Isles' real estate is still in distress

Defaults and foreclosures continue to loom over Hawaii's real estate investment markets, which entered the recession last year.

COURTESY COLLIERS HAWAII

While commercial transactions fell 20.4 percent to $627.5 million last year, there were about 17 notable transactions that fetched substantial sales prices. Above, the Weyerhaeuser Building, which sold for $20 million in May, was the largest industrial sale of the year.

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During the most recent Hawaii investment cycle, tenant demand has slowed, rents have dropped and many proposed developments have been shelved, according to a report released today by commercial real estate brokerage Colliers Monroe Friedlander.

"2010 will likely be the transition year," said Mike Hamasu, Colliers' consulting and research director.

"Many property owners that capitalized on cheap available funding during the peak found themselves overleveraged a few years later."

While the multifamily and retail sectors likely will recover this year, and industrial is expected to improve by the end of the year or the beginning of the next, it could be 2011 before the office sector improves and as late as 2012 before problems in the hotel sector abate, he said.

Last year, total investment transaction volume fell to $627.5 million, a 20.4 percent drop from the prior year and an 85 percent drop from the $4.3 billion record in 2005, Colliers reported. Transaction activity dropped last year to levels not seen since the aftermath of the Japanese bubble period in the 1990s; however, Colliers said financial stresses have created heartaches and opportunities.

Hawaii's hotel and resort sector was battered last year by decreased occupancy and room rates. As a result, a number of high-profile hotels went into distress, including the Ilikai, the former W Honolulu Diamond Head, Maui Prince, Fairmont Orchid, ResortQuest Kauai and the Hilton Kauai, said Mark Bratton, Colliers vice president.

Currently, there are four Hawaii hotels for sale and 11 more that are distressed or in foreclosure, Bratton said.

"It is highly likely that 2010 will yield more financially distressed properties for Hawaii and the U.S.," said Nanette Macapanpan, Colliers' research consultant/project manager. "With an estimated $1.4 trillion in commercial debt due to mature by 2013, there is sure to be more financial heartache for property owners and more opportunistic plays for savvy investors."

The Makena Resort, which sold for $575 million in 2007, is an example of a property in foreclosure after the owners failed to make payments on a $192 million mortgage, Macapanpan said.

While several distressed properties have been taken back or purchased at a discount, investors also are buying notes with the hopes of selling it for a favorable return once the market strengthens, she said.

For example, A&B Properties purchased the distressed note from I-Star Financial last summer when the former Hawaii Raceway Park in West Oahu fell into default, Macapanpan said.

IN DISTRESS

Hawaii distressed properties in 2009:

Property	Type	Status
ResortQuest Kauai	HTL	Foreclosure complete, lender owned
Fairmont Orchid	HTL	Foreclosure complete, lender owned
Makena Resort	HTL	In foreclosure
W Honolulu Diamond Head	HTL	Sold to Unity House
The Ilikai	HTL	Foreclosure complete, lender owned
Kapolei Trade Center	INDL	Foreclosure complete, lender owned
Former Raceway Park site	INDL LND	Foreclosure complete, lender owned
Moana Vista	RES	Sold to OliverMcMillan
Coconut Grove	RTL	Foreclosure complete, lender owned
King Kalakaua Plaza	RTL	Foreclosure complete, lender owned
Ala Moana	R/O	Owner bankrupt, loans restructured
Victoria Ward Properties	R/O/I	Owner bankrupt, loans restructured

HTL: Hotel. INDL: Industrial. INDL LND: Industrial land. RES: Residential. RTL: Retail. R/O: Retail/office. R/O/I: Retail/office/industrial.

Source: Colliers Monroe Friedlander