Commercial real estate
deals to go even higher

Driven by construction, military spending, tax cuts and a rebounding tourism market, the outlook for commercial real estate in 2004 is even brighter than in 2003, which was by all accounts a record year.

"The Honolulu real estate market is the best in the nation, and that's not a small feat," said Gregory B. Valladao, senior vice president and principal at Grubb & Ellis/CBI, who spoke yesterday at a real estate symposium organized by the Certified Commercial Investment Members and the National Association of Industrial and Office Properties.

He identified Hawaii's total residential, industrial and office sales last year came to $2.125 billion, with 138 of those transactions over the $1 million mark. Sales of commercial real estate doubled last year, significantly outpacing the national average, said Valladao, who added average market growth was about a third last year.

Last year was a big-deal, big-dollar year, with one of the biggest real estate transactions in Hawaii's history, the $480 million purchase of the Damon Estate Land by Massachusetts-based HRPT Properties Trust. The Shidler Group, A&B Properties Inc. and MW Group Ltd. followed closely behind, infusing lots of capital into the state's economy.

This year healthy growth in construction and tourism is expected to create more jobs, spurring leasing activity in commercial real estate and boosting investor confidence in Hawaii, said Paul Brewbaker, chief economist for the Bank of Hawaii.

Indeed, much of A&B Properties decision to keep the bulk of its real estate investment in the state was driven by demand from investors, said Stanley M. Kuriyama, the company's chief executive officer.

As long as interest rates remain low and demand for retail, industrial and office properties outstrips the supply, all commercial real estate sectors in Hawaii will remain on fire, real estate professionals and economists predicted. And, if mainland real estate prices continue to rise and investors, continue to shy away from falling stock market returns, more capital will continue to float into the Hawaii's market, they said.

Industrial market

Last year was the most noteworthy for the industrial real estate market in a decade as vacancies declined, rents rose and the deal makers got busy, said Scott Mitchell, executive vice president of Colliers Monroe Friedlander Inc.

An improving economy resulted in more demand for industrial space, but as Hawaii struggled to ride out the Japanese crisis and dips in tourism, the state hasn't really added a whole lot of new inventory, Mitchell said.

"We have a severe shortage in every size category," Mitchell said. "I've been doing this for 20 years, and I've never seen this many industrial parks with under two percent vacancy."

Increasing demand coupled with a limited inventory saw tenants paying higher rents and leasing previously vacant properties. Average industrial rents rose to 91 cents--the highest single year increase and the greatest since the Japanese bubble, he said.

"It would appear that there's a little meat behind this recovery, and we are poised to continue to take off," he said.

Office Market

Hawaii's job growth in 2003, boosted the office market by increasing leasing rates and dropping building vacancies.

With more optimistic job growth forecasted for 2004, the market can't help but improve, said Frances Okazaki, of CB Richard Ellis Hawaii, who said the state could need anywhere from 132,000 to 207,200 square feet of additional office space to meet the estimated demand.

At 12.2 percent vacancy rate for office space, Hawaii significantly outperformed the rest of the nation in 2003. The national vacancy rate stood at 16.7 percent by year-end.

But with no new projects on the books, the state will have a fixed inventory for the next 18 to 24 months -- and rents will rise, she said.

Tenants will also find it harder to negotiate lease concessions, Okazaki sad.

"There's going to be a lot of activity, a lot of competition, but it's still a great office market in Hawaii," she said.

Retail market

Job and tourism growth, combined with growing buying power for Japanese visitors, will help Hawaii see more retail growth, said Mark Bratton, president of Bratton Realty Advisors Ltd.

"The stars are finally aligned for this market," Bratton said, adding 5.85 percent growth in 2004 is forecasted for the retail leasing market.

New developments to watch are the Wal-Mart Keeaumoku Development and the 61,000-square-foot Kunia Shopping Center Development, which is not even out of the ground but is already 50 percent committed, he said.

Projects such as the Ewa Pointe Shopping Center, the redevelopment of the Royal Hawaiian Shopping Center and of the International Marketplace as well as the Outrigger Beach Walk will also have positive impacts on this market, Bratton said.

As Hawaii's economic recovery continues, Bratton predicts more West Coast investors will be eying the state.

"People don't know what to do with their money on the West Coast," he said.


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