Oahu Industrial Vacancy Descends
Earlier this year, Oahu’s industrial vacancy rate submerged past the psychologically important 1% level to 0.81% in Q1 2023. According to Collier’s latest report, the rate further dipped in Q2 2023 to 0.76%. The core explanation is an incredible mis-match of demand and supply. The demand, outside of COVID, hasn’t changed dramatically in recent years, but remains in a steady growth pattern. E-commerce and the important of last mile warehouse storage, is playing out in a similar way in Hawaii as the rest of the world. Low supply, on the other hand, has deteriorated in a more dramatic fashion.
Oahu is seeing a worsening lack of industrial supply for a variety of reasons - there’s no new industrial land being developed for the foreseeable future; the big box retailers (Amazon and Home Depot) collectively grabbed some of the last remaining development land, putting a squeeze on what would have been new small scale development for leasable space or owner-user projects; existing large land owners like HRPT, QEL, KS and others provide little to no visibility on ground lease renewals, making it near impossible for tenants to plan for the future so many of them have looked elsewhere, straining the prices on markets with fee simple land like Kapolei and Mililani; construction costs remain very elevated limiting new spec development and causing the extension of useful life for obsolete spaces that don’t meet today’s user needs, thereby limiting the usability of existing inventory; and now interest rates have skyrocketed, making new development of any variety much easier to pencil. I’m sure there’s a few more I’ve missed, but the point being the list is long. It’s hard to not over-stress the number of negative factors contributing to Oahu’s worsening new supply picture. And how little can be done to fix this situation. The only outlet is higher rents.
The rate, while less important given the fluctuations of available units in a given quarter, was down slightly in Q2 2023 at $1.41 psf / mo vs $1.50 psf / mo in the previous month according to Colliers. Again, it’s better to view the number annually. At the end of 2021, average base rents on Oahu stood at $1.27 psf / mo. At the end of 2022, they jumped to $1.48 psf / mo. 2023 is on pace to beat for further growth. A recent new Kapolei warehouse listing stood at $1.65 psf / mo for 2024 delivery. All signs point towards much higher rents in the future. If a recession hits, causing tourism and construction to falter, it’s likely we see some offsetting pressure, but in no way enough to fully neutralize the growing list of supply constraints we see today.