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The Honolulu Advertiser
Posted on: Friday, January 24, 2003

Investors eyeing Hawai'i properties

By Andrew Gomes
Advertiser Staff Writer

A commercial real estate deal manager with global investment bank Lehman Brothers in New York told a group of Hawai'i industry professionals yesterday that the Islands are increasingly attractive to investors.

The perspective, from a self-described real estate "deal junkie" whose firm has invested more than $200 million in Hawai'i projects during the past seven years, supports what local real estate experts anticipate will be an improved year for commercial property acquisitions and development projects.

"I think there's a general perception in the market that the bottom is near in Hawai'i," said Xavier Schied, senior vice president of Lehman's commercial real estate finance group. "I'm seeing a lot more interest from areas and people that I've never seen before investing in Hawai'i."

Joe Haas, managing director of real estate firm CB Richard Ellis Hawaii Inc., agreed, noting that the dollar volume of commercial property transactions last year, at about $600 million, was a low point in the market that should easily rise this year.

Haas, who with Schied spoke at yesterday's event held by the National Association of Industrial and Office Properties, said he expects a flurry of sales this year.

Among them: two major Waikiki hotels, two office high-rises, Waikiki's Galleria retail center (leased by DFS-Hawai'i), regional mall Queen Ka'ahumanu Center and two large neighborhood retail centers, Koko Marina in Hawai'i Kai and Piilani Village Shopping Center on Maui.

Haas did not identify the hotels because he said they are not on the market, but he said investor interest may trigger sales. He said the renewed interest from buyers also could rekindle offers for the Davies Pacific Center and Pan Am office buildings, which were put on the market before Sept. 11, 2001.

"Given the amount of investor interest, I think they're going to go," he said.

Schied said commercial property in Hawai'i is increasingly attractive to buyers who see booming time-share sales, a strong housing market and Hawai'i's isolated location as more protected from potential terrorist threats.

However, Schied also talked about barriers, such as educating outside investors about the Hawai'i market and unpredictable external influences such as the possibility of war with Iraq, financial instability in Japan, and terrorism fears.

Schied said Lehman likes Hawai'i as an investment opportunity because it appears to be significantly undervalued since the company first started looking at the market in 1995.

Haas said local investors who withdrew following 9/11 are back in the market competing with offshore buyers to satisfy pent-up demand for property. "This is the time to be a buyer," he said, though he noted that many lenders and property owners are still uncertain about the future of Hawai'i's commercial real estate market.

Part of the hesitation comes from property vacancies in some market segments that rose last year instead of rebounding.

According to Mike Hamasu, research director for local real estate firm Colliers Monroe Friedlander, O'ahu office vacancies worsened for a second straight year in 2002, rising to 13.6 percent from 12.7 percent in 2001.

Hamasu said office vacancies should increase this year to between 14 percent and 14.5 percent, as economic forecasts for 1.5 percent to 2 percent job growth and strength in residential real estate and construction-related business are offset by weakness in other industries with office needs.

Jeff Nasrallah, research services manager at Honolulu-based Grubb & Ellis/CBI Inc., had a similar forecast for rising O'ahu office vacancy this year to about 14.5 percent.

Haas predicted that O'ahu's office market will more quickly recover to about 12.5 percent by the end of the year.

Retail vacancies also increased last year to 7.7 percent, including space emptied by J.C. Penney early this month, according to Haas. He expects tenant rents to remain slightly soft, though new retailers filling Penney's space should reduce vacancy to 5 percent by year-end.

Despite the soft spots, Schied remained bullish on investing. "Have patience," he said. "The robust market will return, and when it does, those that have taken positions (investing) and been vigilant will benefit from their patience."

Lehman Brothers, since first exploring Hawai'i's commercial real estate market in 1995, has invested in Waikiki development projects 2100 Kalakaua and King Kalakaua Plaza, Restaurant Row, Wailea condominium projects, residential and retail developments at the Mauna Lani Resort on the Big Island and several smaller deals.