“Overall, there’s a positive side. Land values, property values are starting to decline, so new purchasers can come in and buy and possibly redevelop at margins that make sense…”
Mike Hamasu, Colliers Monroe Friedlander

“As long as there continues to be demand by retailers for space in our centers, we build for them. However, I do not anticipate a significant amount of new space to be built in the near future.”
Jeff Arce, The MacNaughton Group

dck pacific construction, LLC currently is working on renovations to the guest rooms and public areas of the Kauai Marriott Resort & Beach Club, including the main lobby and food and beverage facilities.

The Honu Group, Inc. is developing 280 Beachwalk, with 31,500 square feet of retail space in a two-story configuration. Unlimited Construction Services, Inc. is the general contractor.

Swinerton’s Commercial-Retail Projects:
• Waikiki Shopping Plaza—Leighton Mau, president of Waikiki Shopping Plaza, emphasizes that the new four story, 29,644-square-foot addition currently under construction will transform the former mainly commercial/office space into a retail center with new shopping and dining options. Designed by MGA Architecture, the new addition, which includes many sustainable features, is a LEED (Leadership in Energy and Environmental Design) silver candidate. The project, now 50 percent completed, anticipates tenant openings this fall.

• Makaala Center—Retail giants Safeway and Target signed a lease as tenants-in-common for this property formerly referred to as Hilo Center, on land owned by the Department of Hawaiian Home Lands (DHHL). Swinerton is working on site development and also is bidding on the vertical construction for Safeway. (Nordic PCL is doing the Target store.)
• Renovations at Aina Haina Shopping Center

Foodland Super Market, Ltd. recently held a groundbreaking and blessing for its Kapolei Village Center.

By Lee Schaller
In the midst of still challenging economic times, the current commercial-retail development picture in Hawaii has set a new standard for conflicting projections and diverse directional signals. Even the economic analysts and forecasters have differing opinions in some areas.

However, most everyone agrees on one point. It’s not great.
Compared to the boom time of just a very short while ago, when mainland retailers were scurrying to establish beachheads on our shores and new retail centers were just about colliding with each other in the rush to get their projects going, it definitely is not great.
Most of you also agree that commercial-retail development and construction likely will not see any measure of significant improvement or marketplace excitement in the immediate future.

That being said, we also are hearing rumblings from some quarters about “new deals” starting to materialize and there is no question that there are several commercial-retail projects that (albeit slowly) are moving forward.

So take a number and take your choice. There are still some dark clouds on the horizon. But what about that glimmer of brightness? Could it be the light at the end of the tunnel?

Prognosis from the Pros

As we mentioned above, the forecasts for commercial-retail development and the economy in general remain hazy and, in some cases, conflicting. But there are areas of agreement.
Mike Hamasu, consulting and research director for Colliers Monroe Friedlander and a frequent panelist/speaker on Hawaii’s economic future at major industry seminars and other events, tells us, “West Oahu/Kapolei are the only areas having any type of meaningful construction activity right now. In other areas projects have been delayed, postponed, canceled. At this point in time, there is not a lot of activity as measured by building permitting volume and construction. The hope is that sometime this year the financial market will start to thaw, allowing us to secure additional financing so that development can be pursued. But for our economy,” he points out, “overall, there’s a positive side. Land values, property values are starting to decline so new buyers can come in and purchase and possibly redevelop at margins that make sense — in terms of profit margins or development returns.”
Hamasu explains that the severe economic decline actually began in the latter half of 2008 with the collapse of the financial market. “Sales figures have been devastating, with a lot of turmoil in the retail sector. That impacted development, with big boxes, for example, deciding not to expand. For 2010, we are starting to see a little more activity. The strong retailers in 2009 will continue to expand in 2010 — groceries, pharmacies, for example — no matter what the economy, people need these types of retailers; they hang in during tough times.” Hamasu says 2010 will continue to be challenging, “But we’re pretty healthy here in Hawaii compared to the mainland.” Colliers’ 2009 year-end retail market report underscores Hamasu’s comments, detailing that locally, retailers such as Price Busters, Ross Stores, Target, CVS Longs, Walgreens and Costco all have mentioned expansion plans in Hawaii. “For those retailers considering expansion,” the report says, “there are increasing pportunities for them to capitalize on rarely available space.” For example, when CompUSA closed at Pearl Highlands, 24 Hour Fitness relocated from Pearl Kai Shopping Center to Pearl Highlands, followed by Powerhouse Gym’s move from Kakaako to Pearl Kai. The report also says that for resort retail, the outlook appears to be improving, with leasing agents reporting an increase in interest from prospective tenants.

Bottom line? “Colliers anticipates a further softening in the retail marketplace with vacancy rates continuing to rise as poor economic conditions persist. (But) by mid-year 2010, retail growth will likely be generated by the completion of retail developments that are slated for delivery.”

Mixed Reviews

“Prospects are good for an early 2010 return to growth in Hawaii,” says the University of Hawaii Economic Research Organization (UHERO) in its Dec. 18, 2009 report. “Recent data suggest we are past the trough of the visitor industry downturn, and gradual improvement will occur as the global recovery takes hold. Construction job losses will end by late 2010, with the beginnings of recovery taking hold by 2010. The pace of the recovery will be modest because of lingering weakness in the U.S. and Japan and the disastrous state budget picture.”

The Department of Business, Economic Development and Tourism (DBEDT) says, in its Fourth Quarter 2009 report, “Hawaii’s economy is expected to see some improvements in 2010 and modest growth by 2011.”
Dr. Leroy Laney, economic advisor to First Hawaiian Bank, says in his economic forecast 2009-2010 edition, “…2010 may be a year of stabilization in the Hawaii economy, but it likely will be 2011 before sustained economic recovery sets in, in spite of an improving picture at the U.S. national level and tenuous recovery in Japan. I said a year ago that by 2011 it’s possible for the Hawaii economy to be firing on all cylinders once again. I’ll stick by that forecast.” Laney says there were steep drops in commercial permit values during 2008, at rates that continued into 2009. “This indicates that it probably will be a while before a gradual recovery ensues in the construction sector. “

In his Hawaii retail market view for the fourth quarter of 2009, Jeffrey Hall, senior director of research for CB Richard Ellis (CBRE), says, “On the surface, the Hawaii retail properties market enters 2010 essentially unchanged by the recent economic downturn. Having sustained a loss in consumer spending, significant store closings and the painful restructuring of many leases, it appears that the worst is now over.” While CBRE “expects that the Hawaii retail market and retail sales in particular, will remain essentially flat until later in 2010, when hopefully, companies begin hiring again,” it also states, “There is still a significant amount of new product coming out of the market, some still under construction, and still more is planned. There is no doubt that this growth is important and warranted, but it will be coming slowly for a while.”

What Do You Think?

We’ve heard from the pros—the analysts and forecasters who have been studying Hawaii’s current economic situation and future outlook, in this case, with a particular focus on the commercial-retail sector. Now let’s hear what industry leaders have to say:
“In the long term,” says George Ehara, vice president & division manager of Swinerton Builders Hawaii, “I think national retailers still are interested in Hawaii, but everyone is afraid to make a move in this period of uncertainty. It is hard to invest in the future if you have so much uncertainty about the credit markets, an eventual economic recovery, taxes, etc. Once the economy shows some solid signs of recovery, I think we will see national retailers back in the Hawaii market.” Ehara points out this is the right time to build. “Construction costs are still down and if you start construction now, your timing would be good for a future economic recovery.”

Kyle Chock, executive director of Pacific Resource Partnership (PRP), tells us, “Commercial office and retail spaces continue to suffer the effect of the tightening credit market. Thus, demand for commercial space is negatively affected as job losses and foreclosures rise and retail sales drop. In addition, market apprehension will continue to persist until the ‘bottom’ is identified—development and investment decisions remaining postponed.”

Chock says some of the projects we can expect to see in 2010 include:
• Kapolei Village Center, anchored by Foodland Supermarket with several smaller retail spaces (more about this project later in this report)
• Hilo’s Safeway and Target-anchored center with sitework started in 2009 by Swinerton Builders (more also, on this project later in this report)
• Kamehameha Schools redevelopment of Matsumoto Shave Ice Store in Haleiwa
“Large commercial projects that have been planned and designed are on hold or cancelled,” Chock explains, “and experts such as Mike Hamasu of Colliers Monroe Friedlander do not expect to see this market return until 2011.”

In another take on the current commercial-retail picture in Hawaii, Steven Sofos of Sofos Realty tells us, “The capital markets still have not recovered and until that happens, it will be hard for owner-users and developers to build any new projects in Hawaii. Therefore, we foresee the construction industry remaining in a downturn for at least the next two years.” Sofos also points out that land values are dropping in Kapolei and Campbell Industrial Park. “Appraisers and brokers feel that these values will drop by more than 50 percent in 2010-2011,” he says, “due to an over supply and low demand.” In an area of particular concern to him, Sofos says the industrial market in Kalihi, Mapunapuna, Sand Island, Salt Lake-Bougainville and Halawa will decline in 2010 due to the recent ground rent negotiations with the Queen Emma Foundation, Bishop Estate and HRPT. “The airport industrial (area tenants) will start renegotiating their ground rents as well in the latter part of 2010 to 2012. Many of the ground leases in Salt Lake-Bougainville renegotiated last year with rent based on 7 percent of $65 per square foot, which equated to over a 300 percent increase over the last 30 years. The same thing is happening in the Halawa industrial and Kaneohe’s Kahuhipa industrial areas as well. The only good news,” he adds, “is that there will be a lot of real estate sales in both the residential and commercial markets as foreclosures and bank-owned properties come on the market in the second half of 2010. Lenders will be looking to sell off their troubled assets quickly.”

Shane Peters, immediate past president of the Hawaii Developers’ Council, speaking to us about the difficulties of the past year, says, “Those who were lucky enough to secure financing and begin construction prior to the economic downturn were able to complete their projects in 2009. Some of the noteworthy examples included the Trump International Hotel Waikiki Beach Walk® and the Target stores in Kona and Kapolei Commons.” Several hotels also completed major renovations, such as the Royal Hawaiian Hotel (Swinerton Builders), and the Sheraton Waikiki (Swinerton Builders and Nordic PCL Construction, Inc.) King Kamehameha’s Kona Beach Hotel (Allied Builders System) currently is being renovated. “Other landowners and developers,” says Peters, “have concentrated their efforts on planning in the hopes of timing their new projects to an anticipated market recovery.”

More Challenges Ahead

“The commercial-retail area will be a very difficult sector in 2010,” says Nordic PCL’s Glen Kaneshige. “New office development already was financially unfeasible before the downturn in the market. The rising vacancies will be ‘the nail in the coffin’ for any commercial office space development. If anything, we may see sporadic light industrial/office development as opportunities arise with a pullback in property values. In retail, national retailers such as the Targets, Walgreens and Wal-Marts will continue their expansion into Hawaii and will be looking for property deals that they can develop without relying on debt service.”

In an overview for the industry in this new year, Kaneshige says, “I believe 2010 will be a very challenging year for the construction industry. Tourism needs to recover to lift the local economy out of the recession. Credit remains tight and there is the fear of many commercial loan defaults looming on the horizon, so private development faces stiff headwinds.

“Declining tax revenues will challenge the state and counties so we will probably see programs and projects sacrificed to protect budgets. Many of us are pinning our hopes on light rail and the federal ARRA (American Recovery and Reinvestment Act) funding to get things going again, but these things aren’t happening quick enough.” On the (somewhat) brighter side, Kaneshige agrees that West Oahu will continue to be the focus of future expansion, “But for now, I think future growth there will be squelched if not subdued, until the economy can recover and we address the traffic issues.” And in answer to our question as to whether Hawaii still is attractive to mainland retailers, he answers, “Hawaii remains the last area of expansion for mainland retailers, and many have been deterred by the high cost of development and construction. However, those who have entered Hawaii have been pleased with their healthy sales yield as an offset against the higher cost of entry.”

Great Expectations?

“At this point in time, we are surveying our tenants at all of our properties to see how they fared over the recent holidays,” reports Jeff Arce, partner, The MacNaughton Group. “Most of them were pleased with the (holiday) results, even though in some cases, they are performing lower than they did last year. Most of them actually exceeded their expectations this past holiday season. We have a few tenants who are struggling right now—some due to the macroeconomic issues and some due to other issues. For the most part though, I would have to say that we are doing well in very difficult times.”

In an overview on the present commercial-retail situation and a look at what may lie ahead, Arce says, “We are starting to see some deals surface from capitulation and recapitalization. A good example of this is the Pacifica high-rise by OliverMcMillan, which is the rebirth of the Moana Vista. Other high-rises likely won’t be breaking ground in the foreseeable future, or at least until there is a sense that there is more of a market to be had. Pacifica will be a great bellwether for the new condo market. But the key reason it will be selling is the lower prices that it now can afford due to the discounted purchase price. There likely will be a number of folks in town looking for the next high-rise site and they will start design and planning so that they can be ready when the market does in fact return.

“On the retail commercial real estate side of the market,” Arce says, “we are lucky still to be enjoying a lower vacancy rate than most places around the country. We did not get as overbuilt in Hawaii as some other markets did and that is helping us keep our heads above water here. That being said, I don’t expect to see very many new retail development projects coming out of the ground here any time soon. There certainly will be exceptions, but likely only where there is a low basis in the land or if there is a repricing of a development opportunity, or if a property owner or developer has a very long term horizon.”

Addressing the financial difficulties and meltdowns that elicited the current depressed economic conditions, Arce says, “As a business community, we are quite fortunate to have some very strong banks. Elsewhere across the country, the FDIC is being kept busy with bank takeovers. That can be somewhat disruptive and disheartening. The local Hawaii banks still are looking for deals and still are trying to lend. There are simply few new deals to be had. The banks are now much more conservative than they have been during the past few years and their underwriting tends to look very much like it did 10 to 15 years ago. One fear that I have is that the current underwriting, coupled with expected rising interest rates, truly may stifle future development. If this is the case, then equity and mezzanine capital sources will have to pick up the pace and the old ‘cash is king’ maxim will apply once again.”

Arce says another factor that is impacting development decisions is the cost of construction. “We hear about selected projects on the mainland where a project can go forward because the math works. Construction costs seem to be falling during this slow period as contractors want to keep working and the lower construction cost is a key factor in making development feasible. For example, some of the rail construction bids came in a lot lower than expected. The mainland has much more volatile construction prices while here in Hawaii, they do not tend to fall as much. In the past, our higher construction costs and land costs could be justified through higher rents. But these days, the retailers really are trying to hold the line on rents, so the numbers are pretty tight.”

As for The MacNaughton Group’s own commercial-retail properties, Arce says, “We are quite fortunate in both Kapolei and Kona to have leased up all the spaces that we have built so far and we are continuing to speak to a number of retailers who would like to join our centers. As long as there continues to be demand by the retailers for space in our centers, we build for them. However, I do not anticipate a significant amount of new space to be built in the near future.”

Going Up

Yes, there are projects moving forward and some exciting plans in progress. For example:
• Kapolei Village Center—Foodland Super Market, Ltd. held an official groundbreaking and blessing on Jan. 14 for its new four-acre shopping and “community gathering village” in Kapolei. “We are excited that our vision of opening a new supermarket to serve the Kapolei community is quickly becoming a reality,” says Jenai Wall, Foodland’s chair and CEO. In addition to the 35,500-square-foot Foodland store which will include The Coffee Bean & Tea Leaf, there will be 20,000 square feet of space for approximately a dozen retail shops targeted for such offerings as financial services, fast food outlets, sit-down restaurants, apparel and gifts, electronics and medical services. Management and leasing of the center is being handled by Colliers Monroe Friedlander. It is estimated that the center’s facilities will create more than 150 jobs for residents in the neighboring communities.
• L.A. Anuenue, Inc. is moving forward with its retail/office condominium in Kapolei. Formerly called Haumea Center, the five-story, 142,456-square-foot complex now is officially named the Aloha Pacific Center in honor of Aloha Pacific Federal Credit Union, which L.A. Anuenue says, “is a major part of the project.” Larry Stogdell, president and chief executive of L.A. Anuenue, says the project will be breaking ground in the very near future on Kamokila Boulevard near Assagio restaurant and the state office building. “We have the required sales and leasing threshold in place,” he reports. “In the current down economy, we were still able to deliver our goals for sales and leasing,” which tends to underscore the need, he feels, for such a retail/office complex in the area. “There is a need for additional office space,” says Stogdell, “as well as for restaurants and other retail components.” Retail/office condo space will range from 800 to 4,600 square feet in the center, which Stogdell says will have high communications capability. “It will be the first LEED-certified building as well as the first stand-alone office building in Kapolei,” he points out.
• Moana Vista is reborn and renamed—OliverMcMillan (OM), a San Diego-based developer, has purchased the former Moana Vista condominium from local developer KC Rainbow Development LLP, with plans to resume construction on the 46-story high-rise, now named Pacifica, in March of this year. Dan Nishikawa, an OM partner who has been working in Hawaii for the past nine years, will lead the firm’s activities in Hawaii and throughout the Pacific Rim. OM intends to upgrade and complete the Kakaako project that has been stalled for more than a year by summer 2011. OM, which has already invested $36 million to purchase the property, resolve the construction lien and pay Hawaiian Dredging, the former general contractor in full, will invest roughly an additional $150 million to complete Pacifica. It estimates the continued work will create over 400 construction jobs as well as other indirect jobs. Ledcor Construction Hawaii LLC is the general contractor for the project.

Comings and Goings

Although there has not been a great deal of development or construction activity lately in the commercial-retail sector, there is no shortage of news—projects proceeding and plans continuing, as we already have detailed, in addition to projects cut back, delayed, halted or canceled altogether, plus some new players coming in and several old favorites moving out.
We list a few here, but as you all know, it is an ongoing and big story in itself.
• MW Group Ltd. recently purchased the Plaza Club from Texas-based ClubCorp USA Inc. MW, which owns and manages Pioneer Plaza where the Plaza Club is located, plans a complete renovation of the private club, to be done in phases while the club remains open.
• McDonald’s of Hawaii is selling five restaurants on Kauai, including locations at Lihue, in Wal-Mart on Kuhio Avenue, the Kukui Grove, Waipouli and Eleele outlets. The buyer was not disclosed.
• A deal selling the legendary Hotel Hana Maui to an undisclosed mainland company is expected to close in late March.
• Four new businesses—Jams World, a local clothing company; a shoe store, Deuces Hawaii; Ka Restaurant & Lounge (same owners as Tsunami Bar & Lounge on King Street) and Wraps & Rolls, specializing in wraps and sushi rolls, recently opened at Ward Centre.
• Remember the Ranch House in Aina Haina? A new restaurant bearing that name is coming to Kapahulu in the former space occupied by Sergio’s in the Hee Hing Plaza. Restaurants Hawaii, which also operated Sergio’s Kapahulu location, was given permission to use the Ranch House name from the former Spencecliff Restaurant chain which included the old Ranch House.
• Foot Locker plans to close 117 stores across the country. The stores were not identified. Foot Locker has stores at Pearlridge Center, Windward Mall, Ala Moana Center and in Waikiki on Oahu.
• Ross Stores announced recently that its sales were up 16 percent in December 2009, $132 million more than in the same period the previous year. Costco also reported higher than anticipated increases in December 2009.
• Allure Waikiki, the new luxury high-rise condominium on Kalakaua Avenue, scheduled for completion by the end of March, plans a small retail component—restaurant or retail service business.
• Windward Mall’s new food court opened recently—nearly twice the size of the previous facility, with 18,490 square feet of room and seating for 372 customers. Next design LLC was the architect and Gateside, Inc. the general contractor.
• Bed Bath and Beyond is looking to take over the former Circuit City space at Pearlridge Center.

What lies ahead in Hawaii’s commercial-retail sector?

We’ve detailed what the analysts and forecasters believe. We’ve reported what industry leaders feel. We’ve listed projects, plans, facts and figures.
What we end up with is a mixed bag, at best, of what is expected to happen that may or may not be tempered by factors unknown at this point in time.
There still are substantial plans out there and several major retailers are demonstrating their unwavering belief in Hawaii’s strength as an attractive commercial-retail marketplace.
The one common factor we did see in researching this cover story is a strong measure of resilience and an impressive amount of continued positive planning for better days. You are not talking about “if” the market returns and things improve, but “when” the market returns.
And you are more than ready.