Industrial developers can't meet demand

Vacancy in Oahu industrial space has fallen to 1.8 percent

Frenzied conditions in Oahu's industrial real estate market, characterized by historically low vacancies and high rents, have created a warehouse development boom, according to a report released yesterday by Colliers Monroe Friedlander.

VACANCY OF OAHU INDUSTRIAL AREAS AREA VACANCY Kalihi/Sand Island 1.4% Kapalama Military Reserve 0% Iwilei 2.3% Airport/Mapunapuna 1% Bougainville/Halawa 6% Pearl City 0.6% Waipahu 3.9% Gentry Business Park 0.4% Campbell/Kapolei 1.6% Kailua 0% Kaneohe 0.7% All 1.8%

Honolulu's strong economic growth, especially in the construction, tourism and retail sectors, have increased demand for goods and services as well as warehouse space, said Mike Hamasu, Colliers' director of research and consulting.

"It looks like a boom in industrial construction activity is under way with a bunch of speculative construction for industrial condominiums," Hamasu said.

Severe shortages of space and strong market conditions have prompted investors to consider speculative construction -- without prearranged tenants -- for first time in nearly two decades, Hamasu said.

Industrial condominium developments are under way at Kapolei Industrial Court, Sugar Mill Glen Center, Kapolei Spectrum and Kapolei Spectrum II totaling nearly 600,000 square feet that will become available next year.

In the next year, more than 1 million square feet of new industrial properties will be added to the industrial marketplace, Hamasu said. The most significant of these will be a 580,000-square-foot speculative condominium in West Oahu that likely will sell for about $225 to $285 per square foot, he said.

While industrial speculation is expected to continue into the next few years, rapid development will likely be hampered by the increase in construction costs, land costs and a lengthy permitting process, Hamasu said. "Despite the rapid rise in industrial rents, compared to rising construction costs, many speculative developments are still not financially feasible," he said.

During the past year, industrial growth has occurred in Mill Town, Kapolei, Campbell and Kenai industrial parks. New occupancy has soared to 425,344 square feet, the greatest increase since 2000, according to Hamasu's report.

More than 350,000 square feet of new warehouses were added to the inventory during the past year; however, the boom isn't likely to alleviate tight market conditions anytime soon, Hamasu said. Despite the increase in new inventory, the vacancy rate remained a minuscule 1.8 percent, he said.

The number of available industrial warehouse listings has dropped from 141, representing 1.3 million square feet of space, in 2001 to 69, representing 640,540 square feet, at year-end 2005, Hamasu said.

"This represents a 51 percent drop in listings and available industrial space during the past five years," he said.

Increasing demand coupled with a limited inventory saw rents edging up and tenants leasing previously vacant properties. At year end, Oahu recorded a 99 cents per square foot asking rent for warehouse space -- up from 96 cents during the previous year.

The rental rate gap between urban Honolulu industrial properties and outlying suburban markets has also shrunk, Hamasu said.

Among Kakaako, Kalihi and Iwilei industrial property, rents ranged from $1 to $1.25 per square foot. Rents in Kapolei, Campbell and Waipahu increased 33 percent from 60 cents per square foot to 80 cents per square foot.

"Long-held beliefs that leasing industrial space in Kapolei would impact a company's ability to service Waikiki and downtown clientele are being replaced with the realities of managing rising tenant occupancy costs," Hamasu said.