Due to its unique location and an economy pretty well recovered from the recession, Honolulu has experienced explosive growth in high-rise condo developments. These are exciting times for investors and developers of multifamily properties on the islands.
Hawaii’s economy is finally on a positive growth trend for 2014. This is expected to continue into 2015 and beyond. The state’s economy relies heavily on conditions in the U.S. economy and key international economies, particularly Japan, which has experienced slow growth.
Tourism in Hawaii is the No. 1 industry. Last year, it grew 4.8 percent, which resulted in more than eight million annual visitors. This is expected to taper to 3 percent in 2014. U.S real GDP is expected to increase by 2.4 percent in 2014 and 3 percent in 2015. In comparison, Hawaii’s economy is projected to show a 2.4 percent increase in 2014 and 2.2 percent in 2015. Hawaii’s unemployment rate is projected to be 4.2 percent in 2014, 4 percent in 2015 and 3.5 percent in 2017. The Honolulu Consumer Price index is expected to increase to 2.1 percent in 2014 and 2.5 percent in 2015.
These are all positive signs. However, Hawaii suffers from a critical shortage of affordable housing. Some management firms are reporting no units available for rent. Factors that are driving up rental rates include Hawaii’s barriers to entry, high land costs and a lengthy entitlement process for new developments. As a result, the majority of new multifamily projects are for-sale condominiums instead of traditional market rate apartment communities.
The construction industry is the fourth largest private industry in Hawaii. Last year it completed an estimated $7.7 billion in GDP. There are currently two projects that will have major impacts on the economy: the $5.1-billion Honolulu rapid transit rail project and the boom in Kakaako.
The Kakaako area in Honolulu is a 600-acre area near Ala Moana Shopping Center that is being constructed by a variety of developers as an urban village neighborhood. The project includes five housing developments that are under construction; six developments that received permits in 2013; and more in the planning stages as other developers jump on the bandwagon. The project should include 17 planned buildings in total, which will provide an estimated 5,740 housing units.
Hawaii commercial real estate transaction volume in 2013 soared 66 percent over the past year, rising to $3.66 billion. The top sales in 2014 consisted of hotels and retail properties.
Unfortunately, very few apartment buildings are selling. According to the REIS Metropolitan Apartment Ranking for the first quarter of 2014, Hawaii has the seventh lowest vacancy rate in the U.S. at 2.3 percent. Combine this with the increasing rents, and it’s easy to see why some owners may decide to hold instead of sell.
One factor that may influence this decision is just how long interest rates may continue to bump along the bottom. Compared to the next five years, now might be the best time to sell while cap rates are in the 5 percent to 5.5 percent range while owners can take advantage of high values and low vacancies.
Unlike the mainland where it is common to see 200-unit, Class A communities, most of the apartment sales over the past three years have been B and C Class properties that contain 15 to 40 units. These typically range in price from $5 million to $7 million.
Now might be the best time to sell if you’re an apartment building owner in Hawaii. A rise in interest rates or a decrease in debt capital will place upward pressure on historically low cap rates in the next few years. But it is hard to say no to living in paradise. Thus, a new year will bring a new wave of investors wanting a piece of the paradise pie.
By Keoni Fursse, CEO, Kokua Realty in Kahului, Hawaii. This article originally appeared in the July 2014 issue of Western Real Estate Business magazine.