Hawaii Industrial Vacancy Lows Continue in Q3 2021
Colliers released their Q3 2021 industrial report for Oahu real estate. Here’s a few highlights worth mentioning:
Speculative development remains suppressed by high construction costs.
Lack of speculative development continues to drive vacancy lower, hitting a 4-year low of 1.73%.
The pandemic spawned new industrial businesses, many of which can’t find space to expand.
With listings at a record-low and existing warehouse users short on space to expands, there’s a concern this dynamic could hinder the economic recovery currently underway.
Weighted average asking rents hit $1.33 psf, up nearly 7% since the end of 2020.
Bringing these factors together, it feels like more of the same with strange COVID-related events continuing to play out. Oahu, along with Maui, already lacks developable land with gridlock local politics failing to address the issue. When you layer on high construction costs and a major shift for industrial-adjacent businesses (e-commerce growth, logistics improvements, last-mile developments, supply chain durability) since the pandemic started, what results is a severe shortages of available warehouse space, coupled with rising rents. The same story is playing out all across the country. High demand, low supply. Even worse, the low supply of new industrial product is further restrained by unpredictable construction costs keeping many would-be developers on the sidelines.
Hawaii has always been an industrial-driven market. The importance of construction and logistics industries have never been more pronounced. Looking to the future, especially as tourism returns and more money floods the state from both East and West, it’s hard to envision a near-term scenario where the pressure points ease. So as we see the constraints build, where is the outlet to regain some semblance of equilibrium?
A couple possibilities come to mind, including a near-term recessionary event to the downside and to the upside, supply chain improvements. Such events would ease demand and help improve the availability of construction supplies, although likely not at the same time. One is impossible to predict, yet growing in probability by the day, while the other, supply chains, is undergoing a massive reconstruction that will take years to play out. Forget just-in-time, it’s now just-in-case. The flat world we came to enjoy is no longer flat, but littered with pot holes, politics and huge logistical hurdles. If COVID only lasted 6 months, I would be more optimistic on reversion to normality based on the elasticity of the legacy global economic platform. But with the 2-year mark quickly approaching, and seeing no signs of shipping lead-time and inflation issues easing, it’s clear we’re still very early in the re-building process.
Looking back and then looking forward, the facts of what we know today with low vacancy, limited to no new supply coming and growing demand, against the uncertainty of the future, creates an intriguing set of variables for consideration when investing in real estate. It’s especially worth monitoring the coming quarters as we cross year-end and embrace a whole new set of variables like pending tax increases and the Fed’s response to growing inflation pressures. At any given point, one particular variable may pop, causing a domino effect of others. All this makes it interesting for me to stay on top of new developments as they come.