Oahu Industrial Doldrums
It’s a persistently crazy story. Oahu industrial vacancy remains stubbornly low with no relief in sight for tenants. We’ve been hearing this for years now. Vacancy and rents fluctuate slightly quarter by quarter, but on a larger continuum the trend is mostly flat. Colliers’ latest Q1 2024 reports confirms more of the same.
Relief? Largely, none in sight. Developable industrial-zone land on Oahu is virtually non-existent. What once was available in West Oahu has since been gobbled up by the big box and e-commerce giants for their own development purposes. Before that, Mapunapuna’s industrial prospects vanished with the Damon estate sale to then HRPT who rarely offers extensions on ground leases, giving lessees zero incentive to upgrade their improvements. More land developers might at least attempt to endure the multi-year entitlement battle, but stay away because of daunting politics and near-impossible approval conditions. Cost to build are also prohibitively high, almost 2x mainland markets. Finally, spec builders can’t stomach the quadruple whammy of endless permit timelines, sky-high construction costs, high financing costs and relatively weak rents. It’s a grueling process for any investor to endure.
How, in a world since COVID when industrial use exploded, can rents on Oahu stay so stubbornly low? According to CBRE, rents in Kapolei, home to the majority of Oahu’s newest inventory, are only up 9% since 2019 ($1.35 psf / mo vs $1.47 psf / mo on average asking rents) while many robust US markets, with higher vacancy rates, are up nearly 100%. On mainland markets, where land is often more readily available, demand heats up, rents go up, and new warehouses are eventually built. Once supply is overbuilt and economic conditions soften, rents drop until the point where tenants re-enter the market and the cycle starts all over again. It’s economics 101.
On Oahu, things work mysteriously different. Rents barely budge when vacancy dips below 1%. And the honest truth is it’s all about THE RENTS. The industry need to change its mindset to lay the groundwork for future relief. Market participants, especially developers at the forefront of delivering precious little new products, need to change the narrative by demanding higher rents for quality, well-located, high cube spaces meeting the needs of today’s modern industrial users. So far, few have demanded this result with many on the other side of the table scoffing at the attempts to do just this. End result, more of the same. And another Colliers quarterly report lambasting the shortcomings of a frustratingly stagnat industrial market.
On Maui, where many of the same supply / vacancy / rents dynamics mirror Oahu, developer RD Olsen is taking a new approach with its 132,000 SF Class A tilt-up project delivering in 2025. Asking rent are reportedly at $2.50 psf / mo. Their type of tilt-up distribution concept doesn’t exist yet on the island and so far no leases outside of build-to-suit or cold shortage come anywhere near these rent levels. Even $2 psf / mo is seen as a far-off pipe dream rent target to some. Crazy, they might say. But why not? Someone needs to push the envelope. And if they hit the mark, others will benefit and likely follow, thereby creating a possible breakthrough for a healthier Hawaii industrial market in the years ahead.