LIHU‘E – Kaua‘i’s commercial real estate market is soft and weak, but it’s not as dire as it was a year ago, industry experts say. The atmosphere has shifted from fear to caution. That was the overall message at a
LIHU‘E – Kaua‘i’s commercial real estate market is soft and weak, but it’s not as dire as it was a year ago, industry experts say. The atmosphere has shifted from fear to caution.
That was the overall message at a Lihu‘e Business Association meeting Thursday featuring CB Richard Ellis guest speakers Jim Mayfield, a commercial brokerage and leasing specialist, and Wade Lord, vice president of asset services.
The three primary areas of commercial real estate covered were industrial properties, retail properties and office space.
Industrial property
Mayfield said the weakness in industrial property exists for two reasons: low demand and increased supply.
Contractors, who are not growing their businesses at this time, occupy much of the industrial property on the island. Meanwhile, new industrial space has become available — at least 30,000 square feet in the last two years, he said.
“It’s a construction-based market,” Mayfield said. “A lot of the space is used by construction companies and contractors, and that factor is gone. The demand for contracting just isn’t there anymore.”
As a result, there has been a decline in industrial rents, he said. Landlords who could demand $1.25 per square foot during the 2006 to 2008 peak now draw rents in the 75- to 85-cent range.
Local investors tend to be less leveraged and there’s less speculation.
“In Lihu‘e there was not a huge amount of panic because there were not a lot of speculators,” Mayfield said. “It’s a small, older market.”
Lord said the industrial market is “bifurcated.” “Some would rather have a tenant paying rent than a vacant space,” he added.
Many five-year leases are expiring, Mayfield said, and renewals are dropping by 40 percent, primarily due to downsizing.
In some cases, landlords have worked with tenants to adapt to the market, but those who don’t find themselves with vacancies, he said.
The government has not been a significant factor in the industrial space market.
Total space in Kaua‘i’s industrial market is 1.85 million square feet. Vacancy rates, according to a CBRE report, are 6.8 percent.
Statewide lease rates on industrial properties have dropped from $1.30 a square foot to $1.
“I really don’t see lease rates going up at all,” Mayfield said. “Successful landlords have nimble rates and are willing to be responsive to tenant needs, like downsizing during their contract and adapting to their space needs.”
Retail market
“Retail is tied to employment figures and the ability to finance,” Lord said. “Both are in dire straights.”
Hawai‘i’s unemployment rate sits at 8.6 percent; however, the effective unemployment rate is likely to be double that number. Fewer consumers with cash mean fewer sales. Fewer sales translate to lower retail rents.
There are 16 retail centers in Kaua‘i with a gross leasable area of 1.22 million square feet. Retail vacancy is 10.5 to 11 percent, but a portion of the market is obsolete, meaning not really rentable. Retail rents are down 30 to 50 percent.
Other factors include less lending and a complete halt to almost all major construction projects on the South Shore during the downturn, he said. “At one time, there were 11 projects going on. Now, it’s down to two or three.”
The average age of retail inventory is 28 years. This is fine, Lord said, if retailers maintain their properties.
“It’s a tertiary, tail-end of the dog market. First, retailers look to O‘ahu, then Maui, then the Big Island, then us. Retailers have very specific parameters on deal making,” he said.
For example, merchandise zones reduce tenant pools. The synergy of a shoe store next to a clothing store next to a jewelry store, like at Kukui Grove Center, weeds out some prospective retailers.
“One of the problems with the retail market in Kaua‘i is that it has an abundance of small spaces not suitable for box retailers,” he said. “These things limit national retailer interest.”
Lord said there are some specific retailers that are eyeing Kaua‘i’s market, but they tend to be small-box retailers, in the 10,000 to 40,000 square-foot range. Kaua‘i doesn’t have the right kind of space needed for big-box retailers.
“It’s not all bad,” he said. “They’re out there looking. If they can find the right deal, they’ll come into the marketplace … five to 10 are considering Kaua‘i right now.”
However, the banks are very conservative, Lord said. “They’re not going to take risks. Until that improves, you’re not going to see a whole lot of activity.”
Banks are requiring 30 percent equity stakes, and revenue coverage over principle and interest payments of 120 to 150 percent, considerably higher than four years ago.
Office space
Office space occupancy has improved from 85 percent to 90 percent for Lihu‘e over the last year, Mayfield said. He described the market as shallow.
“Lease rates are down from where they were three years ago,” he said, “and some of the three- to five-year leases are maturing, so there’s some back and forth in the market.”
Well constructed, well maintained and newer offices are willing to ride out the market with lower occupancies rather than lower their rates, he said.
“I don’t expect office lease rents to rise or fall in the next couple of years, because the market is stable,” Mayfield said.
The county and state government is a significant factor in this category, because they lease a great deal of office space for various divisions of government, such as social services. It’s an area that should be watched carefully as government stimulus programs wind down and states look to cut budget spending, the experts said.
State Sen. Ron Kouchi, D-Kaua‘i and Ni‘ihau, said the state is systematically assessing office space needs and leases. By reviewing its portfolio, it can eliminate inefficiencies.
Cuts in federal defense spending and fewer government contracts may be affecting the new West Kaua‘i Tech Center, which has only 40 percent occupancy, Lord said.
Nationwide, a CRE crisis looms because balloon payments are gradually coming due on properties financed at peak prices during 2006 and 2007. Unlike residential financing, commercial properties were typically financed at 20 percent equity with a balloon payment due in five years.
According to Mayfield, Hawai‘i banks did seven to 10 year balloon loans, and they were primarily through main regional banks, such as First Hawai‘i Bank and Bank of Hawai‘i.
Attempts to contact a First Hawai‘i Bank communications representative to confirm this were unsuccessful by press time Sunday.
Most loans originating between 2006 and 2008 at peak prices will come due between 2011 and 2013, as the Congressional Oversight Committee chart shows.
Overall, the situation is dependent largely on the lending practices of banks, which are concentrating more on their portfolios and balance sheets rather than new commercial lending, the experts said.
• Vanessa Van Voorhis, staff writer, can be reached at 245-3681 (ext. 251) or by e-mailing vvanvoorhis@kauaipubco.com.
