As Usual, Demand Outpaces Supply in Hawaii’s Multifamily Market
Hawaii’s multifamily market continues to achieve record pricing driven by strong local investor demand and notable institutional investors of larger mega deals at $100 million or above. This market is defined by limited inventory and prohibitively expensive new construction that leaves Hawaii with stable annual vacancy rates of about 96 percent.
Hawaii has seen only modest increases in annual rental rates of less than 1 percent and relatively low rents for apartments in our market that pencil out to $1.75 per square foot to $2.25 per square foot. Despite these relatively anemic financial returns, enthusiasm remains for this sector. In fact, multifamily continues to reign as the most desired asset class for local investors with monthly transaction counts in the five to seven range and the most aggressive cap rates currently averaging 3.86 percent. The pricing results for multifamily have been stunning with per-unit sales prices ranging from $250,000 to $380,000, depending on the type of construction.
The multifamily market demand drivers are not anticipated to change in the near term. While the island of Oahu reports average annual new housing demand of 3,500 units, only 1,500 housing units at most are approved annually. Paul Brewbaker, former chief economist for Bank of Hawaii and owner of TZ Economics, has concluded that Oahu is “in the midst of a shortage that will likely never be resolved.” Limited and expensive land, as well as unrelenting construction costs that have risen at more than 20 percent annually in recent years, have prevented new multifamily development.
In fact, prior to the delivery of 7000 Hawaii Kai (269 units) and Kapolei Lofts (494 units) in 2016 And 2015, respectively, there had not been a speculative for-lease apartment property with more than 50 units constructed on Oahu since the late 1960s. Even those that were developed in that time period ultimately converted to (and were sold off as) condominiums.
Colliers International represented the seller of 7000 Hawaii Kai earlier this year to a regional developer who is in the process of “condominiumizing” the project to be sold off as individual units. Also of note was the 2017 completion of a 38-unit project in Kailua, an affluent submarket in eastern Oahu. While the units have been rented out as apartments, there is a condominium map in place and the developer recently listed the property for sale for $18 million, or $474,000 per unit, anticipating a buyer would sell off the units individually.
In order to make multifamily projects economically viable, local and state government agencies have enhanced entitlements and increased densities through the 201H process. Others have helped developers obtain federal and state funds in the form of tax credits and other mechanisms. An example of this was the recently approved 28-story, 402-unit Oliver McMillan project on Kuhio Avenue in the heart of Waikiki. About 22.6 percent (91 units) of the project will be available to residents earning 80 percent of the area median income and will remain affordable for 30 years. These entitlement enhancements and/or subsidies will be necessary to spur on any meaningful future multifamily deliveries.
— By Mark Bratton, president, Bratton Realty Advisors. This article first appeared in the January 2019 issue of Western Real Estate Business magazine.