Repost from Pacific Business News:
Some 600 people attended the annual real estate forecast event put on by CCIM and the Institute of Real Estate Management Hawaii chapter.
The outlook for Hawaii’s commercial and residential real estate industries this year depends on the sector, but one of the presenters at Friday’s real estate forecast event for 2018 may have summed it up best for his sector with one word: frozen.
That’s how Anthony Provenzano of Sofos Realty Corp. described Oahu’s industrial market to the 600 people at the annual breakfast event put on by CCIM and the Institute of Real Estate Management Hawaii chapter.
The event was moderated by Mark Ambard of Ambard & Co., with presentations by Provenzano; Mike Hamasu of Colliers International Hawaii on the investment market; Anne Hogan Perry of Coldwell Banker Pacific Properties on the residential market; Todd Hedrick of The MacNaughton Group on the retail market; Matt Raff of Standard Commercial on the office market and Jack Suyderhoud, a University of Hawaii professor of business economics, on the economic marketplace.
Presenters were asked to answer whether real estate is at the end of the cycle — and the consensus varied.
Hamasu said 2017 was the third consecutive year of a decline in investment sales volume, with a decline of 20 percent last year to $3.2 billion, compared to 2016.
While Hamasu’s forecast is for a 15 percent decline in sales volume to $2.76 million in 2018, he noted that over the past 20 years, the average sales volume has been $2 billion.
“It’s like getting a “B-minus” instead of a “C,” he said.
Raff, who drew laughter for calling the office market “the worst performing product type in Hawaii,” noted that unlike investment, retail and industrial, the office market didn’t rise after the recession ended, remaining in a trough where average vacancy, especially in Downtown Honolulu, has risen and asking base rents have declined by 20 cents per square foot per month to $1.39 since 2007.
Past cycles saw office occupancy and rents rise along with job growth, but “job growth is no longer fueling the same demand for office space,” Raff said. “That’s a major headwind for us.”
Hedrick noted that the retail sector is undergoing a “transformative change” as stores grapple with how to compete with online sales, but said retail sales volumes are projected to rise over the next three years.
However, Hedrick noted that Hawaii’s tight job market and record unemployment rate is the biggest issue affecting labor costs for shopping centers and retailers, despite the increase in the state minimum wage to $10.10 per hour.
“Shopping centers, retailers and restaurants are all seeing wage increases associated with obtaining and keeping employees in response to record unemployment,” he said. “Retail rents are impacted by all of these factors. When you combine the increase in available space along with the added triple-net cost and higher labor costs, it’s my prediction that retail rents will remain flat for the near term for the non-resort areas as inventory gets absorbed.”
Provenzano’s remark about the industrial market being frozen referred to the sector’s 2 percent vacancy rate, with construction costs, land values and development costs and rents holding it back from expansion.
Despite that, an informal survey of 50 industrial tenants in the distribution, construction and auto businesses found that 65 percent of those companies expect their businesses to increase this year, while 19 percent expect to stay the same and 16 percent expect to decrease, he said.
But the No. 1 issue for most of them was “finding good qualified employees and sometimes that’s hindering them from expanding,” he said. Hogan Perry noted that 2017 was a “stellar market for the housing market not only for across the country but in Hawaii,” noting that the median price for single-family homes on Oahu hit an all-time high of $795,000 last year.
In the luxury market, while most of the sales of homes for $1 million or more were less than $2 million, the number of condominiums selling for $5 million or more jumped in 2017 to 82, from 21 the year before, thanks to the new inventory of luxury condos in the Kakaako and Ala Moana areas, namely Waiea and Park Lane Ala Moana.
This year is expected to see sustained growth in 2018, with some of the local buyers who bought into those new buildings putting their single-family homes on the market, but a lack of supply will continue to drive prices, she said.
As for the larger economy, Suyderhoud noted that although the U.S. is already 73 months into the current expansion — the average prior to 2008 was 59 months — he expects the economy to continue growth through 2019 and probably 2020.
When looking at the factors that contributed to a downturn, Suyderhoud noted that mortgage debt service payments as a percentage of disposable income were much, much higher right before the last recession than they are now, meaning homeowners are not as exposed today as they were then.
Hawaii’s economy is growing, buoyed by a healthy tourism industry, but a “reflection of the growth is the labor market,” he said.
“A lack of labor force, lack of available workers, is what will slow down growth in Hawaii’s economy,” he said. “You just can’t expand, there aren’t workers enough to support business expansion.”