59 commercial real estate properties were in some type of distress in the state of Hawaii at the beginning of 2011. These properties were primarily held by national lenders and loan special servicers. Many of the lenders and borrowers were caught-up in the peak of the last real estate boom and as rent and occupancy rates dropped, these owners were not able to keep up with debt service payments.

In 2011, we saw the number of Hawaii distressed properties begin to lower significantly compared to previous years. At year end, 10 properties were lender owned, also referred to as "Real Estate Owned" (REO), 15 properties had their loans restructured or extended, and 11 properties resolved their loan issues. This proves upwards progress on all sides. Lenders are more reasonable and borrowers are able to contribute equity.

However, some borrowers threw in the towel when the property was overburdened by debt. It was profitable for a handful of Hawaii investors who made purchase on these distressed properties. New investors are getting into the market with a completely new basis on their investment. These new owners may offer lower rents and provide homes for new commercial real estate tenants. We expect to see less distress in the Hawaii market this year and more sales of commercial and investment properties in Hawaii.

The multi-family market in Honolulu is on a comfortable and steady rise. In 2011 alone, 20 multi-families were sold in Honolulu and 61 mufti-families were sold state-wide. This can be attributed by the increasing average rental rates of 12% in the last 3 years and a decreasing vacancy rate at a low 2.1% in 3Q of 2011. The vacancy rate in Honolulu, 2.1%, is strikingly low compared to the rest of the nation which comes in at 5.6%. With a continuously decreasing asking price, -11.8% state-wide from October 2011, we will see an increase in sales for 2012.

Investors will ask themselves a few questions before making an offer and spending their time and money on due diligence. The first question for investors is, “will there be enough of a premium over borrowing costs?” We all want to grow our money over time and most investors are happy to accumulate their profits slowly but surely each year. When the market takes a big leap, we can cash-in on those profits and move up to a new property or improve our lifestyle. The next question investors ask themselves is, “will the net income go up or go down over the next five years?” Investors always hope for rents to increase but over the last few years, the pressure has multiplied. The third question is, “what kind of repairs will be required?” Accurately estimating the cash flow and expense is key here. If we only had a crystal ball, it would be so much easier….. but if there was no risk there would be no reward.

Investment Market and DistressIn 2011, the Hawaii Commercial Real Estate market took off with flying colors as cap rates compressed till the day of the devastating earthquake in Japan. After the earthquake, U.S. and Europe’s economies were on a brief roller coaster ride but managed to land softly.
In 2012, we will see more investment transactions, particularly larger deals in Hawaii. While 2011 was a year of $1-4 million transactions with very few deals over $10 million, 2012 will provide significant improvement as the overall volume increases. Japanese investors will come back to Hawaii and sellers will begin closing deals with China and Korea. With a projected increase in airlift of 16% for 2012, we are poised to see a lot of new investors this year.
Investors will see another benefit in the Hawaii market. There are $70 billion worth of CMBS mortgages that were made in 2006 and 2007 which will be due this year and need refinancing. Hawaii has begun to see its share of these transactions. With all the healthy local lenders and servicers willing to hold on for limited ownership period, we will see a significant percentage of transactions that are earmarked as distressed real estate in Hawaii. Hawaii’s positioning in the middle of the Pacific as a tropical paradise (where now you can do business- thank you APEC) will pay great dividends as we play off both the U.S. and Asian markets in 2012.

OfficeSoft demand continues in the urban high-rise office market. With a slow but steady climb in job growth and a surge of entrepreneurs and remote workers working out of their home and local coffee shops, very little new office space is being absorbed. Though numbers show a rise in employment last year, most of this was outside of typical office use.
We expect the office vacancy rates in Hawaii to increase to a little below 14% by year-end 2012. Many investors are concerned about the costs to reshuffle, relocate, and upgrade tenants within their office buildings. For these reasons, investments in office properties will continue to be the slowest category of Hawaii commercial investment properties.

Retail and Shopping Centers:The retail market is hanging tough. It is driven by tourism and new visitors landing on our shores. The all-elusive retail dollar seems to be passed from Waikiki to the suburbs, trickling down to our residential and neighborhood shopping districts. The vacancy rates will likely remain in the mid 4% range as no new supply is expected to go to market. There seemed to be a minimal amount of rental increase in our higher-end shopping centers last year. Online shopping is making a significant dent now in the retailers’ format and size of their stores. It will be interesting to see what retailers will come up with to entice shoppers from both channels.
Although investment in Hawaii shopping centers can be profitable, it is rare to find one on the market. It is even more difficult to find a shopping center that is grocery-anchored and fee simple. From time to time, we do see free-standing retail projects or unanchored projects that will continue to sell due to the migration from stock market to hard assets. Anchored projects will trade at very low cap rates when they come available.

IndustrialThe industrial market is also a bit stagnant as supply is limited. Vacancy rates are hovering at 4% and without new supply of space, rates will stay stable. A small migration of tenants into the core of the city over the past 2 years has increased occupancy rates. A handful of troubled industrial projects have sold and recapitalized and are now being leased individually.
Investment into industrial property in Hawaii will continue to stay strong by owner-users. The demand from owner-users is more saturated in Hawaii because of the lack in interest from large industrial market and low supply of high-quality structures. The rates of return are relatively low compared to the western United States which keeps many investors on the sidelines in this target market area.

Multi Family MarketApartment rents rose for the past 18 months. Due to a small climb in job growth and mortgages harder to come by, demand to rent apartments in Hawaii will continue to rise. We expect apartment rents in Oahu to increase by 5% in 2012. Small apartment buildings will continue to trade at a healthy pace. Cap rates for Hawaii apartment buildings still carry the lowest initial rate of return, in the 5-6% area. This comes from rents rising and investors being very comfortable with the property type. This is evidenced by apartment deals being the greatest number of transactions in 2011.

Hotels and ResortsThe hotel and hospitality market is coming back strong. With continued rate appreciation through 2014, cash flows will increase on these properties. Occupancy is very high in Oahu and Maui, and is starting to build in Kauai and the Big Island. Although we are unable to disclose the name of the hotel, a new and desirable hotel is under construction and will be up and running in 2014. We expect continued pressure on rates in the neighborhood of a 4% increase a year.
Investments in Hawaii hotels will be led by very strong international demand. Although there has been a shortage of high-quality hotels and resorts for sale in the state of Hawaii, the marketplace has undergone a restructuring with debt which resulted in only a few foreclosures and bankruptcies over the past 3 years. We expect an uptick in sales of hotels in Hawaii in 2012.

Foreign Investment in Hawaii Real EstateForeign investors, particularly from Asia, are seeking investment in the form of real estate in Hawaii. With numerous Korean conglomerates and Chinese investors searching and bidding for properties in 2011, we expect they will actually purchase properties in 2012. Japanese investors are making resurgence with the strong Yen. Although they are interested in many types of properties, they are most interested in hotels, resorts, and shopping centers.

http://www.staradvertiser.com/businesspremium/20111214_Safeway_offers_Kapahulu_site_for_sale.html

Safeway Inc. has put its flagship Kapahulu complex on the market just as it prepares to open a new store on Beretania Street.

Safeway plans to sell the buildings and land, and lease the supermarket portion from the new owner.

The complex, also home to Barefoot League, Cold Stone Creamery and Burgers on the Edge, is part of a four-property portfolio that includes retail outlets in West Hollywood, Dublin and Burlingame, Calif., according to a confidential offering memorandum obtained by the Star-Advertiser.

“The offering represents one of the highest quality grocery-anchored portfolios presented in the United States over the past decade,” according to the memorandum by New York brokerage firm Eastdil Secured, which is offering the properties to a select group of investors with no asking price.

The Pleasanton, Calif.-based grocery chain will enter into a long-term lease with a buyer to “demonstrate the importance” of the properties.

“In this case, there would be no effect on Safeway whatsoever if a new owner would be interested,” said Susan Houghton, Safeway’s director of public affairs.

The 4.7-acre complex, built in 2007, has 10 tenants in addition to Safeway and a gross leasable area of 78,608 square feet.

The supermarket is one of the company’s highest-volume stores in Hawaii based on sales, according to marketing materials.

It is an “extremely rare opportunity for fee ownership of a premier grocery-anchored retail property in Honolulu,” the memorandum said.

“Honolulu is a severely supply-constrained market with limited, if any, developable land remaining, high barriers to entry, and very few retail opportunities available. Given the scarcity of available land and existing restrictions in the Waikiki district, the area is effectively built-out.”

Meanwhile, a grand opening for the grocery chain’s new Beretania store, measuring about 64,000 square feet, is scheduled for Friday, and the store will be open to the public on Saturday, operating 24 hours.

Safeway’s strategy in recent years has been to develop new stores in conjunction with adjacent retail space for restaurants and other tenants through its affiliate Property Development Centers.

Its projects include a Safeway-anchored complex in Ewa Beach and two slated for construction next year in Lihue and Hilo.

“This is their unique strategy — basically they’re investing much more capital then a typical retailer would,” said Mark Bratton, vice president of the investment properties division at Colliers International. “Now what they’re doing is capitalizing on that, getting their money out so that they can go to their next location.”

Bratton said at least three of his clients are interested in the portfolio.

“We’ve had a couple buyers come through town and get serious about it,” he said.

Safeway operates about 1,700 stores across North America.

It opened its first Hawaii store on Beretania Street in 1963.

See Below for the specifics from the Star Advertiser.

The U.S. Small Business Administration’s Hawaii office lent $73.6 million to 343 small businesses in the fiscal year that ended on Sept. 30, setting a record.
Hawaii’s previous high was in 2004, when the SBA lent $63.6 million here.
“The record loan volume is a great sign,” said Jane Sawyer, SBA district director. “Each loan makes a big difference to our economic and employment outlook.”
The SBA also announced awards for lender of the year in three categories. Top honors in the large-bank category went to Bank of Hawaii, which made 80 guaranteed loans for $8.98 million. The midsize lender of the year was American Savings Bank with 36 approvals for $3.69 million. Hawaii National Bank captured the top award in the small-bank category with 13 loans for $3.6 million.
HEDCO, a certified development company that works with the SBA, provided more than $28 million for 54 small business ventures, a record performance in its program’s history. First Hawaiian Bank was honored as the most active participant in this program in 2011, making 30 loans. These loans provide long-term, fixed-rate financing to help expanding firms acquire land, buildings, machinery and equipment for building, modernizing or renovating facilities.
“I applaud our lenders for working diligently with borrowers to deliver the financing needed to keep their businesses viable and moving forward,” said Sawyer.
The Hawaii SBA also presented Holomua Awards to several organizations that assisted the small-business community, including:
» The Hawaii Chapter of SCORE for its expanded training and outreach to veteran-owned small businesses.
» Ohana Pacific Bank for its steady increase in SBA loans in 2011.
» The Honolulu Star-Advertiser business section for the “Akamai Money” column, which provides information for small businesses.
» Central Pacific Bank for its fast response and pace of SBA lending.
» The Hawaii Small Business Development Center Network for its work with financial institutions to support borrowers in developing and revising financing plans and strategies.

Usually when I am talking to office building or shopping center owners and even Hotel owners in Hawaii ,I spend 40 percent of my time updating who has left the company and who has the new responsibility for Hawaii commercial real estate.

This confirms my suspicion that apartment complexes are the most stable asset class to come thru this recession.