When we last reported on the health of Hawaii’s industrial market in 2018, we offered rationale for a then 2.02 percent Oahu industrial vacancy rate. This rate was fueled by the completion of many large residential high rises in urban Honolulu, the ongoing construction of a $9.2 billion light rail system (voter approved at less than $5 billion), and booming tourism and military sectors, our two biggest economic drivers.
Oahu’s small, 41 million-square-foot industrial market was under further compression as industrial product was either being taken — or functionally interrupted — by the state to support light rail construction or lost to high-rise residential construction and the expansion of our main Honolulu harbor. A prohibitive industrial construction cost scale, which generally exceeds $125 per square foot for metal skin shell warehouse, had also slowed spec and build-to-suit construction.
Fast forward to late 2019, and our market reflects an Oahu industrial vacancy rate of just 2.13 percent, a monthly industrial base rent average of $1.24 per square foot and monthly operating expenses of $0.41 per square foot. Much of this rate is composed of property taxes, which have increased more than 30 percent year over year in some areas, and 50 percent over the past three years. Maui Island and Kailua-Kona, Hawaii’s second and third largest industrial markets, respectively, have experienced comparable vacancy rates and base rent averages as tenants scrape the bottom of the inventory barrel looking for suitable space.
One positive note is the current availability of industrial land on Oahu and Maui. Kapolei Business Park West had 63 available acres that came to the market in late 2018 with asking prices north of $1.7 million per acre. More than 80 percent of parcels are currently reserved or sold. Maui Business Park is a 79-parcel light industrial park in central Maui with prices starting in the mid-$30s per square foot. Waiale Business Park in Waikapu, Maui, has come to market with small and large parcels starting in the low $30s per square foot. Despite all this land being sold, our vacancy rate has changed very little. When Kapolei Business Park West is sold and fully built out, it will only add about 1 percent to Oahu’s industrial inventory.
High construction costs and market cycle concerns have caused the majority of land sales to occur to owner-users. The exception is Hanua Distribution Center, a 226,530-square-foot industrial spec warehouse with 42 loading docks and more than 200 parking stalls. It is scheduled for completion in August 2020 and has shown strong interest from several credit tenants.
Industrial rental rates are expected to increase in the near term, with vacancy rates staying compressed.
— By Bill Froelich, senior vice president, Hawaii, industrial and investment services divisions, Colliers International. This article first appeared in the January 2020 issue of Western Real Estate Business magazine.