Market Reports

Monthly Archives: November 2009

Is the commercial real estate market in Hawaii at the bottom?

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Earlier this week, while canvassing prospects for one of our projects, I spoke with a local company who invited me over to discuss their needs.  While meeting with them, we spoke about long-term planning, and the five, ten, and twenty-year plans that their board has been working on.  They believe that now is the time to start looking seriously for land here in Honolulu.  While they currently have a facility that is adequate, their long-term needs are for much larger properties and buildings.  They believe, and we concur, that the land prices for them will be severely discounted (up to 50%) from the peak of the market in 2005 and 2006.

Another client recently let us know they are back in the market to buy, because they believe the market is beginning to hit bottom.  It’s not that important to find the exact bottom, but to jump back in near the bottom, because over time, the only way is up.  This client bought nothing in 2005-2007, when they believed property prices were  inflated with low returns and unrealistic expectations for rent growth.  Over the past four real estate cycles, we have seen great wealth created by the long term players who jumped back in near the bottom of the cycle.

To be a great investor, all you have to do is judge the top 1/2 of the market cycle versus the bottom 1/2 of the Hawaii commercial real estate cycle.

Disney Hotel in Hawaii is already constructed to the 8th Floor

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Today, I attended an Economic Development Conference at Ko Olina Resort on Oahu.  I was amazed to see that the Disney Hotel had not only broken ground, but is also already up to the 8th floor.  This hotel, when completed in 2011, will have over 800 rooms, approximately half of them hotel rooms and the other half time-share rooms, available for sale.

This is the single largest construction project in Hawaii at this time.  We are very lucky to have such a strong brand investing such large amounts of money on the island of Oahu during this down-cycle.  It’s not only keeping a number of local construction workers employed but also it will employ hundreds of people in the West Oahu area starting in 2011.

Are foreign investors back in the Hawaiian commercial real estate investment market?

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The first evidence of foreign investors coming back to Hawaii is the recent sale of Pacific Guardian Tower at the corner of Kapiolani Boulevard and Keeaumoku Street, near the Ala Moana Shopping Center.  This eighteen story high-rise office building was recently purchased by a Japanese investor (Maruito USA, Inc).  With the yen hovering around 90 per dollar, the Japanese buying power goes a long way for U.S. real estate.  Undoubtedly, the location and attraction of Ala Moana Shopping Center was a high priority for this investor.

In addition, since direct flights were announced to China we have had several inquiries from investors and real estate operating companies to purchase specific types of assets to service this new visitor coming to the islands.

With this first evidence of a new wave of investors, we will be looking east again, hopefully, for many of our investment real estate buyers.

Apartment building sales in Hawaii have dropped dramatically

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Year to date, there has only been one apartment building sale in the State of Hawaii.  This is due to a number of factors, but mainly buyers’ fear of rents being on a downward trend.  Rent adjustments vary market by market and seem to be holding the strongest in the better buildings located in the core part of the city. One of our clients, who own a dozen buildings, told us they have had to reduce rents 20% to keep their properties at 96% occupancy levels.  Financing for many of these properties is still available and is one category of property where non-recourse financing is still available.

Currently on the market there are 45 apartment buildings for sale in Hawaii.  With the slowdown in the velocity of sales, rates of return are going up on these properties.  A quick look through the available properties today reveals that two of the 45 properties are offering a 10% initial return (both are located on the neighbor islands) with a high return for Oahu properties pegged at 8.4% at asking price.  The vast majority of the properties being offered are being offered at 6.5% or lower initial returns.

We expect to see a pick up in the last quarter of the year in sales due to pent up demand, available financing, and some stability in the market coupled with the need for year-end closing.

Commercial Real Estate loans in Hawaii are getting harder to come by

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One of our clients recently came in to discuss his property.  We started talking about his plans for leasing, marketing, cost reduction, etc in 2010.  As we went through the budget and looked at items where we could reduce costs and add value, we noticed that his mortgage is due at the end of 2010.  This is a property that was purchased three years ago at the height of the credit market.  We immediately switched the discussion to what options are available for this loan even though it is due in over one year.  We spoke about the following:

1.  Refinance the property with a local lender.

2.  Refinance the property with a private individual.

3.  Refinance the property by recapitalizing the ownership.

4.  Sell the property and pay off the loan.

The owner thought, as with his previous loans, he would be able to just renegotiate with the existing lender.  The existing lender on this property is a number of bond holders that own this loan through an investment in a commercial mortgage-backed securities pool.  However, the collection of owners had no interest in refinancing this property.  Their interest was in collecting the monies due on the current monthly payments so they would each be able to redeploy their capital into different places as they required at the end of 2010.  This loan that was originally made by a group of Wall Street bond holders, now needs to be replaced and the owner, luckily, has time to shop around to a few avenues that are available to him to refinance.  Another real possibility is he will be offered a new, smaller loan which means he will need to invest additional equity into this property. We have agreed to assist him in working with local lenders and national life insurance companies analyze the possibilities.  He has agreed that if an acceptable source of refinance is not found in the next three months, he will have to seriously look at putting the property up for sale in today’s marketplace or taking in a partner to recapitalize the property.  This strategy and timeline keeps the owner in control and not at the mercy of the lender.

Another client of ours, who was in for a similar annual planning discussion, advised that their loan is not due for eight years and as we were going through the process of planning, we looked at their current value of the property and noted that the existing loan could not be replaced under current underwriting guidelines by a local bank or national finance or insurance company.  The next step will be to present the following options to the partnership for consideration:

1.  Continue on the path they are on, hoping that underwriting standards change and they will be able to refinance the entire amount.

2.  Consider paying down the loan with the available cash from the disbursements to partners.

3.  Curtail disbursements to partners and put the money into savings to provide for the unknowns that may be coming with this long-term refinance.

We believe the Partnership will decide on a conservative approach of putting the money into savings and looking at the marketplace again or get financing in their annual review of the property next year.

Golf Courses in Hawaii are Selling

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As I was reviewing the investment property sales in Hawaii for the ending of third quarter 2009, I noticed that, year to date, three golf courses have sold.  The common thread seems to be that the properties that have sold are somewhat distressed, with sellers having some motivation or reportedly having other debts to pay.

One new Golf Course has just come on the market for sale. The only other “Resort” property that has sold so far this year is a 12-unit hotel in Waikiki.  There will be many more resort properties coming to market in the next year.

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