The impact of sub-1% vacancy and development
We hope this email finds you and your family well. I have been giving thought to our sub-1% industrial vacancy rate, the cost of construction, the amount of industrial leasehold property, the cost of land, and what is in the development pipeline vs. what will be needed to sustain economic activity in Hawaii.
As our industrial product ages more and more, I have come to the conclusion that industrial rates have to substantially climb to support development.
Back of the napkin, best-case math: $60 land in Kapolei, 50% lot coverage, $225 warehouse construction costs inclusive of best case soft costs, 7% hurdle rate, and you would need a base rent of $2.01 PSF. However, our industrial base rent averages far below that.
In many markets, even as industrial real estate has cooled from the rapid pace set during Covid, rental rate averages have increased by more than 20% year over year, and on a national basis are projected to increase between 4% and 8% year over year going forward. See this article for more.
As users come up for renewal, will it be the lack of options that move our averages up, or will it be new development and pent up demand? Only time will tell, but the balance of power between Landlords and Tenants is as far in Landlords’ favor as I have ever seen.
Commercial real estate and the economy
UHERO's 2024 economic forecast. (Both a video summary and written article.)
Civil Beat’s UHERO 2024 economic forecast recap with helpful graphs.
Julia had spring break last week. We went to visit Grandma and Grandpa in California where the slides are steep and push-up pops are king.
I have made my entire career about helping my clients Think like a Professional Owner. All of my advice, education and passion is built around helping my clients make professional and informed decisions and not forgetting that little things matter in commercial real estate.
I hope you give me the opportunity to assist you or anyone you know in the future.
Aloha,
Bill
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