Hawaii Q3 2022 Industrial - Slowdown?
3rd quarter broker reports outline more of the same for Hawaii industrial - extremely low inventory, lack of new supply for the foreseeable future and a growing potential for a slowdown ahead, underscored by the impact of permit volumes dropping off a cliff. High construction costs and rising interest rates are the main culprits behind permit volume decline of nearly half compared to the same time last year.
On to the hard facts, Colliers is calling Oahu’s industrial vacancy rate 1.22% with an expectation of going sub-1% by year-end. CBRE is calling Oahu’s vacancy rate at quarter-end 4.7%. In a market as small as Oahu with vacancy as tight as it is today, a 3.5 percentage point difference between the two reports is statistically very significant. Asking rents softened slightly in Q3 to $1.27 psf / mo on Oahu per Colliers and $1.31 psf / mo per CBRE, mostly due to available inventory being limited to lower quality properties. However, a quick scan of Loop Net or Crexi reveals a different story with a handful of Oahu’s newer buildings asking $1.50 psf / mo. The disparity between published “asking rents” in quarterly reports and what’s found on sites like Loop Net underscores the sample set challenges with Hawaii’s very limited amount of available inventory. Quarterly reports fluctuate widely a result despite the underlying trend of the last 18 months being a consistent movement upwards on rents.
Condo warehouses, typically small bay (less than 4,000 SF), appear to be the only relief on the horizon for Oahu’s inventory shortage. The Crossing at Kapolei Business Park West, a 162k SF condo project scheduled for delivery in March 2024, is advertising smaller unit sizes. Given that not all industrial users can afford to buy condos, the question becomes how much will these projects address the supply concerns? Financing and affordability is now tougher than ever, potentially limiting the candidate of potential buyers. HEDCO, the local SBA financing option, is showing 10-year fully amortizing loans at 5.33% and 25-year loans at 6.22%. To address possible financing challenges, the project is advertised as both leasing and sale. Given the strength for either option, it appears to be a smart way to tap the big profits of condo sales while at the same time playing in a very strong for-lease market. At the end of the day, the remaining condo units can always be sold at the right time in the future, investment horizon permitting.