Investment Sales Volume Jumps 66%

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1 YE 2013 HAWAII INVESTMENT HAWAII YEAR-END 2013 INVESTMENT MARKET REPORT Investment Sales Volume Jumps 66% MARKET INSIGHT It is very exciting that none of the commercial sectors are in hypersupply, interest rates this low, demand this high and the outlook for the coming year so positive. William Froelich (S) JD CCIM SIOR MARKET INDICATORS (OVER PRIOR YEAR) SALES VOLUME SALES COUNTS CAP RATES HAWAII HIGHLIGHTS YEAR END 2013 $1M+ COMMERCIAL INVESTMENT NUMBER OF TRANSACTIONS YEAR END 2013 $1M+ COMMERCIAL INVESTMENT SALES VOLUME YEAR END $3.66B Hawaii commercial real estate investment transaction volume soared over the past year, achieving levels not seen since the last economic boom period. Sales rose to $3.66 billion, a healthy 66% jump in volume over 2012 levels and have nearly doubled in volume over the past two years. Transaction counts also grew strongly, rising by 34.6% from 182 to 245 sales during the year. Real estate has long been considered a cyclical business. Colliers segments the real estate cycle into four quadrants: expansion, hypersupply, recession and recovery. During the expansion phase, a market experiences healthy economic growth, rising tenant demand, and increasing rents. At a certain point during this cycle, development becomes feasible and construction becomes prevalent. Unfortunately, most markets cannot sustain unlimited development and a saturation point is reached where demand for new product does not keep up with the increase in supply (the hypersupply quadrant). At this junction, rents begin to decrease and the market enters the recession phase. During the recovery phase, the market stabilizes and rental rate decreases flatten out. Hawaii CRE Sales Volume ($ Billions) $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 $ $ Volume (Billions) # of Transactions 2014 Colliers International Research and Consulting. All rights reserved

2 The current performance of the various property sectors in Hawaii reflects rising tenant demand and falling vacancy rates which are indicative of the expansion phase of the real estate cycle. Real Estate Cycle 2013 RECOVERY EXPANSION HYPERSUPPLY RECESSION Multi-family Resort/Golf In addition to healthy market conditions, several other factors contributed to improvement in the real estate investment marketplace. Hawaii s economic environment has steadily improved since the recent recession and optimism has returned as job gains and real personal income growth have been experienced. Office Industrial Retail Golf The low interest rate environment also played a major role in fueling demand for real estate investments. As treasuries, bonds and other fixed income investment vehicles remained at depressed levels, investors sought out alternative investments, such as real estate, to diversify their portfolios. As capital flowed back into real estate, investors who placed their funds into relatively safe top tier markets such as New York, Los Angeles, and San Francisco, encountered rising competition from other investors with the same philosophy. Hawaii Sales Volume Percentage by Investor Type 70% 60% 50% 40% 30% 20% 10% 0% 38% Local 36% % Offshore 64% Offshore Investors Boost Investment Activity Between 2012 and 2013, offshore investors increased their spending on Hawaii commercial real estate by nearly 76% from $1.37 billion to $2.41 billion. The majority of this sales volume was concentrated in hotel and resort properties. Acquisitions by offshore investors more than doubled over the previous year and their percentage of the total transaction count rose from 18% to 25%. Although these investors historically focused on big ticket investments in Hawaii, the number of smaller investments purchased by this investor group increased. Of the 61 offshore transactions, roughly twothirds were for properties priced under $10 million. However, local investors continued to acquire the bulk of the properties priced under $10 million in For the multifamily and industrial property sectors, local investors captured 88% and 89% of these transactions, respectively. Roughly 78% of all retail transactions and 68% of vacant land sales went to local investors. Hawaii Transaction Counts by Investors Type 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Hawaii CRE Sales Volume Percentage by Product Type (2012 vs. 2013) 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 25.79% 82% Local 10.87% 7.69% 50.64% 74% 7.74% % 10.97% 5.47% 40.48% 22.44% 4.14% Multifamily Resort/Golf Industrial Office Retail Land % Offshore 25% 9.57% P. 2 COLLIERS INTERNATIONAL

3 A&B Boosts Investment Activity RESEARCH & FORECAST REPORT YE 2013 HAWAII INVESTMENT The most active local investor this past year was A&B Properties, Inc. By the end of 2013, the company had acquired the Kaneohe Ranch/Castle Foundation real estate portfolio, Pearl Highlands Center, Genshiro Kawamoto s residential portfolio, Napili Plaza and Waianae Mall. Combined, these transactions totaled more than $660 million. In addition to its boost in Hawaii property holdings, A&B is also very active in the development arena as well. Two highrise condominium projects in Kakaako, Waihounua and The Collection, are progressing forward. Additionally, lot sales for Maui Business Park Phase II commenced in 2013 and should boost industrial development in Kahului. Cap Rate Compression Anticipated to End Nationally, compression of the capitaliztion & rate ( cap rate ) continued for the fourth consecutive year as investors increased their allocations for real estate. However, real estate performance lagged behind the Dow Jones Industrial Average, S&P 500 Index and NASDAQ in 2013 as these markets posted strong gains of 22% or more. In this light, investors will likely reevaluate their investment strategies and search out higher returns from the stock market for The measured approach to adjusting interest rates by the Federal Reserve has helped to fuel the demand for real estate. Interest rates are projected to steadily increase over the mid-term time horizon, resulting in a subsequent jump in borrowing costs. This will likely place upward pressure on cap rates. Similarly, for the Hawaii marketplace, cap rates have begun to flatten out during The hope by many real estate investors is that the projected growth in the economy will fuel rental rate increases, which in turn, will counteract any increase in interest rates. NOTABLE TRANSACTIONS PROPERTY TYPE PROPERTY NAME BUYER SALES PRICE SQ.FT./UNITS SALES DATE Hotel Grand Wailea Government of Singapore $665,000, rooms Mar-13 Hotel Hyatt Regency Blackstone Capital $450,000,000 1,230 rooms Apr-13 Hotel Hyatt Place Host Hotels and Resorts LLC $130,790, rooms Jun-13 Hotel Courtyard at Marriott Highgate Holdings $125,000, rooms Apr-13 Hotel Ritz Carlton Kapalua Centerbridge Capital $100,000, units Feb-13 Office Waikiki Trade Center Seaside Equity $49,475, ,985 Feb-13 Office ANA Building S2155 SPE LLC (Shoei) $37,750, ,216 Feb-13 Warehouse 2291 Alahao St. United Laundry $20,000, ,788 Oct-13 Warehouse 911 Middle St. Evergreen LLC $13,975, ,936 Apr-13 Industrial Land Sears Distribution Center Mun Waiau LLC $30,000, ,080 May-13 Industrial Land Hawaiian Telcom Site (Mapunapuna) Wasa Electrical Services $13,860, ,233 Jun-13 Retail Land International Marketplace (Ground Lease) Taubman Development $87,210, ,557 Aug-13 Retail Land Puunene Shopping Center Property Development Centers LLC $40,350,000 1,065,129 Nov-13 Retail Pearl Highlands Center A&B Properties $141,500, ,000 Sep-13 Retail Waianae Mall A&B Properties $29,760, ,827 Jan-13 Portfolio Kaneohe Ranch/Castle Foundation Portfolio A&B Properties $373,000,000 Varied Nov-13 COLLIERS INTERNATIONAL P. 3

4 Hotel Investments Surge As cap rates compressed, investors had to broaden their search to secondary markets (such as Hawaii) to find better returns. The continued rise in air passenger arrival counts to Hawaii has strengthened hotel performance metrics and put Hawaii hotel properties back on the investment radar screen. Thirteen hotel/resort properties sold for a total sales volume of more than $2.0 billion in Hotels/Resort properties constituted more than 53% of the total sales volume, increasing eightfold over the past year. Selected 2013 Stock Market Returns 40.00% 36.14% 34.46% 35.00% 30.00% 29.12% 25.00% 22.76% 20.00% 15.00% 10.00% 5.00% 2.26% 0.00% NAREIT Equity S&P 500 DJIA Russell 2000 NASDAQ Source: NAREIT Wall Street Financial Markets Improving For the first time in five years, mortgage debt increased after declining during the downturn in the real estate marketplace. Between year-end 2012 and third quarter 2013, outstanding mortgage debt had increased 2.5% from $3.06 trillion to $3.14 trillion. A big part of this increase in debt issuance is the result of the rapid rise in CMBS funding which jumped 79% from $48 billion to $86 billion over the past year. Additionally, banks posted a 3% gain in mortgage debt levels between 2012 and Commercial bank loan delinquencies, which rose to nearly 9% in 2009, steadily declined over the past four years to a mid-year 2013 rate of 2.8%. Similarly, Commercial Mortgage delinquencies which rose above 8% during the financial crisis, posted a November 2013 delinquency rate of 5.64%. For CMBS loans that faced difficulties over the past few years, a small percentage ended up with special servicers. Cap Rate for U.S. Core Properties Over $2.5 Million 10.00% 9.00% 8.00% 7.00% 6.00% 5.00% 4.00% 3.00% All Core Apartments Industrial Office Retail Source: Real Capital Analytics 10.0% 9.0% 8.0% 7.0% 6.0% Hawaii Estimated Cap Rates 5.0% 4.0% 3.0% Apartment Office Industrial Retail 2013 Sales Summary YEAR END 2013 SALES COUNT SALES VOLUME PROPERTY TYPE SALES VOLUME SALES COUNT % OF $ VOLUME % OF SALES COUNT LOCAL INVESTOR OFFSHORE INVESTOR LOCAL INVESTOR OFFSHORE INVESTOR Multifamily $260,543, % 33.1% $234,458,076 $26,085,000 Resort/Golf $1,991,665, % 6.1% 1 14 $97,150,762 $1,894,514,987 Industrial $142,037, % 14.3% 31 3 $110,570,260 $31,467,045 Office $185,322, % 9.0% 13 9 $31,804,000 $153,518,600 Retail $760,409, % 21.2% $663,785,228 $96,623,900 Land $324,226, % 16.3% $111,790,888 $212,435,334 TOTALS $3,664,204, % 100.0% $1,249,559,214 $2,414,644, Colliers International Research and Consulting. All rights reserved P. 4 COLLIERS INTERNATIONAL

5 For Hawaii, there were a number of hotel and resort properties with CMBS funding that fell into default. Fortunately, with Hawaii s tourism sector recovery, many of these problem hotel loans have been refinanced or resolved. There has not been a hotel/resort property added to the CMBS Special Servicing watch list in over a year. ($ Trillion) $4.00 $3.50 $3.00 $2.50 $2.00 Mortgage Debt Outstanding According to Trepp LLC (a securitized market analyst firm), roughly $1.4 trillion of mortgage debt will mature between 2014 and The primary issue facing borrowers seeking to refinance is a more restrictive lending environment with lower loan to value ratio ( LTV ) parameters. A lender faced with an underperforming property will likely require a boost in equity from the borrower to meet the appropriate LTV ratio. If the borrower is unable to meet this criteria and a clear refinancing option is not available to them, loan defaults are likely to increase. $1.50 $1.00 $0.50 $0.00 Source: PREA Banks CMBS Insurance GSE Others Coinciding with this surge in loan maturities has been the steady recovery of both the economy and the improved performance of commercial real estate investments. Rising tenant demand, stabilization of rents, and a growing appetite by investors has kept cap rates low. The corresponding increase in property values has helped to increase lender flexibility and willingness to resolve loan issues with modifications and extensions. CMBS Issuance ($ Billions) $250 $200 $150 $100 $ $86.14 $50 $0 $ Source: Commercial Mortgage Alert Commercial Banks - CRE Loan Delinquency Rates 10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0% Source: Federal Reserve Bank of St. Louis COLLIERS INTERNATIONAL P. 5

6 A Look Back at Hawaii s Changing Investment Market ANDREW FRIEDLANDER (B) SIOR Principal Broker The Asian Influence During the Japanese bubble period in the mid-1980s, a significant share of the major hotel/resorts, shopping centers, and office buildings in the state were owned or developed by Japanese entities. The overzealous investment in Hawaii was the result of a lax monetary policy by the Bank of Japan which led to heightened liquidity and lending, the rising value of the Japanese Yen against the U.S. dollar, and a heavy infatuation with the tropical island state. From 1988 through 1991, more than $10.7 billion or nearly one-quarter of the total Japanese investment on U.S. real estate was spent on Hawaii properties. The bubble burst as interest rates climbed sharply at year-end While the ensuing Asian debt crisis of the mid-1990s was a downfall for several major Japanese banks, it created favorable opportunities for local and mainland investors to purchase prime assets for a fraction of the original sales prices. From 1993 to 1996, Japanese companies divested or restructured debt for over $7.3 billion in Hawaii real estate. 1 Picking up the Pieces at Bargain Prices In 2001, distressed sales for Japanese-owned properties accounted for half of the total commercial real estate sales in Hawaii. Approximately $678 million in luxury resort hotels, high rise office buildings, vacant development land, and other properties were sold, including the Hyatt Regency Maui, Ritz Carlton Kapalua, Pioneer Plaza, the NICOS Building and Pacific Guardian Tower. In total, these assets sold to local and mainland investors at $250 million below their original purchase prices. The distressed sales continued through the mid-2000s. The availability of these properties increased the appetite of mainland investors for Hawaii commercial real estate. In 2004, $2.8 billion of the $3.6 billion in investment sales were to mainland-based entities, including REITs, investment funds, and TICs (Tenants in Common). The Financing Bubble Bursts Strong economic factors, healthy market dynamics, continued fervent demand and an overabundance of available capital helped push commercial real estate pricing up and sales volume to a record high of $4.3 billion in Underwriting parameters were often based on projected versus existing or historical cash flows. The Asian investor all but disappeared during this time period as Wall Street now provided the liquidity for the marketplace. But the good days would eventually end as the flow of funds provided via the CMBS markets came to a screeching halt during the Global Financial Crisis of Hawaii was definitely impacted as the total commercial real estate sales volume for Hawaii dropped in 2008 and 2009 to $788 million and $627 million, respectively. Hawaii s commercial real estate market faced a dramatic turn for the worst as recessionary economic conditions resulted in weak market dynamics which negatively affected property operating cash flows. Loan defaults were commonplace and a new investor trend emerged of buying loans on distressed properties with the hope of taking the asset back at a discount to the actual property value. Back to Basics In 2010, the market began to show signs of recovery as sales volume more than doubled from 2009 levels to $1.5 billion. Private and institutional investors and lenders were relieved as property fundamentals stabilized in major markets and the number of distressed properties declined. A broader range of lenders, including CMBS conduits, foreign banks and life insurance companies reemerged in the credit markets. Tightened underwriting criteria prevailed with lenders returning back to the basics of analyzing existing and historical cash flows at conservative leverage ratios. The New Asian Investor The purchase of the Pacific Guardian Tower by Maruito USA in 2010 for nearly $38 million raised some eyebrows as this was the first major commercial real estate investment in Hawaii by a Japanese company in quite awhile. P. 6 COLLIERS INTERNATIONAL

7 It became evident that a more astute and practical Asian investor had emerged and learned from the mistakes of the past. In addition, high net worth individuals and families, sovereign related groups and other investors from China, Vietnam, South Korea, Singapore, the Philippines and Japan began more actively targeting Hawaii investments. Examples include Chinese investors purchasing the Kapolei Golf Course, Makaha West Golf Course, and Olomana Golf Course, Korean investors acquiring the Waikele Golf Course and Mililani Golf Club, and the Singapore government buying the Grand Wailea Resort. The investment community in Hawaii now seems to be a blend of the investors of the past as Asian investors, local investors, and mainland investors consider Hawaii a viable and strong market and should continue to seek properties here as part of their portfolios. 1 Kenneth Leventhal & Company, 1990 Japanese Investment in U.S. Real Estate; 1993 Japanese Disinvestment in U.S. Real Estate. Honolulu Urban Land Shortage MARK D. BRATTON (R) CCIM* Throughout urban Honolulu, construction cranes are emerging as the State enters its next construction boom. Of the dozens of high-rise condominiums planned, the heaviest concentration of these projects is located along the major thoroughfares between downtown Honolulu and Waikiki. The significant growth in households from all this new development has also attracted commercial real estate developers who want to benefit from the boost in consumer spending potential in the area. The list is even more expansive for those ownerusers, investors, and small developers seeking an acre or less of developable land in urban Honolulu. In 2013, of the 41 land transactions that occurred on Oahu, only 10 properties were larger than one acre and none of these sales were in urban Honolulu. The high demand and severe shortage of available urban land has pushed land values for commercial and industrial zoned land skyward. The current market value for land with BMX-zoning can be as high as $200 per square foot or more. At these prices, developers are likely to favor high-rise condominium projects to maximize returns. Kakaako has become a lightning rod for controversy as thousands of residential units are planned for this transitioning community. With a shortage of vacant land in the urban core, redevelopment properties have become increasingly desirable. In addition to Kakaako, there are several well-established neighborhoods such as Kalihi, Moiliili, Kaimuki, Kapahulu and Chinatown, which could be targeted next for development. These markets are generally comprised of smaller parcels which would likely have to be consolidated before any major infill development can occur. Success could come to those that demonstrate the patience and perseverance needed. Another game changer is the development of Honolulu s Rail Transit system. Land around transit stations will become more attractive as zoning changes associated with transit-oriented development lead to more mixed-use development options. Residential condominium high-rise developments with ground floor commercial/retail (i.e, Pflueger Honda/Capitol Place and Ala Moana Center/One Ala Moana) are good examples of mixed-use higher density projects. In the meantime, urban land sales remain few and far between. Currently, we are aware of only two vacant land transactions, one on a 2-acre site on North King Street, and another 6-acres site in Pearl City to be sold and be developed. * Bratton Realty Advisors, Ltd. Exclusively contracted to Colliers International HI, LLC NOTABLE LAND COMPARABLES LOCATION ADDRESS PRICE SALES DATE PROPERTY TYPE BUYER Mapunapuna 1021 Kikowaena St. $13,860,000 06/01/13 Industrial Land Wasa Electrical Services Kahului Puunene Center $40,350,000 11/01/13 Commercial Land Property Development Centers LLC Pearl City 600 Kamehameha Hwy. $30,000,000 05/01/13 Industrial Land Mun Waiau Waikiki 2330 Kalakaua Ave. $87,210,000 08/01/13 Commercial Land (Ground Lease) Taubman Development COLLIERS INTERNATIONAL P. 7

8 Available Listings LEIHANO Kapolei, Hawaii Zoning: Height Limit: Density: Highlights: Sales Contact: BMX-3 (high density mixed-use) allows a wide range of commercial and residential uses Up to 90 feet 3.5 floor to area ratio 1.0 to 1.5 acre parcels (can be combined) Rare opportunity to own fee simple land Ideal for Owner/Users with visibility from Kapolei Parkway and Fort Barrette Road Nathan A. Fong (B) KAPOLEI PARKWAY SHOPS 338 Kamokila Blvd., Kapolei, Hawaii Zoning: B-2 Tenure: Fee Simple Land Area: acres Gross Leasable Area: 21,197 square feet 2014 Projected NOI: $814,125 Sales Contact: Mark Bratton (R) CCIM IWILEI BUSINESS CENTER 501 Sumner Street, Apt. 6E, Iwilei, Hawaii Tenure: Fee Simple Zoning: IMX-1 Unit Size: 4,155 square feet Asking Price: $1,047,060 Sales Contact: Ronald C. Ward (S) Alika W. Cosner (S) EXECUTIVE MANAGEMENT Sarah Lee Morihara (S) President sarah.morihara@colliers.com CONSULTING & RESEARCH Mike Y. Hamasu Consulting & Research Director mike.hamasu@colliers.com Nanette M. Vinton (S) Research Consultant/Project Manager nanette.vinton@colliers.com INVESTMENT SERVICES GROUP Andrew D. Friedlander (B) SIOR Principal Broker andrew.friedlander@colliers.com Scott L. Mitchell (B) SIOR Executive scott.mitchell@colliers.com Jon-Eric Greene (B)* jon-eric.greene@colliers.com Mark D. Bratton (R) CCIM** mark.bratton@colliers.com Kim F. Scoggins (B)*** kim.scoggins@colliers.com Nathan A. Fong (B) nathan.fong@colliers.com Guy V. Kidder (B) CCIM SIOR guy.kidder@colliers.com Ronald C. Ward (S) ronald.ward@colliers.com William Bill Froelich (S) JD CCIM SIOR william.froelich@colliers.com Brandon Bera (S) Tel: brandon.bera@colliers.com * Greene Property Group, LLC ** Bratton Realty Advisors, Ltd. *** Rokit, Inc. Exclusively contracted to Colliers International HI, LLC COLLIERS INTERNATIONAL 220 South King Street, Suite 1800 Honolulu, Hawaii TEL FAX Colliers International makes no guarantees, representations or warranties of any kind, expressed or implied, regarding the information including, but not limited to, warranties of content, accuracy and reliability. Any interested party should undertake its own inquiry as to the accuracy of the information. Colliers International excludes unequivocally all inferred or implied terms, conditions and warranties arising out of this document and excludes all liability for loss and damages arising there from. This publication is the copyrighted property of Colliers International and/or its licensee(s) All rights reserved. Accelerating success.