the 110,000-square-foot neighborhood, grocery-anchored Kauai Village Shopping Center for $40 million in 2007. Faris-Lee has plans to redevelop this site and boost occupancy from its current 85 percent.
Topping the construction activity has been the introduction of big box retailers to Kauai’s small market. In addition to Wal-Mart, Kmart and Borders Books & Music, Costco recently opened up their first Kauai discount warehouse this past year.
Despite robust construction activity on nearly every island in the state, growth is not without its problems. Anti-development sentiment is on the rise as new residential communities further tax aging infrastructure. Traffic congestion, water rights, sewer capacity and a host of other issues are being addressed by local government legislation and are likely to impact those interested in pursuing commercial development.
Neighbor island markets of Wailuku and Kihei on Maui, Waikoloa and Kailua-Kona on Hawaii, and Lihue and Kapaa on Kauai are areas to watch. Strong economic growth and healthy tourism expenditures are anticipated to fuel consumer demand and peak retailer interest in these markets.
Mike Hamasu is director of consulting and research for Colliers Monroe Friedlander in Honolulu.
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