Wednesday, January 12, 2000

Consolidation seen
for Waikiki retailers

The shift will reduce rents,
a consultant forecasts

By Russ Lynch


Waikiki's retail store mix is about to undergo radical change, as all the luxury brand-name business moves into the hands of just five or six big international retailers, forcing small stores to close, Honolulu retail consultant Douglas Smoyer said today.

Fifty to 60 small retailers are in Waikiki now, he said. "Most of those people will be gone in the next couple of years," Smoyer, owner of consulting firm Retail Strategies, told the annual economic forecast breakfast meeting of the Hawaii chapter of the Institute of Real Estate Management.

It's all part of a massive consolidation trend in worldwide retailing, he said. It will dramatically change the tenant mix in Waikiki and one effect will be to bring down rents, because the newcomers selling U.S. goods to American tourists won't be able to pay what their Japanese-market predecessors did, he said.

Consolidation is affecting every type of retail business, Smoyer said. "Forty percent of all supermarkets were merged or consolidated last year" across the nation, he said, leaving only a handful of giant companies running the business.

Smoyer said Hawaii likely will be affected by that trend and he would not be surprised to see one or more locally-owned supermarket chains "gobbled up" by outsiders.

Meanwhile, many island retailers deserve praise for expanding elsewhere in the Pacific and even to the mainland, he said. And Smoyer had words of praise for some Hawaii businesses he sees as risk-takers. The leader among them is DFS Hawaii, which is spending more than $65 million on a big retail complex in Waikiki, he said.

"We're all watching Liberty House," which could go out of business if its bankruptcy reorganization doesn't succeed, said Smoyer, switching to the topic of department stores and shopping centers. Not only would 5,000 local jobs be affected, the malls would suffer, too, he said.

"There is not another tenant to take Liberty House's place," Smoyer said, and he urged everyone to support the business and spread the word about how important it is to do so.

A leading local expert on commercial real estate told the meeting that Hawaii can expect to see more hotels, shopping centers and other commercial properties sold this year and next as low prices attract mainland buyers.

"Honolulu remains the last U.S. market that has not yet recovered," with commercial properties selling for much less than it would cost to build new ones, said Joseph Haas, a senior associate for the commercial market in the real estate firm CB Richard Ellis.

Haas said there will be strong sales among office buildings, although not as much activity as in hotels.

The vacancy level in Honolulu business district office buildings is running at about 14 percent, compared with only 4 percent 10 years ago, Haas said. New construction has added 700,000 square feet of additional office space from what existed in 1990, he said.

"In the next 12 to 24 months, it is expected that the Japanese will begin selling off their nonperforming real estate portfolios," Haas said. "As these properties sell, this should have the effect of further softening prices."

He said owners thinking about selling their commercial properties might consider doing so now, rather than waiting for that sell-off, after which it may take years for prices to recover. Haas reviewed the sale of seven major Honolulu office buildings over the last 12 months and found that the average sales price was equal to $164 per rentable square foot, while it costs $300 to $350 a square foot to build new ones.

Reviewing the last 18 months, Haas said Hawaii has seen amazing activity in the hotel and office markets. "Add to that the sale of the Ala Moana Center (for $640 million) and numerous properties along the Kapiolani corridor and it adds up to $2 billion in sales," he said.

Other speakers at today's session at Ala Moana Hotel were economist Jun Tian of the Department of Business, Economic Development & Tourism on tourism trends, and Herbert Conley of Coldwell Banker Pacific Properties on residential real estate.

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