The Hawaii investment sale market was active in 2018 with an abundance of capital seeking investment opportunities throughout the state and across all product types. Mortgage availability from local banks and non-local financiers remained strong, and there was a steady flow of new interest from debt and equity sources looking for first opportunities in Hawaii.
Last year’s transaction volume (including entity level) was up 33 percent from 2017 to $5.5 billion. Institutional and cross-border investment volumes were up from 2017 and performing well above the 10-year average. It was a slower year for private investors and REITs, though institutional capital from Singapore, Zurich, Kuwait, Germany and Japan were the foreign standouts in 2018.
Entity-level activity boosted Hawaii’s transaction volume significantly in 2018. We anticipate this story to continue to spill over into Hawaii through 2019 as institutions deploy large amounts of capital to build scale. Brookfield’s acquisition of GGP was the largest entity-level transaction, which included the 2.5 million-square-foot Ala Moana Center with its two office buildings consisting of about 400,000 square feet, the Whalers Village in Maui and the Prince Kuhio Plaza in Hilo.
The hospitality sector led the charge for the third year in a row with $2.45 billion in transaction volume, which was nearly half the total sales volume for the entire year. The largest hotel sales included the 463-unit Ritz-Carlton Kapalua for $275 million, the 838-unit Grand Wailea Resort & Spa for about $1.1 billion, the 623-unit Hilton Garden Inn Waikiki Beach for $212 million, and the 300-unit Andaz Maui, which was part of a three-property portfolio sale with an estimated allocated value of $288.2 million.
The Modern, Aston Waikiki Beach and St. Regis Princeville were also significant hospitality transactions. The outlook for hospitality in Hawaii remains strong as occupancies and ADR’s stay at historic high levels. For example, demand in Waikiki has created new investment and development opportunities, including Salem Partners’ recently announced groundbreaking of the Residences at Mandarin Oriental, located directly across the street from the Hawaii Convention Center and adjacent to the Ala Moana Center. Salem’s luxury condo/hotel entitled development at 1500 Kapiolani is also situated within a few hundred yards of the Mandarin Oriental. Both developments are responding to demand and spurring hoteliers’ perceptions of submarket possibilities.
The multifamily sector experienced the most growth in year-over-year transaction volume. This was primarily the result of three significant transactions. Two of these transactions involved projects that were recently built, including the 191-unit Hale Mahana student housing property completed in 2018 that supports the University of Hawaii at Manoa. The other is the 499-unit Kapolei Lofts built in 2016 by Forest City. The single largest transaction was the 1,457-unit Kapilina property in Ewa Beach, which Carmel Partners sold to Brookfield as part of a five-property portfolio sale. The allocated price was about $575 million.
The retail sector experienced an increase in transaction volume compared to 2017. Capital remains polarized, primarily chasing best or distressed assets. Concerns focused on malls and commodity/box retail tenants have spread to nearly all retail formats. Bankruptcies for stalwart tenants, such as Toys“R”Us, Aaron Bros and Sears, continue to drive concern. However, retail negativity seems to be tempering with the realization that online and brick-and-mortar retail should coexist. CBRE’s National Retail Partners expects repositioning of malls to produce success stories, shifting the narrative in a positive direction — and Hawaii has a few malls in the midst of doing exactly that. The 2018 standouts include the previously mentioned GGP/Brookfield entity-level transaction and the Terramar portfolio sale to Alexander & Baldwin. This transaction included Laulani Village ($124.4 million), Pu’unene Shopping Center ($63.6 million) and Hokulei Village ($68.7 million). Separately, high-street retail activity included Tozai purchasing 280 Beach Walk from Irongate Partners and First Hawaiian Bank’s acquisition of 1858 Kalakaua, both in Waikiki and setting new high watermarks for pricing.
The office sector experienced an increase in volume, including the Shidler Group’s sale of the Pan Am Building to Don Quijote for $78.5 million ($385 per square foot), which is adjacent to Don Quijote’s top-performing store. The Class A office market is poised for a significant rent growth event as the second largest office property in the CBD is exploring the potential conversion to multifamily. This move shrinks the GLA and reduces the largest block of vacant space in the state. Vacancy rates will drop from the mid- to high-teens into the mid-single digits possibly within the next 24 months. Base rents in the CBD are expected to spike and concessions are predicted to dry up, while the residual value analysis game takes on an entirely different line. This is consistent with the effects Waikiki’s office market experienced when the Trade Center converted to the Hyatt Centric.
Outside of a black swan geopolitical event, we anticipate 2019 to be like 2018; it will be robust. Cap rate compression has leveled off and certain segments of retail will experience a softening. The entire industrial and office markets will see a higher rate property appreciation. Besides palpable reasons to be in Hawaii, our high barrier to market entry and resilience will continue to attract capital from around the globe.
—By Matt Bittick, senior vice president, capital markets, CBRE. This article first appeared in the January 2019 issue of Western Real Estate Business magazine.