The Benefits of Investing in Hawaii Commercial Real Estate

Hawaii is well known for its world-renowned, pristine white-sand beaches and its near-perfect year-round weather, making it one of the most popular tourism destinations in the world and drawing millions to the islands each year.

The Aloha State is also becoming increasingly popular among commercial real estate investors, who journey to its shores not for a vacation, but to acquire properties.

In 2018, Hawaii saw big-wave investments in commercial real estate, with a record total sales volume of $5.2 billion, according to Colliers Hawaii. That figure — of course — dropped in 2020 and the first half of 2021 because of the COVID-19 pandemic, which disrupted real estate investments on a global basis.

However, interest in Hawaii real estate investment is accelerating again, as more investors resurface and seek to take advantage of the benefits of investing in Hawaii’s lucrative commercial real estate market. Colliers projects that a healthy recovery is on the way for the second half of this year, with investment sales volume anticipated to exceed $2 billion in 2021.

“The lack of supply of properties and available land will accentuate the increasing demand for Hawaii investment properties,” said Mark Bratton, senior vice president for Colliers Hawaii. “I see an accelerating market for limited properties with little or no long-term effects from the pandemic.”

While LoopNet explored some of the unique challenges of investing in Hawaii commercial real estate in a previous article, this piece will uncover some of its benefits. Interestingly, in some cases, the benefits and challenges are intertwined. For instance, the difficulties investors face when developing commercial real estate in Hawaii contributes to a scarcity of properties in the market, which, in turn, promotes high values for existing properties or developable land. Some of the benefits of investing in Hawaii commercial real estate include:

• Substantial appreciation.
• Marked scarcity.
• International interest.
• Significant stability.
• Tax benefits.

While 2020’s total sales volume in Hawaii commercial real estate plummeted to $1.2 billion, the lowest mark since the Great Recession, there was one megadeal that stood out: Amazon’s $125 million purchase of the 14.5-acre former Servco Pacific car lot near the Daniel K. Inouye Honolulu International Airport.

It turned out to be an advantageous transaction for Servco Pacific, as the auto dealer known for its Toyota brand netted more than $106 million in appreciation from the sale. In 1987, Servco Pacific paid just $18.9 million for the industrial-zoned lot, according to public records.

This type of remarkable appreciation in Hawaii commercial real estate is not uncommon, and represents one of the main reasons why investors buy up Hawaii properties. For Amazon, which has plans to build multiple warehouses on its new property, it may turn out to be a great investment over time, as the land already has an assessed value of $76.6 million, according to City and County of Honolulu tax records.

One of the main reasons why Amazon paid so much for the Servco property is that there were virtually no other viable alternatives near the Honolulu airport, which is a key location for the retailer’s delivery and logistics platform.

The Seattle-based e-commerce giant had long been seeking locations in Hawaii to facilitate its distribution operations. When the Servco Pacific lot went on the market in early 2020, Amazon was among the first parties to investigate the opportunity and completed the transaction just a few months later.

The scarcity of land in Hawaii leads to many off-market deals, and the state has experienced a plethora of off-market commercial transactions in recent years.

There is, perhaps, no company more experienced at completing large off-market commercial acquisitions in Hawaii than Honolulu-based, publicly traded real estate investment trust Alexander & Baldwin Inc. The company has completed a slew of recent purchases, including two retail centers, one located on the island of Kauai and the other on the Big Island, as well as West Oahu warehouse buildings and a ground lease under the Home Depot store in Honolulu.

Chris Ponsar — owner of Ponsar Valuation, a Honolulu-based real estate appraisal and consulting firm — says that scarcity is truly one of the main benefits of investing in commercial real estate in Hawaii.

“Especially on Oahu, you start to get physically limited on where the next development is going to be located,” he told LoopNet. “As long as you’re on Oahu, you are more resilient to change than other parts of the mainland.”

However, Ponsar noted that in other areas of Hawaii that have much lower population counts, such as the Big Island, it can be a different situation, as investment opportunities are not nearly as limited in those locations.

“Oahu is definitely more resilient because the population base is here, and there’s just a limited amount of zoned land for developments,” he said.

Hawaii is one of the most stable markets for commercial real estate investments. The main reason for this is that an undersupply of properties continues to persist in the state. The challenge of developing properties in the state, coupled with the high demand for existing properties, continues to foster stability.

There are many long-term holders of commercial properties in Hawaii, and these investors are seeking the type of gain that Servco Pacific saw when it sold its property to Amazon.

From an investor’s standpoint, Hawaii’s higher average rental rates make many properties attractive acquisitions, partially because these elevated rents often cover the carrying costs of the property, allowing an investor to hold on to it indefinitely, as it continues to appreciate.

International interest in Hawaii, mainly from Asian countries such as Japan, China and South Korea, certainly wasn’t as significant in 2020 as it was five years ago when the total sales volume from these investors topped a decade high of about $1.5 billion, according to Colliers Hawaii. In 2020, total sales volume from Asian investors was just $11.7 million.

Traditionally, Asian investors prefer hotel or golf properties in Hawaii, as evidenced by the slew of investments made over the years in such assets, most notably China Oceanwide Holdings’ multiple acquisitions at the luxury Ko Olina Resort in West Oahu. Those transactions totaled hundreds of millions of dollars and concerned the acquisition of undeveloped land upon which multiple hotels were eventually constructed, including an Atlantis-branded resort.

That type of large-scale investment will create opportunities for other investors, as China Oceanwide will likely look to sell some of these assets in the coming years.

There are at least 70 real estate investment trusts, or REITs, operating in Hawaii, including a company that owns the state’s largest shopping mall — Ala Moana Center in Honolulu.

REITs operating in Hawaii currently do not pay corporate income taxes. Because of this, it is estimated that Hawaii-based REITs save between $10 to $65 million each year in taxes.

For almost a decade, state lawmakers have been trying to pass a bill to impose corporate income taxes on REITs. While some smaller investors say that imposing this tax would create a level playing field, other investors are quick to stand by REITs, as they create opportunities by actively buying and selling properties in the state.