$156M

LUCY PEMONI / STAR-BULLETIN Metropole Realty Advisors Inc. and Heller Properties acquired 2100 Kalakaua Avenue from Lehman Brothers.

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This time, no one's
saying 'bubble'

When Massachusetts-based HRPT Properties Trust purchased Damon Estate's industrial properties for nearly $500 million in 2003, it signaled a new wave of dealmaking that's starting to rival the Japanese investment boom of the late 1980s and early 1990s.

The HRPT purchase -- the most expensive land acquisition in Hawaii since General Growth Properties Inc.'s $810 million buyout of Ala Moana Center in 1999 -- was so large even by mainland standards that it forced institutional investors to pay closer attention to Hawaii's real estate market, said Jamie Brown, president of Hawaii Commercial Real Estate LLC, a local consulting firm.

"That was a watershed event," said Brown. "All of the other big players woke up and said 'wow, there's something there.' "

Driven by low interest rates, a strong local economy and mediocre returns in the stock market, mainland and local investors purchased between $3.5 billion and $4 billion worth of hotels, office buildings, industrial properties and retail centers last year, according to Mike Hamasu, director of consulting research at Colliers Monroe Friedlander.

STAR-BULLETIN FILE A group headed by local developer Bill Mills bought out its partners in the Waikiki Galleria Tower.

The flurry of dealmaking is underscored by the Maui's Wailea resort area, where all of the top hotels have changed hands during the past 15 months. They include:

» The 780-room Grand Wailea Resort & Spa, which was purchased by Florida-based CNL Hospitality Partners last April;
» The 450-room Fairmont Kea Lani Maui Resort bought by Host Marriott Corp. for $355 million last June;
» The 521-room Wailea Marriott which was bought by an affiliate of New York-based Blackstone Real Estate Advisors in June.

"It's an attractive market because you have strong demand, high occupancy rates and limited supply," said Joseph Toy, president of Hospitality Advisors LLC.

The retail sector also has seen more activity. Last September, New Jersey-based Chelsea Property Group Inc. sold the 522,000-square foot Waikele Center in September 2004 to American Assets Inc. of San Diego for $210 million.

More recently, General Growth has agreed to pay more than $175 million for 111,000-square-foot Whalers Village center on Maui while New York partners Metropole Realty Advisors Inc. and Heller Properties paid $156 million for the high-end 2100 Kalakaua Avenue retail complex in Waikiki.

"It's amazing to see the amount of buying and selling out there," said Hamasu. "The activity level is furious."

And it's not showing any sign of slowing.

Based on a high volume of real estate sales in January, Hamasu predicted that 2005 will be another banner year for the industry, absent a major economic catastrophe such as a major terrorist attack.

Hamasu also believes the real estate market will be able to withstand a 1 percent increase in interest rates over the next 12 months since large investors already have factored in such an increase in their business plans.

GEORGE F. LEE / GLEE@STARBULLETIN.COM An investment fund managed by New York-based Morgan Stanley purchased the Pearl Highlands Center.

At the same time, the commercial real estate supply should remain tight since there hasn't been any new major office tower or hotel construction since the mid-1990s, he said.

"We see a lot of investor interest in Hawaii and we think that's because people have a lot of confidence in the future of he visitor industry and other underlying elements of the economy," said Steve McKenzie, managing director at Los Angeles-based Eastdil Realty, which brokered more than $2 billion worth of real estate transactions in Hawaii, including the sale of the Damon Estate lands and the sale the Marriott Wailea.

"Hawaii remains one of the last real estate markets in the U.S. where most properties can be purchased at a discount at what it would cost to build today," McKenzie said.

Brewbaker contrasted the current market with the Japanese economic bubble of the late 1980s and early 1990s when foreign investors poured billions of dollars into Hawaii real estate.

STAR-BULLETIN FILE Alexander & Baldwin Inc. bought the 32-story, 177,000-square foot 1100 Alakea office building.

Hamasu also sees none of the signs of a speculative bubble, such as a big run up in land values and rents.

The analyst said he worked in San Francisco during the late 1990s dot-com boom where office vacancies went from a healthy 8 percent to 9 percent to below 2 percent.

That market became so overheated there that developers began converting their warehouses into office buildings and many tenants paid their office rents with stock options in their Internet or high-tech companies, he said.

"I don't see it flaming out overnight," Brewbaker said. "It doesn't have the same vulnerability."