WAILUKU - Maui's commercial real estate industry sure isn't as bad as on the Mainland, said veteran local leasing broker Ed Bello of Bello Realty Inc., who on a recent business trip to Colorado saw a bankrupt big-box store converted into a charter school and a former Blockbuster Video into a veterinary clinic.
If they had any tenants at all.
When he looks around at Maui's shopping centers, Bello said, rather than maybe one empty storefront, there may be four. Three more vacant spaces is a big shift for an island that just two years ago had a nearly 100 percent occupancy rate, he said.
The vacancy rate for retail, office and industrial space is estimated to have doubled to about 5 or 10 percent, depending on the type of retail center and the location, while the poor economy keeps typically free-spending tourists away, said Grant Howe, Commercial Properties of Maui LLC founder and managing general partner.
Look up to the second floor of those strip malls, and there are also more "For Lease" signs taped to the windows of empty offices than ever before, local Realtors and lease brokers said.
The two-year-old economic downturn has altered the commercial real estate landscape here for years to come, they said. Since commercial real estate typically trails residential sales and rentals (People always need a roof over their head, one expert explained.), it may be two more years before commercial space is again at a premium on Maui.
And it could be years more before expansions and new shopping centers planned long ago finally get built.
Developers interviewed last week repeated complaints about Maui County's notoriously difficult and drawn-out permitting process; and then they'd say it's probably that byzantine system that allowed a lot of landlords today to make their mortgages by not having to compete themselves into foreclosure in order to maintain or attract tenants.
"I don't think we need them," Bello said of the various new commercial projects awaiting green lights. "We would have been a lot more worse off if those had been built."
On the flip side, if entrepreneurs are looking to start a business on Maui today or an existing business wants to relocate, they will probably find some sweet deals on commercial rental space, the commercial property brokers said. Many, if not most, landlords are reportedly offering up to a few months of free rent, slashed rates and free improvements, according to the 2009 fourth-quarter report by CB Richard Ellis, Hawaii.
The experts also said that with some landlords who've paid off their property or when a shopping center is owned by a deep-pocketed corporation, they tend to be less flexible. The price per square foot, percentage of gross sales contribution or common area maintenance fee may be less, but the lease will probably be shorter, too.
No one wants to get stuck not getting fair market value for years if the economy suddenly comes roaring back, Howe said.
Bob Horcajo, owner of Kama'aina Properties, said they didn't give tenants whose leases were up a break on rent only because they asked for it. It's an investment for him as well, because a successful tenant is a long-term tenant, he said.
The experts said that available space is only in great abundance in pockets, like on Lahaina's Front Street, where even before the recession, nascent businesses were serfs to fickle tourists. During the recession, Front Street rents have sunk by as much as 30 percent, Howe said.
Hit extra hard these days are out-of-the-way shopping centers that never performed that well in the first place, the experts said. There's also added anxiety about a handful of retail centers that went ahead and opened in the midst of the downturn, with only a few tenants lined up, they said.
"Without enough money coming in, the big-picture question is: How many commercial (real estate) foreclosures will we have in the next year and a half?" said former Realtors Association of Maui President Bob Lightbourn. "We know it's coming, we just don't know whether Maui will be hit as hard the Mainland, although we don't think so."
The reasoning for these difficult economic conditions are simple enough to understand, Lightbourn said. By some estimates, tourism makes up 40 percent of Maui's economy. And Maui has seen a double-digit percentage drop in visitor arrivals.
It is a cycle, the experts said. Consumer spending drops. Businesses close. Jobs are lost. Rents and mortgages aren't paid, etc.
In particular, the Maui real estate pros said that restaurants - which is already a high-risk industry - are getting murdered these days.
One real estate broker asked: If you're not an established name like chefs Peter Merriman or David Paul, both of whom have new restaurants, who wants to open in today's environment? He noted that even award-winning Roy Yamaguchi's Kihei restaurant closed last year.
Bello and others said that Maui is in a unique situation when it comes to the commercial real estate market, in that there is a finite amount of space for development, which will eventually help landlords when the economy recovers. It is an island, Bello noted.
Some communities have only a few acres of undeveloped land zoned commercial, Bello said. Maui has become a relatively mature market, he said. The building boom days, with the exception of homes, appears to be over, he said.
Finally, mix in Maui County's unique "show me the water" ordinance, which requires new development to provide its own water source, and the upcoming Maui General Plan 2030 update, which will place boundaries on where new growth can occur, and the commercial real estate market should actually be pretty tight once the economy rebounds, the experts said.
Even those who have the hard-to-get county permits to build new retail centers have stalled or abandoned the projects as the development companies bleed cash, and banks are more reluctant than ever to lend.
For example, this week, major Maui real estate players Alexander & Baldwin Properties and the Lahaina Cannery Mall will ask the Maui Planning Commission to give them another two years before they have to move ahead on plans for the Kahului Town Center Project and a mall expansion, respectively.
County Council Member Mike Victorino said that, based on his conversations with developers, they are just taking a wait-and-see approach.
Most people who built at the economy's peak several years ago are suffering now, Bello said. However, Bello, who developed the South Maui Center, said he "lucked out" and has 95 percent capacity on retail. The second-floor office space, though, is not doing so hot, he said.
Other landlords reported similar vacancy issues, although they declined to discuss percentages.
Kahului's Queen Ka'ahumanu Center is the island's largest commercial space by far at 571,000 square feet. By comparison, the new Lahaina Gateway Center is 137,000 square feet.
"Yes, we have vacancies," said Queen Ka'ahumanu Center spokeswoman Lisa Paulson. "We are struggling in the economy, but a lot of our retailers are making adjustments, smart adjustments, in order to help their sales."
For example, she said, a women's clothing store noticed that customers wanted their dresses for $20 less than what they normally pay, so they just stocked up on items in that price range.
"With the stores and restaurants that closed, we were aware of their struggles ahead of time," she said. "Most of them just held on as long as they could after the holidays. We may also see some more corporate bankruptcies soon, too (of franchises)."
Bello said he believes that the commercial real estate rental market may have topped out. Landlords who were getting $3.50 per-square-foot are now in the $2.25 per square foot range. Maui's prices were probably too high, and this is a natural, healthy adjustment, he said.
"In this environment, everything becomes negotiable," said Realtor Rick Woodford of Peake/Lavoy Commercial Real Estate Services. "Personally, I think that there is a little more inventory than we're used to, but I still think this year we are going to be busy."
Peake & Lavoy's management and brokerage portfolio includes the Lahaina Gateway Center and new Wailea Gateway Center and Kukui Mall in Kihei.
Woodford said that the Maui Mall, which is owned and managed by Alexander & Baldwin Properties, should do well when the anxiously awaited Whole Foods Market opens Feb 24. The mall lost some tenants last year, so it has space for rent in what's almost guaranteed to be a very busy place, Woodford said.
He said the shopping centers near the resorts in South and West Maui tend to be more stable, with the exception of Front Street, which he called "its own environment." Wailuku and parts of Kahului are tougher markets, for the most part, Woodford said, noting that in Wailuku town a lot of the empty storefronts were vacant before the recession struck.
"But sooner or later, though, someone will come along with the right idea for a place and know what to do with it and make it work," Woodford said. "Retail is like that."
Bello said he's not as concerned about retail as he is about office space. While the T-shirt shops and delis will someday return, he doubts that IBM will be opening headquarters anytime soon in Maui, he said. In addition, a lot of small businesses have laid off workers and consolidated offices, or even work out of their homes to get by, he said.
A lot of people had to move on to new careers, he said, such as mortgage brokers and real estate agents.
"Obviously, times are not good," Bello said. "But on the Mainland, you might only see two stores open, and the rest of the shopping center is empty. We are not seeing that at all here. We're just used to seeing almost everything full. It's a concern, but it's not 'Oh, my God, the sky is falling.'
"As soon as tourism comes back, I think everything will be OK."
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