Hawaii's Real Estate Markets Thrive Despite Slow Tourism
Geographically and culturally situated between the United States and Asia, Hawaii offers residents and tourists diverse natural attractions, recreational activities, and an agreeable climate. However, “contrary to mainland impressions, tourism makes up less than 30 percent of the state gross product,” says James M. Brown, CCIM, SIOR, of Colliers Monroe Friedlander in Honolulu. While the state depends heavily on military and government industries, it offers an aggressive tax incentive program to attract research and development and biotechnology companies, he says.
Honolulu Office Market Stabilizes
The island of Oahu's office market “is relatively soft, which has been the state of the market for the last eight to 10 years,” says Robert Ewert, CCIM, of Ewert & Co. LLC in Honolulu. Although occupancy was strong three years ago, vacancy currently resides around 16 percent. Lease rates and returns on sales have fallen as well, he says.
In Honolulu, occupancy, lease rates, and sales prices withstood the effects of the recent economic downturn, Brown says. Many tenants are moving into class A properties in the central business district, including Atlas Insurance, which recently leased 20,000 square feet at 1132 Bishop St., dubbed “Honolulu's Connected Office Building” for its advanced technical infrastructure, and Adtech, which moved from a suburban location into 24,000 sf at First Hawaiian Center. Although steady, lease rates “are far below those necessary to justify new high-rise construction,” Brown says.
Due to modest vacancy rates, low rental rates, and no new construction, “modest absorption could quickly drive vacancy rates down and should drive rents up” in Honolulu during the next five years, he says.
Few Multifamily Properties Available
Due to the popular residential market, a majority of Hawaii's multifamily properties have been converted to condominiums over the last several years, says J. Allen Johnson, CCIM, CRE, of First Nationwide Exchange LLC in Honolulu. “The supply of multifamily properties is very limited, especially in Honolulu,” agrees Albert S. Wong, CCIM, CIPS, of Palace Realty. “Most of the inventory is in two- or three-story walkups.”
Due to this small stock, occupancy rates over the last year have hovered around 98 percent, and lease rates and sales prices have been rising steadily, Wong says. However, high development costs prohibit new construction. In the future, “prices will continue to rise, and capitalization rates will remain below mainland markets,” he predicts.
Golf Courses Play On
Hawaii's temperate climate and stunning scenery draw thousands of enthusiastic golfers to its approximately 1,500 holes year-round, although stiff winds often make play challenging. In fact, Koolau Golf Club on Oahu is considered the most difficult course in the country, according to Scot J. Voronaeff, CCIM, MAI, of Première Properties in Honolulu.
The golf course market currently is undergoing “a correctional mode,” which will continue as “properties overpaid for are unloaded by Japanese investors as pressure increases from their lenders,” he says. For example, Hawaiian developer Bert Kobayashi purchased the Mililani Golf Club on Oahu, the Kiahuna Golf Club on Kauai, and the Pukalani Country Club on Maui from the Sports Shinko Group of Japan for $12.4 million in January 2002. Several new courses are near completion, including the 18-hole Hokuli'a course on the Big Island designed by Jack Nicklaus. Future new development will focus on “luxury resort residential golf courses,” Voronaeff says.
Industrial Improvement Stymied
Honolulu's industrial market is in equilibrium: “very little vacancy (4 percent) and very little demand,” says William R. Liggett, CCIM, of Chaney, Brooks & Co. Functional obsolescence plagues most of its stock, and “the commercial leasehold system will continue to stymie improvements,” he says. Also, “Uneconomical ground rents and lease terms have made investment in improvements not viable,” he adds.
Several entities own approximately 75 percent of the city's industrial land and have tied it up in long-term ground leases, and high construction and land costs don't justify investor development, Liggett says. However, a few build-to-suit projects are underway on Oahu, including an $80 million printing and distribution facility on 11 acres in Kapolei for the Honolulu Advertiser, says Susan H.S. Graham, CCIM, of Campbell Hawaii Investor LLC. Yet the downturn in the telecommunication market has put several other projects on hold, she says.
Retail Activity Increases
The Oahu retail market has experienced five straight years of declining vacancy rates and positive absorption, according to Mark Bratton, CCIM, of Colliers International in Honolulu. “Overall, retail activity is on the upswing as big-box retailers continue to identify Hawaii as a strong consumer marketplace,” he says. However, Waikiki, which comprises 10 percent of the island's retail market, saw vacancy rates triple to 15 percent last year. Visits by Japanese tourists, Waikiki's primary luxury goods consumers, have declined, forcing retailers to “reevaluate their merchandising strategies and incorporate efforts to market to the growing U.S. westbound visitor market,” he says.
Although investment interest is high, Hawaii faces a shortage of quality properties for sale, says Douglas A. Pothul, CCIM, SIOR, of Colliers International in Honolulu. Significant sales in Honolulu last year include Wal-Mart's acquisition of the 10.5-acre Keeaumoku superblock from the Wichman Family Trust for $34 million and A&B Properties' purchase of the 180,300-sf Mililani Shopping Center for $30.2 million from the Morita Co.
To compensate for increasing retail activity, many new developments are being built on Oahu, Bratton says. In December, Honu Group opened its 2.5-acre retail and multifamily development on Kalakaua Avenue, a top shopping district in Waikiki, at which luxury retailers such as Tiffany & Co. and Gucci opened stores. Wal-Mart plans to build a two-story megacenter on the Keeaumoku site, as well as other stores in Pearl City Manana. Outrigger Hotels & Resorts recently invested $300 million “to redevelop Lewers Street into a retail entertainment promenade that will likely revitalize this aging section of Waikiki,” Bratton says.
Long known as the automobile manufacturing capital of the United States, Detroit has begun diversifying its economic base. Automation Alley, a high-technology corridor northwest of the city “is the third-largest employer of high-tech in the country,” says John Khami, CCIM, of Cushman & Wakefield of Michigan in Southfield. “Our high-tech industry related to robotics and telematics … will be a driver in the future,” agrees Laurence R. Goss, CCIM, of Burton-Katzman Development Co. in Bingham Farms.
The influx of sublease space stalled during third-quarter 2002, leading to increased stabilization, yet flat leasing activity contributed to an 18 percent vacancy rate, Khami says. However, “As the market continues to gain strength and both national and local economies improve, the metropolitan Detroit area will be poised and ready for the market turnaround,” he predicts.
Activity picked up considerably last year, and at the end of third-quarter 2002 occupancy stood at approximately 91 percent, says Jon G. Savoy, CCIM, GRI, SIOR, of Grubb & Ellis in Southfield. Although lease rates are flat, “several large lease and build-to-suit deals have been facilitated by tax incentives from brownfield legislation,” Goss says.
Sales activity is brisk, as “capital outside of Michigan is finding its way into a market previously dominated only by local family builders and investors,” says Steven D. Weinstock, CCIM, of Marcus & Millichap in Southfield. Major transactions include the 424-unit Gateway Apartments sold by Archon Group for $26.1 million and the Village Park of Rochester Hills sold by Village Green for $15.2 million, he says.
To combat increasing vacancies, developers are curbing new projects: An estimated 1.3 million square feet of new space is planned for this year, down 43 percent from the 2.3 million sf added in 2002, according to Marcus & Millichap's November 2002 Retail Research Report. However, vacancy rates are expected to continue climbing until the end of 2003, the report says.