STAR-BULLETIN / FILE General Growth Properties' $250 million purchase of Victoria Ward Ltd., owner of the Ward Centers, was the largest commercial real estate transaction in the state last year.

Big deals fall

Hawaii's big-money commercial
property sales dipped in 2002

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By Russ Lynch
rlynch@starbulletin.com

Sales of commercial real estate in Hawaii fell 40 percent in 2002 from a bumper 2001 punctuated with Japanese companies unloading property, according to a new survey.

The Hawaii commercial real estate market last year was dominated by just a few big-dollar transactions, says the report by Mike Hamasu, research director at Colliers Consulting, the research arm of commercial real estate firm Colliers Monroe Friedlander.

He identified total residential, industrial and office sales last year that came to $868.2 million, well down from the $1.44 billion recorded in 2001.

About 60 percent of 2002's total was from three transactions, Hilton Corp.'s $158 million acquisition of the Hilton Waikoloa Village in April, General Growth Properties Inc.'s $250 million purchase of Victoria Ward Ltd. in May and Fairmont Hotels & Resorts Inc.'s October purchase of the luxury hotel Orchid at Mauna Lani for $140 million.

The inventory of available commercial properties is also slipping, with 10 properties priced at $10 million or more now listed for sale, compared to 18 a year ago, Hamasu said.

But Hawaii properties are becoming more attractive to investors than mainland equivalents, his study showed. Hawaii office buildings are getting a 7 percent to 9 percent "cap rate," the term real estate experts use for the net operating income divided by the purchase cost.

With prices and rents both soaring on the mainland, where inventory is also falling, the rate of return often is below 6 percent, making Hawaii's rates start to look attractive, real estate officials say.

"Cap rates traditionally on the mainland were much higher than here and that is no longer the case," said Joseph T. Haas, senior associate at CB Richard Ellis, a local commercial real estate firm. "We have a lot of mainland investors who are interested in Hawaii."

Haas cites Koko Marina, the Hawaii Kai shopping center that went on the market last year through his firm. Within the first week there were 70 inquiries from qualified buyers and 17 of them were sent formal deal packages. The center has not yet sold but a deal is likely soon, Haas said.

Part of the attraction of Hawaii is the lack of inventory in other places, Haas said.

Former Hawaii resident John Dilks, whose Dilks & Jacobs real estate firm sold mostly Windward Oahu residential real estate, said he tried from his San Francisco home to find properties to buy in California, which would enable him to sell an Oahu apartment building and get a capital gains tax advantage.

He made a couple of offers at the asking price but was topped by others. The cap rate would have been 6 percent to 7 percent, about what investors can get in Hawaii.

Instead, Dilks decided to retain the Honolulu property rather than go into an bidding war for mainland properties.

Investors are being driven to Hawaii because of that, he said. "Naturally, they'd like to buy in their own back yards," Dilks said. But if they see a chance of a better return in Hawaii they'll go for it, Dilks said.

Hamasu's research shows that there is some inventory Hawaii, although it is slipping. He identified 106 properties currently for sale at prices of at least $1 million each, including more than 1.2 million square feet of office space in 29 buildings, priced at a total of more than $279 million.

There are 21 retail and mixed-use properties up for sale, for a total of about $123 million, but half or more of that could come from one property, the Waikiki Galleria, Hamasu said.

"Investors eager to acquire commercial real estate will find a shortage of supply for prime investment properties" across the country, he said. That is one reason Hawaii properties are generating interest, he said.

Another factor generating interest in commercial real estate is the dismal performance of the stock market, Hamasu said. By comparison, real estate looks safer.

Jamie Brown, who recently left Colliers to start his own business, Hawaii Commercial Real Estate, said there is renewed interest in two buildings he has listed for sale, Davies Pacific Center and 1600 Kapiolani, known as the Pan Am Building.

"Investors are finding that opportunities are more limited on the mainland and alternative investments, like the stock market, don't look as good," he said.