Last week, Walgreens closed on the purchase of the existing Safeway store in the heart of Honolulu.  This is subsequent to Safeway purchasing a larger site two blocks away within the past 60 days.  Walgreens elected to partner with Petco on the site and will sublease part of the site to them.

As outlined at the beginning of the year, the top half dozen retailers in the state of Hawaii are becoming the biggest buyers of real estate and the most active developers of sites within the state.

With a success record and sales topping their list of stores throughout the country, Hawaii is a very attractive market to these retailers.

Click on the link below to view the original article in the Star Advertiser:

Walgreen buys Safeway land

Activity is being driven by investor confidence that rents have leveled off and will not be dropping in the future.

Currently, there are 24 apartment buildings available for sale on Oahu.  Of these 24 properties, 14 of them have been on the market for over 1 year.

A client of ours has recently purchased large portfolios of loans from failed banks.  Including some of the well-publicized FDIC auctions of leftover commercial real estate loans from now-closed banks.  In talking to this client last week, he believes we are seeing a divide in commercial real estate financing markets on existing debts.

The first pool of loans are the ones similar to the FDIC sales, which come from private banks, which are generally smaller in nature on local commercial real estate projects and properties.  Clearly, banks that failed have a new ownership and are forced to make some changes to their loan portfolios, but the few we’ve seen that the FDIC has actually sold off so far are the exception.  Most banks today have been able to hold their loans and have their former mortgage originators now monitoring those loans on a monthly basis to assess their cash flow potential.  With this knowledge of the up-to-date operations of each individual property, these private banks are often extending Tenant loans and softening terms.  Foreclosure is an expensive legal process and takes the loan into a different category with bank regulators.

The second type of loans are the commercial mortgage backed security loans, which as we had discussed before are pooled together and sold off as bonds in many pieces.  Our client has been active in buying a few of these pieces that on the surface seem to be riskier portions of the loan, but in all instances so far, the loan terms have been renegotiated and/or extended as opposed to foreclosed upon.

Many in the industry today call it “Extend and Pretend.”  If the underlying economics are on the upswing or do continue to improve, then operating results, including the payment of pricinpal and interest, will be able to increase on these loans.  The lenders today obviously feel it is more productive for them to continue to work with the existing in-place borrower than to draw a line in the sand, and force the company to go through the foreclosure process, let the property essentially disintegrate in condition, and command a significantly lower value at a distressed sale.

Many seasoned investors know that the commercial real estate market is cyclical.  Although, we almost forgot this fact over the last extended period of prosperity.

If you think of the real estate cycle as either a side wave with crests and valleys, or as a clock, peaking at noon and hitting the bottom at 6 p.m., you are likely to do well with your investments in commercial real estate.

They key to making money over the past five cycles has been to predict the upswing.  It doesn’t need to be an exact science.  One of our clients says that anywhere in the bottom third of the cycle is a good time to invest.  That same client also stops investing when they believe we are in the top third of the cycle.

Many clients today feel that some of the best buys that we’ve seen in the bottom of the cycle may be defined as a period during 2009.  If you remember back to the uncertainty in the market, and how people were holding onto cash, you will note that the few that spent equity dollars actually received very strong returns.  I believe we are still in the bottom third of the cycle, but probably on the way up.

If you are looking to invest in Hawaii commercial real estate, pick the time when you believe we are 12 to 24 months from a strong market, meaning increase in occupancies and strong capital availability, and invest at that point in time on the upswing.

One of the main points I took away from his speech was that it used to be imperative that we write 5-year and 10-year plans. While we may still do these today, his comment was in regards to the speed of information. Even with an organization as large as theirs, they have to be flexible. He said they were focused on continually making decisions on current information and relaying and understanding large amounts of data. He said he will sometimes make a wrong decision, but it’s better to continue to update their plan to support and serve their customer base than to sit back and evaluate every 12-60 months.

You may ask, what does this have to do with appraisals in commercial real estate? One of the biggest issues for our team this year has been current appraisals of properties. It is clear to us that prices have risen on many assets for 2010 versus 2009. We find that appraisers are often using data that is 6-9 months old to value properties. While we have a long line of buyers willing to pay where the market is and where the market seems to be going, every once in a while the appraisers step in and suggest a much lower value.

Recently, what we have found helpful is sharing our most current information with appraisers, including bidding characteristics, depth of the market, and the motivation of equity investors. In addition, we’ve noticed that the same market conditions are happening on the mainland. Because we have been sharing this data throughout our offices, we can share the transactional information, including cap rates and depth of the market, with local appraisers so they are able to get a global perspective on what investors are looking at today.

If you conduct an appraisal for your property in today’s market, be cautious, sit down with the appraiser at the beginning of the process to understand what the expectations are, and make decisions on the most current information.

Our advice is to watch the market carefully, hunt after the properties that you’re really interested in, and make offers aggressively when you see something you want that you can close quickly and efficiently.

With the closing of the sale for Bishop Square (usually described as the best office complex in Honolulu), it can be said that the market for the purchase of office buildings in Hawaii is strong again.  There was strong bidding for this asset which was openly marketed.  There were several established bidders and a couple of major national office building owners looking to enter the Hawaii market who were competing for this asset.

The purchase of this property at roughly 50% of replacement costs will be a good purchase for this buyer and allows them to control a major portion of the marketplace in downtown Honolulu for office buildings.  This buyer was well positioned and had put their “ducks in line” for a purchase like this in 2009.  By first addressing existing building issues as the recession came on, they built liquid capital and credit lines to make strategic and opportunistic buys while the market was in the lower range of its natural variations.

We expect to see continued strong interest for quality office buildings in Honolulu that do come to market.  There are two other office complexes under contract at this time on Oahu that will be major indicators of current value in the marketplace.

A small office building recently came on the market that I really like.  This property, at approximately 10,000-sq. ft., is located one block from Ala Moana Shopping Center, has great parking, and will offer the buyer a great term of ownership.  This property is listed by another firm, but I believe it’s a great buy and it will sell in the near future. I thought it would be worth sharing with you to keep up on good buys in the marketplace.

If you would like more information, click here and feel free to give me a call at 808-523-9708 to discuss further.

The attached article details additional flights both from the United States and from Asian countries, showing a strong pickup for the economy in Hawaii in the near future.

Star Advertiser – Airlines taking wing for isles again

In our marketplace, vacancy rates are generally lower than most parts of the United States Mainland.  In recent offerings, we have seen stronger interest, more bidders, more cash offers, and lower rates of returns for the buyers.

There does seem to be a flight to quality and certainly investors today are demanding immediate cash flow as opposed to waiting several years for monthly cash flows.

With the stock market’s fluctuations our clients are more than happy to receive returns in the 6% to 8% per year range on commercial real estate in Hawaii.