When we last reported on the health of Oahu’s industrial market in December 2017, we offered rationale for a then 1.88 percent industrial vacancy rate. This was fueled by demand from contractors building large residential condo developments, the construction of a nearly $10 billion light rail system (voter approved at less than $5 billion), booming tourism and military sectors and large public infrastructure improvements.
Oahu’s small 40.4-million-square-foot industrial market was under further compression as industrial product was being taken by the state to support rail construction, or lost due 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 2018, and our statistics reflect an industrial vacancy rate bouncing off the bottom at just 2.02 percent. The monthly industrial base rent average is $1.20 per square foot and monthly operating expenses are $0.40 per square foot. This vacancy rate average reflects a small increase over the previous quarter as tenants scrape the bottom of the inventory barrel looking for suitable space. LoopNet cites six industrial availabilities of more than 30,000 square feet on the island of Oahu of which, only three are vacant. Maui Island and Kailua-Kona, which are Hawaii’s second and third largest industrial markets, respectively, have experienced comparable vacancy rates and base rent averages.
One positive note is the availability of industrial land on Oahu, Maui and Kailua-Kona. This includes notable properties like Kapolei Business Park West, Maui Business Park Phase 2, Waiale Business Park and Honokohau Industrial Park. Kapolei Business Park West’s 80 available acres on Oahu came to the market with asking prices north of $40 per square foot. Maui Business Park is a 79-parcel light industrial park in central Maui with pricing starting in the high $30 per square foot. Waiale Business Park in Waikapu will soon come to market with small and large parcels starting in the low $30 per square foot. Honokohau Industrial Park came to market in the middle of 2016 totaling nearly 40 acres with more than 10 parcels, only three of which remain unsold.
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 our overall inventory. In the near term, industrial rental rates are generally expected to increase, while vacancy rates remain compressed. Steel tariffs have further increased construction costs for a state with some of the highest construction costs in America.
— By William Froelich, senior vice president, Colliers International. This article first appeared in the January 2019 issue of Western Real Estate Business magazine.